During a recent webinar, Steve explained that the market and trading conditions caused by the COVID-19 pandemic might be “reasonably expected to materially affect one or more of [a mutual fund’s] investments’ classifications” for purposes of the fund’s liquidity risk management program (its “LRM Program”). In this circumstance, Rule 22e-4 under the Investment Company Act of 1940 requires more frequent review of these classifications. This post describes how a rough market may require a mutual fund (other than a money market fund or in-kind exchange traded fund) to reclassify an investment’s liquidity classification.
Continue Reading Navigating Mutual Funds in Rough Markets—Liquidity

As we touched upon briefly in our previous post on the SEC’s recent Fund-of-Fund (“FOF”) rule proposal, proposed Rule 12d1-4 includes a provision that would limit an acquiring fund’s ability to redeem shares of an acquired fund. Specifically, proposed Rule 12d1-4(b)(2) would prohibit a fund that acquires more than 3% of an acquired fund’s outstanding shares from attempting to redeem more than 3% of the acquired fund’s shares in any 30-day period. Unlike most current exemptions from Section 12(d)(1), this limitation would apply to acquiring and acquired funds that are part of the same group of investment companies. However, the release asked for comments on whether to exempt funds within a group of investment companies from the limitation on redemptions.

Continue Reading SEC Fund-of-Fund Rule Proposal: Potentially Disruptive Impact of Redemption Limitation

In my recent article on money market fund reforms, I observed:

The minimal credit risk determination for ABS [an Asset-Backed Security] should identify every entity on whose financial strength the fund will rely; the illiquid security determination should identify to whom the fund might sell the ABS in seven days. A fund may exclude any entity not so identified from further consideration as a potential guarantor of the ABS.

Wait a minute, writes a credit analyst:
Continue Reading What Does Liquidity Have to Do with Diversification?

Funds Don’t Identify Rule 144A and Regulation S Securities as “Restricted”

Notwithstanding my technical interpretation of “restricted security” in Part One, my sampling of recent annual reports found no funds treating Rule 144A or Regulation S securities as restricted.
Continue Reading Are There Still Such Things as Restricted Securities?—Part Two

SEC Commissioner Kara Stein gave a thoughtful speech at the Brookings Institution the other day, identifying some urgent questions regarding mutual fund regulation. I am simpatico with many of the views expressed in her speech. But I cringed when she referred to liquidity as “a foundational principle of the Investment Company Act since its inception.” Far from being part of its foundation, liquidity wasn’t even in the blueprints for the Act.
Continue Reading Liquidity: An Afterthought to the Investment Company Act