The SEC Liquidity Rule – How to Hit a Moving Target

The asset management industry broadly welcomed a delay in implementation to the SEC Liquidity Rule, but the change in course has left many wondering exactly when and how to execute. Here’s what asset managers need to know:

From the moment, the US Securities and Exchange Commission (SEC) proposed its initial Liquidity Risk Management Program Rule (Liquidity Rule), the US asset management industry was skeptical. Asset managers believe they already sufficiently track portfolio liquidity and don’t think the SEC needs to prescribe to them how to do so. Regulators tried to draft a final rule that balanced their own desire for greater transparency and investor protection with the industry’s call for pragmatism. The sheer scope and complication to the final requirements have driven pushback as US managers now struggle to understand how they will implement the rule in a timely manner.

Over the past 16 months, asset managers and industry associations voiced concerns and advocated strongly for more time and a fit for purpose ruleset. Perhaps now, regulators have listened.

Change of Plan

On February 21, the SEC issued a widely anticipated delay to certain requirements of the liquidity rule citing “expressed concerns regarding the difficulties that funds are facing in preparing to comply in a timely matter.” They cited specific challenges due to interpretive guidance, service providers, and system readiness.

But, even the delayed announcement itself felt like a moving target. A scheduled open meeting on the matter was cancelled without explanation at the last minute. Then, the reprieve was approved in private and announced the next day. Though the industry welcomed the delay, the positivity was tempered as only certain aspects of the rule were delayed and the exact timing of the delay remains unknown and up for negotiation. For example, funds need to have a liquidity risk management program by the original compliance date of December 1, 2018 (for fund complexes with greater than $1 bn in net assets), but it will not need to be formally approved by the board until June 1, 2019. Funds and their boards will need to decide if those programs are the same or different, and if the same, those aforementioned challenges still exist. We expect to hear more from the SEC later this week, as they tackle the last remaining agenda item from that cancelled meeting.

In a surprising move, the SEC also sought further comments and feedback on interpretation and compliance dates through the release of the interim rule. After discussing the six-month compliance period extension, they requested comment on the appropriateness of that extension. Is six months enough time or should it be longer? Should it be shorter than six-months or should there be no extension at all?

In the table below, the SEC outlined the requirements that are subject to the extension:

SEC table 2

Comments are not due back to the SEC until the end of April which means the possibility of a further change to the rules or compliance dates will not be communicated until Q2 at the earliest. While a delay is usually not a bad thing, the uncertainty of further changes is a roadblock itself.

Asset managers are already expending time, money, and resources to establish their liquidity risk program which includes evaluating and contracting with market vendors, creating workflows, and engaging with their boards. It’s difficult to finalize any program when they are working towards an extending finish line. On Wednesday, the SEC will hold an open meeting to consider amendments to liquidity-related reporting and disclosure requirements on Form N-PORT and Form N-1A.

This latest delay represents a pivotal moment for fund groups who must decide where to go from here. Do they wait to see if and how the rule is amended further? Or do they move forward and possibly reconsider decisions they’ve already made? Either way, now is the time for fund shops to have some serious discussions with their boards and service providers on how best to proceed.