The SEC & New Liquidity Management Rules

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The SEC & New Liquidity Management Rules

Bob Ciura Oct 20, 2015


For example, one of the benefits of investing in the stock market is that stocks are highly liquid. It takes only a matter of minutes and a few mouse clicks to buy and sell stocks. As a result, stocks are highly liquid, because an investor can turn their shares into cash very quickly.

The Securities and Exchange Commission has proposed new rules designed to enhance liquidity for investors as it pertains to the mutual fund industry. Here is a rundown of the new rules, and why they matter for investors.


How the New SEC Measures Will Affect Mutual Funds


The proposed changes also include language on what is called “swing pricing,” a tactic used to pass on costs of liquidation and redemptions directly to shareholders. This measure is designed to protect existing fund holders from dilution caused by other shareholders’ purchases and redemptions.

Moreover, the proposed rules would require mutual funds to have a liquidity risk management program. There are many key aspects of this program that fund holders should know about. First, open-ended funds would have to classify each position according to its liquidity. Then, they would have to determine a minimum percentage of its assets that must be invested in cash, otherwise in assets that can be converted into cash within three business days. The Board would then be responsible for reviewing the fund to make sure it meets these requirements.


The Bottom Line


Liquidity is one of the main reasons why exchange traded funds have become increasingly popular in recent years. ETFs give the investor the same benefits of a mutual fund, in that they invest in a basket of securities, but with the added benefit of higher liquidity than traditional mutual funds. As a result, enhancing liquidity for mutual funds could place mutual funds on more even ground with ETFs.

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