Rule 22e-4 Compliance

Is Your Liquidity Program in Place?

Liquidity Risk Profile (LRP)

SEC Rule 22e-4, also called the Liquidity Rule, requires an exchange-traded fund or an open-end management investment company to assess, manage, and review liquidity risk on a regular basis. Liquidity risk, in this case, refers to the risk that a fund may not be able to meet share redemption requests without significant dilution of remaining investors' interests in the fund.

 

Abel Noser has three decades of experience providing liquidity holdings analysis, daily data handling, and next-day reporting to fund complexes.  Contact us today to see why we are uniquely qualified to be your liquidity compliance partner.

 

Compliance Deadlines

 

According to published online information*, open-ended mutual funds and ETF complexes with more than $1 billion of assets under management were required to be in compliance with some key implementation requirements of the SEC Rule 22e-4 'Liquidity Rule' by December 1st, 2018.  Funds with less than $1 billion of assets had until June 1st, 2019 to comply with these elements of the rule.  Depending upon the size of your fund complex, other elements of the regulations have been in effect as of June 1, 2018, while other requirements, such as additional liquidity rule mandates and elements in the 'Modernization Rules,' may have later compliance deadlines.

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Investment Liquidity Categories

 

HIGHLY LIQUID

Any investment that a fund reasonably expects can be convertible into cash in current market conditions in three business days or less.

 

MODERATELY LIQUID

Any investment that a fund reasonably expects can be convertible into cash in current market conditions in more than three calendar days but in seven calendar days or less.

 

LESS LIQUID

Any investment that a fund reasonably expects can be sold or disposed of in current market conditions in seven calendar days or less ... but where the sale or disposition is reasonably expected to settle in more than seven calendar days.

 

HIGHLY ILLIQUID

Any investment that a fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less.

 

SEC Rule Overview

 

As a manager, you should base your assessments on the assumption an asset can be converted to cash without significantly changing the market value of the investment.

 

General implementation mandates of the 'Liquidity Rule' affected by upcoming deadlines:

 

  • Implementation of a liquidity program
  • Assessment, management and periodic review of liquidity risk
  • 15% limit on illiquid investments
  • Liquidity related board and SEC reporting requirements (w/ some exclusions)
  • Board designation of a program administrator
  • Redemption in-kind policies and procedures

 

* Please consult your own legal counsel for details and direction.  For reference purposes only, here are links to published legal updates from Dechert LLP, and from Goodwin Proctor LLP (both non-affiliated).

 

Our Compliance Services

We are prepared to assist you with Rule 22e-4 reporting requirements in the following ways:

 

  • Custom design a daily load-in process to input your equity portfolio holdings
  • Use our Trade Compass tool to estimate your daily equity position liquidity
  • Fixed income holdings can be custom processed on a periodic basis
  • Automatically calculate the percentage of your overall portfolio in each liquidity category so you can construct a framework for exception identification and archiving
  • Use our compliance dashboard  to create an Overview Report with daily email alerts if a fund reaches a Highly Illiquid threshold level
  • Help you process the monthly N-PORT file upload to the EDGAR system

 

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