Registered Investment Company Update |

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Registered Investment Company Update

New guidance on liquidity risk management programs

On Jan. 10, 2018, the staff of the Division of Investment Management of the SEC posted responses to a number of Frequently Asked Questions (“Staff FAQs”) concerning liquidity risk management (“LRM”) programs required to be implemented pursuant to new Rule 22e-4 under the Investment Company Act of 1940 (“1940 Act”).1 Under Rule 22e-4, adopted by the SEC in October 2016,2 1940 Act registered open-end management investment companies (other than money market funds) must adopt and implement written LRM programs that are reasonably designed to assess and manage liquidity risks.3 Elements of these programs must generally include:

1. Assessment, management and periodic review of liquidity risk;

2. Classification of portfolio investments into one of four liquidity categories;

3. Establishment of a “highly liquid investment minimum”4; and

4. A 15 percent of net assets limit on the purchase of illiquid investments.

The Staff FAQs provide helpful guidance relating to the design of LRM programs for sub-advised funds (including multi-manager funds) and to issues uniquely associated with in-kind exchange-traded funds (“In-Kind ETFs”).5 They also provide guidance relevant to all funds that are subject to Rule 22e- 4, particularly with respect to the delegation of responsibilities under the programs and variations in the classification of particular investments by different funds managed by the same adviser or subadviser.

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