Conformed to Federal Register Version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270 and 274[Release Nos. 33-11130; IC-34746; File No. S7-26-22]
RIN 3235-AM98
Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT
Reporting
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing
amendments to its current rules for open-end management investment companies (“open-end
funds”) regarding liquidity risk management programs and swing pricing. The proposed
amendments are designed to improve liquidity risk management programs to better prepare funds
for stressed conditions and improve transparency in liquidity classifications. The amendments
are also designed to mitigate dilution of shareholders’ interests in a fund by requiring any openend fund, other than a money market fund or exchange-traded fund, to use swing pricing toadjust a fund’s net asset value (“NAV”) per share to pass on costs stemming from shareholder
purchase or redemption activity to the shareholders engaged in that activity. In addition, to help
operationalize the proposed swing pricing requirement, and to improve order processing moregenerally, the Commission is proposing a “hard close” requirement for these funds. Under thisrequirement, an order to purchase or redeem a fund’s shares would be executed at the current
day’s price only if the fund, its designated transfer agent, or a registered securities clearing
agency receives the order before the pricing time as of which the fund calculates its NAV. The
Commission also is proposing amendments to reporting and disclosure requirements on Forms

N-PORT, N-1A, and N-CEN that apply to certain registered investment companies, including
registered open-end funds (other than money market funds), registered closed-end funds, andunit investment trusts. The proposed amendments would require more frequent reporting ofmonthly portfolio holdings and related information to the Commission and the public, amend
certain reported identifiers, and make other amendments to require additional information about
funds’ liquidity risk management and use of swing pricing.
DATES: Comments should be received on or before February 14, 2023.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic comments:
Use the Commission’s internet comment form
(https://www.sec.gov/rules/submitcomments.htm); or

Send an email to rule-comments@sec.gov. Please include File Number S7-26-22 on thesubject line.

Paper comments:
Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-26-22. This file number should be

included on the subject line if email is used. To help the Commission process and review yourcomments more efficiently, please use only one method of submission. The Commission will
post all comments on the Commission’s website (https://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the Commission’s Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s

2

Public Reference Room. All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit personal identifying informationfrom comment submissions. You should submit only information that you wish to makeavailable publicly.
Studies, memoranda, or other substantive items may be added by the Commission or staff
to the comment file during this rulemaking. A notification of the inclusion in the comment file ofany such materials will be made available on our website. To ensure direct electronic receipt ofsuch notifications, sign up through the “Stay Connected” option at www.sec.gov to receive
notifications by email.
FOR FURTHER INFORMATION CONTACT: Mykaila DeLesDernier, Y. Rachel Kuo,
James Maclean, Nathan R. Schuur, Senior Counsels; Angela Mokodean, Branch Chief; Brian M.
Johnson, Assistant Director, at (202) 551-6792 or IM-Rules@sec.gov, Investment Company
Regulation Office, Division of Investment Management, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to amend thefollowing rules and forms:
Commission Reference
Investment Company Act of 1940(“Act” or “Investment CompanyAct”)1

1Rule 22c-1

CFR Citation(17 CFR)§ 270.22c-1

Rule 22e-4
Rule 30b1-9
Rule 31a-2
Form N-PORT
Form N-CEN§ 270.22e-4§ 270.30b1-9§ 270.31a-2§ 274.150§ 274.101

15 U.S.C. 80a-1 et seq. Unless otherwise noted, all references to statutory sections are to theInvestment Company Act, and all references to rules under the Investment Company Act are totitle 17, part 270 of the Code of Federal Regulations [17 CFR part 270].

3

Securities Act of 1933(“Securities Act”)2 andInvestment Company Act

2

Form N-1A§§ 239.15A and 274.11A

15 U.S.C. 77a et seq.

4

TABLE OF CONTENTS
I.

Introduction...................................................................................................................
A. Open-End Funds and Existing Regulatory Framework.........................................12
1. Liquidity Risk Management............................................................................15
2. Swing Pricing...................................................................................................17
B. March 2020 Market Events...................................................................................21
C. Rulemaking Overview...........................................................................................33
II. Discussion...................................................................................................................
A. Amendments Concerning Funds’ Liquidity Risk Management Programs............38
1. Amendments to the Classification Framework................................................38
2. Highly Liquid Investment Minimums.............................................................77
3. Limit on Illiquid Investments..........................................................................91
B. Swing Pricing.........................................................................................................93
1. Proposed Swing Pricing Requirement.............................................................95
2. Amendments to Swing Threshold Framework..............................................104
3. Determining Flows........................................................................................112
4. Swing Factors................................................................................................116
C. Hard Close...........................................................................................................132
1. Purpose and Background...............................................................................133
2. Pricing Requirements.....................................................................................135
3. Effects on Order Processing, Intermediaries and Investors, and Certain
Transaction Types..........................................................................................139
4. Other Proposed Amendments to Rule 22c-1.................................................156
5. Amendments to Form N-1A..........................................................................157
D. Alternatives to Swing Pricing and a Hard Close Requirement............................158
1. Alternatives to Swing Pricing........................................................................158
2. Alternatives to a Hard Close..........................................................................176
3. Additional Illustrative Examples...................................................................188
E. Reporting Requirements......................................................................................200
1. Amendments to Form N-PORT.....................................................................200
2. Amendments to Form N-CEN.......................................................................230
F. Technical and Conforming Amendments............................................................231
G. Exemptive Order Rescission and Withdrawal of Commission Staff Statements 232
H. Transition Periods................................................................................................234
III. Economic Analysis....................................................................................................
A. Introduction..........................................................................................................236
B. Baseline................................................................................................................243
1. Regulatory Baseline.......................................................................................243
2. Overview of Certain Industry Order Management Practices........................248

5

3. Liquidity Externalities in the Mutual Fund Sector........................................252
4. Affected Entities............................................................................................264
C. Benefits and Costs of the Proposed Amendments...............................................278
1. Liquidity Risk Management Program...........................................................278
2. Swing Pricing.................................................................................................302
3. Hard Close Requirement................................................................................316
4. Commission Reporting and Public Disclosure..............................................322
D. Effects on Efficiency, Competition, and Capital Formation...............................327
1. Efficiency.......................................................................................................327
2. Competition...................................................................................................330
3. Capital Formation..........................................................................................336
E. Alternatives..........................................................................................................338
1. Liquidity Risk Management..........................................................................338
2. Swing Pricing.................................................................................................345
3. Hard Close Requirement................................................................................360
4. Commission Reporting and Public Disclosure..............................................363
F. Request for Comment..........................................................................................365
IV. Paperwork Reduction Act.........................................................................................
A. Introduction..........................................................................................................370

6

B. Rule 22e-4............................................................................................................372
C. Rule 22c-1............................................................................................................375
D. Form N-PORT.....................................................................................................378
E. Form N-1A...........................................................................................................383
F. Form N-CEN.......................................................................................................385
G. Request for Comment..........................................................................................387
V. Initial Regulatory Flexibility Analysis......................................................................
A. Reasons for and Objectives of the Proposed Actions..........................................389

7

B. Legal Basis...........................................................................................................390
C. Small Entities Subject to the Amendments.........................................................390
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements......391
1. Liquidity Risk Management Programs..........................................................391
2. Swing Pricing.................................................................................................392
3. Hard Close.....................................................................................................394
4. Reporting Requirements................................................................................396
E. Duplicative, Overlapping, or Conflicting Federal Rules.....................................399
F. Significant Alternatives.......................................................................................399
G. General Request for Comment............................................................................403
VI. Consideration Of Impact On The Economy..............................................................
Statutory Authority..........................................................................................................
I.

INTRODUCTION
When the Investment Company Act was enacted, a primary concern was the potential for

dilution of shareholders’ interests in open-end investment companies.3 In addition, the ability ofshareholders to redeem their shares in an investment company on demand is a defining feature ofopen-end investment funds.4 Section 22 of the Act reflects these concerns and priorities. For
example, section 22(c) gives the Commission broad powers to regulate the pricing of redeemablesecurities for the purpose of eliminating or reducing so far as reasonably practicable any dilution

3

See Investment Trusts and Investment Companies: Hearings on S. 3580 before a Subcomm. of
the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. (1940), at 37, 137-145 (statingthat among the abuses that served as a backdrop for the Act were practices that resulted in
substantial dilution of investors’ interests, including backward pricing by fund insiders to increase
investment in the fund and thus enhance management fees, but causing dilution of existing
investors in the fund) (statements of Commissioner Healy and Mr. Bane).

4

See Investment Trusts and Investment Companies: Letter from the Acting Chairman of the SEC,
A Report on Abuses and Deficiencies in the Organization and Operation of Investment Trusts andInvestment Companies (1939), at n.206 (“[T]he salient characteristic of the open-end investmentcompany…was that the investor was given a right of redemption so that he could liquidate his
investment at or about asset value at any time that he was dissatisfied with the management or for
any other reason.”). An open-end investment company is required to redeem its securities on
demand from shareholders at a price approximating their proportionate share of the fund’s net
asset value (“NAV”) next calculated by the fund after receipt of such redemption request. See
section 22 of the Act; rule 22c-1.

8

of the value of outstanding fund shares.5 Section 22(e) of the Act establishes a shareholder rightof prompt redemption in open-end funds by requiring such funds to make payments onshareholder redemption requests within seven days of receiving the request.6
The open-end fund industry has grown significantly over the last six years as more
Americans rely on funds to gain exposure to financial markets while having the ability to quickly
redeem their investments.7 At the end of 2021, assets in open-end funds (excluding money
market funds) were approximately $26 trillion, having grown from about $15 trillion at the endof 2015.8 An estimated 102.6 million Americans owned mutual funds at the end of 2021, up from5

Section 22(c) of the Act authorizes the Commission to make rules and regulations applicable toregistered investment companies and to principal underwriters of, and dealers in, the redeemablesecurities of any registered investment company related to the method of computing purchase andredemption prices of redeemable securities for the purpose of eliminating or reducing so far as
reasonably practicable any dilution of the value of other outstanding securities of the fund or any
other result of the purchase or redemption that is unfair to investors in the fund’s otheroutstanding securities. See also section 22(a) of the Act (authorizing a securities association
registered under section 15A of the Securities Exchange Act of 1934 (“Exchange Act”) similarly
to prescribe the prices at which a member may purchase or redeem an investment company’s
redeemable securities for the purposes of addressing dilution).

6

Section 22(e) of the Act provides, in part, that no registered investment company shall suspend
the right of redemption or postpone the date of payment upon redemption of any redeemablesecurity in accordance with its terms for more than seven days after tender of the security absent
specified unusual circumstances.

7

For purposes of this release, the term “fund” or “open-end fund” generally refers to an open-end
management investment company registered on Form N-1A or a series thereof, excluding money
market funds, unless otherwise specified. Mutual funds and most exchange-traded funds(“ETFs”) are open-end management companies registered on Form N-1A. An open-end
management investment company is an investment company, other than a unit investment trust or
face-amount certificate company, that offers for sale or has outstanding any redeemable securityof which it is the issuer. See sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C.
80a-4 and 80a-5(a)(1)]. While a money market fund is an open-end management investmentcompany, money market funds generally are not subject to the amendments we are proposing andthus are not included when we refer to “funds” or “open-end funds” in this release except where
specified. Although unit investment trusts, like open-end funds, issue redeemable securities, they
are not included when we refer to open-end funds in this release, unless otherwise specified.

8

The $26 trillion figure is based on Form N-CEN filing data as of Dec. 2021. Of the $26 trillion in
assets, ETFs had $5.1 trillion in assets. See Investment Company Liquidity Risk Management
Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18,
2016)] (“Liquidity Rule Adopting Release”), at text accompanying n.1046 (estimating open-end
fund assets of approximately $15 trillion at the end of 2015).

9

an estimated 91 million individual investors at the end of 2015.9 Open-end funds continue to be
an important part of the financial markets, and as those markets have grown more complex, somefunds are pursuing more complex investment strategies, including fixed income and alternative
investment strategies focused on less liquid asset classes. For example, as of December 2021,
bond funds had assets of more than $6 trillion, funds with alternative investment strategies had
about $15 billion in assets, and bank loan funds had around $12 billion in assets.10 Figure 1
below shows the amount of assets held by different types of open-end funds.
Figure 1: Open-End Fund Assets by Fund Type
Open-End Fund Assets – December 2015($ Trillions, % of Total Open-End Fund Assets)

9

See Investment Company Institute, 2022 Investment Company Fact Book (2022) (“2022 ICI Fact
Book”), at 44, available at https://www.icifactbook.org/; Investment Company Institute, 2016
Investment Company Fact Book (2016), at 110, available at https://www.ici.org/fact-book. Retailinvestors hold the vast majority of mutual fund net assets. See 2022 ICI Fact Book, at 48(estimating that retail investors held 88% of mutual fund assets at year end 2021). An estimated
13.9 million U.S. households held ETFs in 2021, in addition to many institutional investors. See
id. at 83.

10

Based on Morningstar data. Unless otherwise indicated, data discussed throughout this section isbased on Morningstar data. Bond funds include funds that invest in taxable bonds (approximately$5.5 trillion in assets) and funds that invest in municipal bonds (approximately $1 trillion in
assets).

10

Source: Morningstar
Open-End Fund Assets – December 2021($ Trillions, % of Total Open-End Fund Assets)

Source: Morningstar

11Without effective liquidity risk management, a fund may not be able to make timely
payment on shareholder redemptions, and sales of portfolio investments to satisfy redemptions
may result in the dilution of outstanding fund shares. Moreover, even when a fund is managing
its liquidity effectively, the transaction costs associated with meeting redemption requests orinvesting the proceeds of subscriptions can create dilution for fund shareholders. These concerns
are particularly heightened in times of stress or in funds invested in less liquid investments. To
that end, the ability of funds to meet investor redemptions, while mitigating the impact of thisredemption activity on remaining shareholders, is an important aspect of the regulatory regime
for open-end funds.
Commission rules currently provide open-end funds with several tools to mitigate
dilution from shareholder purchase or redemption activity and facilitate a fund’s ability to meetshareholder redemptions in a timely manner. These tools include a fund’s liquidity risk
management program, the option to use swing pricing for certain funds, the ability to impose
purchase or redemption fees, and/or the ability to redeem in kind.11 In March 2020, in connection
with the economic shock from the onset of the COVID-19 pandemic, U.S. open-end funds faced
a significant volume of investor redemptions.12 As investors sought to redeem fund investments
to free up cash during a time of market uncertainty, open-end funds faced significant
redemptions and liquidity concerns.13
In light of these events, we have reviewed the effectiveness of funds’ current tools for
managing liquidity and limiting dilution, including through staff outreach and review of
11

See Liquidity Rule Adopting Release, supra note 8; Investment Company Swing Pricing,
Investment Company Act Release No. 32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)](“Swing Pricing Adopting Release”).

12

See infra section I.B for a discussion of the fund flows for different types of open-end funds
during the Mar. 2020 period.

13

See infra section I.B discussing the events of Mar. 2020.

12

information funds are required to report to the Commission.14 We have identified weaknesses infunds’ liquidity risk management programs that can cause delays in identifying liquidity issues instressed periods and cause funds to over-estimate the liquidity of their investments, as well as
limited use of tools such as redemption fees or swing pricing that are designed to limit dilution
resulting from a fund’s trading of portfolio investments in response to shareholder redemptions
or purchases. As a result, we are proposing amendments to enhance funds’ liquidity risk
management to help better prepare them for stressed market conditions and to require the use ofswing pricing for certain funds in certain circumstances to limit dilution. We believe theproposed amendments would enhance open-end fund resilience in periods of market stress bypromoting funds’ ability to meet redemptions in a timely manner while limiting dilution ofremaining shareholders’ interests in the fund.
A.

Open-End Funds and Existing Regulatory Framework

Open-end funds are a popular investment choice for investors seeking to gain
professionally managed, diversified exposure to the capital markets while preserving liquidity.15
There are two kinds of open-end funds: mutual funds and ETFs. Open-end funds offer investors
daily liquidity, but may invest in assets that cannot be liquidated quickly without significantly
affecting market prices. Since the 1940s, the Commission has stated that open-end funds should
maintain highly liquid portfolios and recognized that this may limit their ability to participate incertain transactions in the capital markets.16
14

The review consisted of outreach with funds, advisers, and liquidity vendors that funds use tohelp classify the liquidity of their investments. In addition, staff reviewed data provided on Form
N-PORT, Form N-CEN, and Form-RN.

15

See Liquidity Rule Adopting Release, supra note 8. See also supra note 9 and accompanying text
(discussing an estimated number of Americans who invest in mutual funds).

16

See Investment Trusts and Investment Companies: Report of the Securities and Exchange
Commission (1942), at 76 (“Open-end investment companies, because of their security holders’right to compel redemption of their shares by the company at any time, are compelled to invest13

While the Act requires open-end funds to pay redemptions within seven days, as apractical matter most investors expect to receive redemption proceeds in fewer than seven days.
For example, many mutual funds represent in their prospectuses that they will pay redemption
proceeds on the next business day after the redemption. In addition, open-end funds redeemedthrough broker-dealers must meet redemption requests within two business days because of rule15c6-1 under the Exchange Act, which establishes a two-day (T+2) settlement period for trades
effected by broker-dealers.17
In terms of pricing, an order to purchase or redeem fund shares must receive a pricebased on the current NAV next computed after receipt of the order.18 Open-end funds typicallycalculate their NAVs once a day. Purchase and redemption requests submitted throughout the
day receive the NAV calculated at the end of that day, which is typically calculated as of 4 p.m.

their funds predominantly in readily marketable securities. Individual open-end investmentcompanies, therefore, as presently constituted, could participate in the financing of small
enterprises and new ventures only to a very limited extent.”).
17

The Commission has proposed to amend rule 15c6-1 to establish a T+1 settlement period for
broker-dealer trades. See Shortening the Securities Transaction Settlement Cycle, Exchange Act
Release No. 34-94196 (Feb. 9, 2022) [87 FR 10436 (Feb. 24, 2022)].

18

Rule 22c-1 under the Act. The process of calculating or “striking” the NAV of the fund’s shareson any given trading day is based on several factors, including the market value of portfolio
securities, fund liabilities, and the number of outstanding fund shares, among others. Rule 2a-4
requires, when determining the NAV, that funds reflect changes in holdings of portfolio securities
and changes in the number of outstanding shares resulting from distributions, redemptions, andrepurchases no later than the first business day following the trade date. As indicated in the
adopting release for rule 2a-4, this calculation method provides funds with additional time andflexibility to incorporate last-minute portfolio transactions into their NAV calculations on thebusiness day following the trade date, rather than on the trade date. See Adoption of Rule 2a-4
Defining the Term “Current Net Asset Value” in Reference to Redeemable Securities Issued by aRegistered Investment Company, Investment Company Act Release No. 4105 (Dec. 22, 1964)[29 FR 19100 (Dec. 30, 1964)].

14

ET.19 These provisions are designed to promote equitable treatment of fund shareholders whenbuying and selling fund shares.
A characteristic of open-end funds is that fund shareholders share the gains and losses ofthe fund, as well as the costs. As a result, there are circumstances in which the transaction
activity of certain investors leads to costs that are distributed across all shareholders, unfairly
reducing the value (or “diluting”) the interests of shareholders who did not engage in theunderlying transactions. For example, while redemption orders receive the next computed NAV,
the fund may incur costs on subsequent days to meet those redemptions, because the fund may
engage in trading activity and make other changes in its portfolio holdings over multiple businessdays following the redemption order. As a result, the costs of providing liquidity to redeeming
investors can be borne by the remaining investors in the fund and dilute the interests of nonredeeming shareholders. Similarly, when shareholders purchase shares in the fund, costs may
arise when the fund buys portfolio investments to invest the proceeds of the purchase, and thefund and its shareholders may bear those costs in days following the purchase request, diluting
the interests of the non-purchasing shareholders.
Transaction costs associated with redemptions or purchases can vary. The less liquid thefund’s portfolio holdings, the greater the liquidity costs associated with redemption and purchaseactivity can become and the greater the possibility of dilution effects on fund shareholders. For
example, during times of heightened market volatility and wider bid-ask spreads for the fund’s
underlying holdings, selling fund investments to meet investor redemptions results in greater
costs to the fund. Moreover, funds also incur transaction costs outside of stressed periods.

19

Commission rules do not require that a fund calculate its NAV at, or as of, a specific time of day.
Current NAV must be computed at least once daily, subject to limited exceptions, Monday
through Friday, at the pricing time set by the board of directors. See rule 22c-1(b)(1).

15

Although these costs would generally be smaller than in times of heighted market volatility, theyalso are borne by fund investors and, particularly over time, also can result in dilution.
In times of liquidity stress, there may be incentives for shareholders to redeem fundshares quickly to avoid further losses, to redeem fund shares for cash in times of uncertainty, orto obtain a “first-mover” advantage by avoiding anticipated trading costs and dilution associatedwith other investors’ redemptions. This perceived advantage may lead to increasing outflows,
further exacerbating the effect on remaining shareholders and incentivizing increased
shareholder redemptions. Whether investors redeem because they need cash or want to capitalize
on a first-mover advantage, the remaining investors in the fund may, particularly in times ofstress, experience dilution of their interests in the fund.
1.

Liquidity Risk Management

In 2016, the Commission adopted rule 22e-4 under the Act (the “liquidity rule”) torequire open-end funds to adopt and implement liquidity risk management programs. Rule 22e-4
was designed to address concerns that open-end funds investing in less liquid securities may
have difficulty meeting redemption requests without significant dilution of remaining investors’interests in the fund.20 Rule 22e-4 requires: (1) assessment, management, and periodic review ofa fund’s liquidity risk; (2) classification of the liquidity of each of a fund’s portfolio investments
into one of four prescribed categories—ranging from highly liquid investments to illiquid
investments—including at-least-monthly reviews of these classifications; (3) determination andperiodic review of a highly liquid investment minimum for certain funds; (4) limitation on
illiquid investments; and (5) board oversight.

20

See Liquidity Rule Adopting Release, supra note 8, at section II.B.

16

Funds are also subject to related reporting requirements. For example, funds must report
the liquidity classifications of their holdings confidentially to the Commission on Form NPORT. A fund also must immediately report to the Commission on Form N-RN and to the fund’sboard if its portfolio becomes more than 15% illiquid, as well as if the fund breaches a highly
liquid investment minimum established as part of its liquidity risk management program forseven consecutive days.21 While the compliance dates for specific provisions of rule 22e-4
varied, most funds were required to be in compliance with all requirements of the rule in 2019.22
In 2018, the Commission adopted amendments designed to improve the reporting anddisclosures of liquidity information by open-end funds.23 These amendments modified certain
aspects of the liquidity framework by requiring funds to disclose information about the operationand effectiveness of their liquidity risk management program in their shareholder reports insteadof requiring funds to disclose aggregate liquidity classifications publicly in Form N-PORT.24
Since that time, some individual investors have stated that they care about being able to redeem
but do not need narrative information about how a fund manages its liquidity, while some othercommenters have suggested that aggregate liquidity classifications would be more helpful thannarrative shareholder report disclosure.25 We recently removed the narrative disclosure
21

Form N-RN was previously titled Form N-LIQUID. See Use of Derivatives by Registered
Investment Companies and Business Development Companies, Investment Company Act Release
No. 34084 (Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)] (“Derivatives Adopting Release”).

22

Small entities were required to be in compliance with the reporting requirements under Form NPORT by Mar. 1, 2020. See Investment Company Liquidity Disclosure, Investment Company Act
Release No. 33142 (June 28, 2018) [83 FR 31859 (July 10, 2018)] (“2018 Liquidity Disclosure
Adopting Release”).

23

Id.

24

The Commission also adopted amendments to Form N-PORT to allow funds classifying theliquidity of their investments pursuant to their liquidity risk management programs to reportmultiple liquidity classification categories for a single position under specified circumstances.
See 2018 Liquidity Disclosure Adopting Release, supra note 22.

25

See infra notes 303 to 305 and accompanying text (discussing these comments in more detail).

17

requirement because, in practice, it did not meaningfully augment other information alreadyavailable to shareholders.26
When the Commission adopted the 2018 amendments, it stated that Commission staff
would continue to monitor and solicit feedback on the implementation of the liquidity frameworkand inform the Commission what steps, if any, the staff recommends in light of this monitoring.27
The Commission stated its expectation that this evaluation would take into account at least one
full year’s worth of liquidity classification data from large and small entities to allow funds andthe Commission to gain experience with the classification process and to allow analysis of its
benefits and costs based on actual practice. As discussed below, we have had the opportunity
since the adoption of these amendments to evaluate the liquidity framework while taking into
account the data available to us regarding funds’ liquidity risk management programs.28 We
discuss our evaluation of the current liquidity framework throughout this release.
2.

Swing Pricing

In 2016, the Commission adopted a rule permitting registered open-end funds (except
money market funds or ETFs), under certain circumstances, to use swing pricing, which is theprocess of adjusting the price above or below a fund’s NAV per share to effectively pass on thecosts stemming from shareholder purchase or redemption activity to the shareholders associatedwith that activity.29 When a shareholder purchases or redeems fund shares, the price of those26

See Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee
Information in Investment Company Advertisements, Investment Company Act Release No.
34731 (Oct. 26, 2022) (“Tailored Shareholder Reports Adopting Release”) at nn.462-472 andaccompanying text.

27

See 2018 Liquidity Disclosure Adopting Release, supra note 22, at paragraph accompanying
n.125.

28

See infra sections I.B and II.A.

29

Swing Pricing Adopting Release, supra note 11; rule 22c-1(a)(3).

18

shares does not typically account for the transactions costs, including trading costs and changes
in market prices, that may arise when the fund buys portfolio investments to invest proceedsfrom purchasing shareholders or sells portfolio investments to meet shareholder redemptions.30
Swing pricing is an investor protection tool currently available to funds to mitigate potential
dilution and manage fund liquidity as a result of investor redemption and purchase activity.
The 2016 swing pricing rule requires that, for funds choosing to use swing pricing, thefund’s NAV is adjusted by a specified amount (the “swing factor”) once the level of net
purchases into or net redemptions from the fund has exceeded a specified percentage of thefund’s NAV (the “swing threshold”). A fund’s swing factor is permitted to take into account only
the near-term costs expected to be incurred by the fund as a result of net purchases or net
redemptions on that day and may not exceed an upper limit of 2% of the NAV per share. The
rule also requires a fund that uses swing pricing to adopt swing pricing policies and proceduresthat specify the process for determining the fund’s swing factor and swing threshold. The fund’sboard must approve the fund’s swing pricing policies and procedures, the fund’s swing factor
upper limit, and the swing threshold. The board also must review a written report on theadequacy and effectiveness of the fund’s swing pricing policies and procedures at least annually.
In the time since the adoption of the rule, no U.S. funds have implemented swing pricing.
While swing pricing has been a commonly employed anti-dilution tool in Europe, including
among U.S.-based fund managers that also operate funds in Europe, U.S. funds face uniqueoperational obstacles in its implementation. When considering the adoption of the 2016 swing
pricing rule, the Commission received comment letters articulating the operational issues thatfunds may encounter if they implemented swing pricing.31 In response to the concerns raised by30

See Swing Pricing Adopting Release, supra note 11, at section II.A.1.

31

See Comment Letter of BlackRock on Open-End Fund Liquidity Risk Management Programs;

19

commenters, the Commission adopted an extended effective date to allow for the creation ofindustry-wide operational solutions to facilitate the implementation of swing pricing more
effectively. In that release, the Commission stated that it had directed Commission staff toreview, two years after the rule’s effective date, market practices associated with funds’ use ofswing pricing to mitigate dilution and to provide the Commission with the results of its review.32
Since that time, we have evaluated market practices associated with funds’ lack of use of swing
pricing, and this release reflects that evaluation. Despite over five years passing since adoption,
the industry has not developed an operational solution to facilitate implementation of swing
pricing, nor have individual market participants.33
We understand that the industry has been unable to develop an operational solution to
implement swing pricing largely because funds currently are unable to obtain sufficient fundflow information before they finalizes their NAVs, a necessary precursor to determining whether
a fund needs to use swing pricing on any particular day. Generating fund flow information
involves a broad network of market participants with multiple layers of systems, including,among others, funds, transfer agents, broker-dealers, retirement plan recordkeepers, banks, andSwing Pricing; Re-Opening of Comment Period for Investment Company Reporting
Modernization Release, Investment Company Act File No. 31835 (Sep. 22, 2015) [80 FR 62274(Oct. 15, 2015)] (“2015 Proposing Release”), File No. S7-16-15; Comment Letter of Dodge &Cox on 2015 Proposing Release, File No. S7-16-15; Comment Letter of Pacific Investment
Management Company LLC on 2015 Proposing Release, File No. S7-16-15; Comment Letter ofSecurities Industry and Financial Markets Association on 2015 Proposing Release, File No. S716-15. The comment file for the 2015 Proposing Release, where these comment letters can beaccessed, is available at https://www.sec.gov/comments/s7-16-15/s71615.shtml.
32

See Swing Pricing Adopting Release, supra note 11, at section II.A.1.

33

After the Commission adopted the current swing pricing rule, the industry formed working
groups to explore potential operational solutions to facilitate funds’ ability to implement swing
pricing. See Evaluating Swing Pricing: Operational Considerations, Addendum (June 2017),
available athttps://www.ici.org/system/files/attachments/ppr_17_swing_pricing_summary.pdf (“2017ICI Swing Pricing White Paper”).

20the National Securities Clearing Corporation (“NSCC”). In general, many mutual funds use
prices as of 4 p.m. ET (or the “pricing time”) to value the funds’ underlying holdings forpurposes of computing their NAVs for the current day. This time is established by the fund’sboard of directors. Typically, investors may place orders to purchase or redeem mutual fundshares with the fund’s transfer agent or with intermediaries as late as 3:59 p.m. ET for execution
at that day’s NAV. When the transfer agent or an intermediary receives an order before thepricing time, that order typically receives that day’s price. An investor who submits an order
after the pricing time must receive the next day’s price.
While some investors may place orders by opening an account directly with the fund’stransfer agent, we understand that the majority of mutual fund orders are placed withintermediaries, such as broker-dealers, banks, and retirement plan recordkeepers.34 Someintermediaries do not transmit flow details to the fund’s transfer agent or the clearing agency
until after the fund has finalized its NAV calculation and disseminated the NAV to pricing
vendors, media, and intermediaries (“NAV dissemination”). NAV dissemination tends to occur
between 6 p.m. ET and 8 p.m. ET. Indeed, the fund’s transfer agent or the clearing agency often
do not receive a significant portion of orders until after midnight—i.e., the next day.35 This
contributes to a mismatch between the extent of flow information funds require to implement
swing pricing and the flow information funds currently have before the pricing time. For
34

In 2021, an estimated 18% of U.S. households owning mutual funds purchased them directlyfrom the mutual fund company. See 2022 ICI Fact Book, supra note 9, at Figure 7.8.

35

NSCC currently is the only registered clearing agency for fund shares. A significant portion ofmutual fund orders are processed through NSCC’s Fund/SERV platform. See Depositary Trustand Clearing Corporation 2021 Annual Report, available athttps://www.dtcc.com/annuals/2021/performance/dashboard (stating that the value of transactions
Fund/SERV processed in 2021 was $8.5 trillion and the volume for this period was 261 million
transactions). A part of the platform, referred to as Defined Contribution Clearance & Settlement,
focuses on purchase, redemption, and exchange transactions in defined contribution and otherretirement plans. This service handled a volume of nearly 154 million transactions in 2021. See
id.

21example, based on staff outreach, we understand that some funds receive only around half of
their daily volume by 6 p.m. ET.36 We are also aware of a separate review of funds’ receipt offlow data for a quarter in 2016, which found that only 70% of actual and estimated trade flow
could be delivered by 6 p.m. ET.37 Without sufficient actual or estimated flow information before
the fund finalizes its NAV, funds cannot implement swing pricing because the determination ofwhether to swing the fund’s NAV depends on the size of net flows.
B.

March 2020 Market Events

In March 2020, at the onset of the COVID-19 pandemic in the United States, mostsegments of the open-end fund market witnessed large-scale investor outflows. Investors’
concerns about the potential impact of the COVID-19 pandemic led investors to reallocate theirassets into cash and short-dated, near-cash investments.38 The resulting outflows from many
open-end funds placed pressure on these funds to generate liquidity quickly in order to meetinvestor redemptions. Equity and debt security prices fell as yields rose. Uncertainty throughout

36

We understand based on staff outreach that the time by which a fund receives flow information
varies to some extent based on the fund’s investor base. For example, funds with large
investments by retirement plans generally receive a larger portion of their flow information after
6 p.m. ET than other funds.

37

See 2017 ICI Swing Pricing White Paper, supra note 33 (stating that, for instance, intermediaries
trading via traditional Fund/SERV, such as traditional brokerage and managed account activity,transmit orders to the fund by 7 p.m. ET but, with system and procedural enhancements,
processing and submission of orders as actual trades might be able to occur prior to 6 p.m. ET).
This paper also suggested that 90% to 100% of trade flow (actual or estimated) is required toapply swing pricing between 4 p.m. and 6 p.m. ET.

38

See SEC Staff Report on U.S. Credit Markets Interconnectedness and the Effects of the COVID19 Economic Shock (Oct. 2020) (“SEC Staff Interconnectedness Report”), at 17 to 18, available
at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf. Staff reports and otherstaff documents (including those cited herein) represent the views of Commission staff and are
not a rule, regulation, or statement of the Commission. The Commission has neither approved nor
disapproved the content of these documents and, like all staff statements, they have no legal force
or effect, do not alter or amend applicable law, and create no new or additional obligations forany person.

22the U.S. economy and asset-price volatility rose, and credit spreads and bid-ask spreads
widened.39 The large outflows open-end funds faced during March 2020, combined with thewidening bid-ask spreads funds encountered when purchasing or selling portfolio investments atthat time, likely contributed to dilution of the value of funds’ shares for remaining investors.40
Open-end funds are a large and important component of U.S. markets. At the end of
2019, assets in open-end funds totaled $21 trillion.41 Fixed-income funds accounted for $5.3
trillion, or 25% of total open-end fund assets.42 Bank loan assets were nearly $100 billion, or lessthan 2% of total fixed-income fund assets. At the end of March 2020, following the height of the
COVID-19 related market stress, assets in open-end funds (including ETFs) fell 17% ($3.639

See id., at 3 and 6 to 8 (discussing that the market structure of certain segments of the credit
market contributed to market stress in Mar. 2020, including reduced dealer inventories andreluctance to accommodate customer demand in some cases). On Apr. 1, 2020, the Board ofGovernors of the Federal Reserve System (“Federal Reserve”) made a temporary change to its
supplementary leverage ratio rule to allow banking organizations to expand their balance sheets
as appropriate to continue to serve as financial intermediaries, stating that the rule’s regulatory
restrictions may constrain the firms’ ability to continue to serve as financial intermediaries and toprovide credit to households and businesses in the face of rapid deteriorations in Treasury market
liquidity conditions and significant inflows of customer deposits and increased reserve levels. See
Federal Reserve Board Announces Temporary Changes to its Supplementary Leverage Ratio
Rule to Ease Strains in the Treasury Market Resulting from the Coronavirus and Increase
Banking Organizations’ Ability to Provide Credit to Households and Businesses (Apr. 1, 2020),
available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200401a.htm.

40

We do not have specific data about the dilution fund shareholders experienced in Mar. 2020
because funds do not report information about their trading activity and the prices at which theypurchase and sell each instrument. However, European funds experienced similar market
conditions as U.S. funds and, to mitigate dilution during this period, many European funds
increased their use of swing pricing and the size of their swing factors. See infra paragraphaccompanying note 60. European funds are subject to regulatory regimes that differ in somerespects from the U.S. regime for open-end funds. We are not aware, however, of differences
between the regimes that would have significantly reduced dilution for U.S. funds relative toEuropean funds during this period, such that European funds needed to use swing pricing to
mitigate dilution that U.S. funds were not experiencing due to regulatory or other differences.

41

Of this amount, ETFs had assets of $4.4 trillion and other open-end funds had assets of $16.4
trillion. Money market funds and funds of funds are excluded from calculations relating to thesize and redemptions of open-end funds.

42

Fixed-income funds, excluding ETFs, had assets of $4.5 trillion, and fixed-income ETFs had
assets of $800 billion.

23

trillion) from $20.8 trillion in December 2019 to a total of $17.2 trillion. Assets of open-end
funds excluding ETFs fell 18% ($2.9 trillion) from $16.4 trillion to $13.5 trillion, and ETF assets
fell 17% (approximately $760 billion) from $4.4 trillion to $3.7 trillion. Of this amount, fixedincome mutual fund assets fell 5.5%, although fixed-income ETFs’ assets increased slightly.43 In
addition, bank loan fund assets fell by 30% in March 2020, or from $100 billion to $70 billion,
compared to the level of assets reported in December 2019.
Figure 2: Trends in Open-End Fund Assets
Open-End Fund (Excluding ETF)
Assets43

Open-End Fixed-Income Fund (ExcludingETF) Assets

Fixed-income funds, excluding ETFs, had assets of approximately $4.1 trillion, while fixedincome ETFs’ assets increased slightly from Dec. 2019 levels to $830 billion.

24Source: Morningstar
ETF Assets

Fixed-Income ETF Assets

25Source: Morningstar
The market disruptions of the March 2020 period included significant redemption activity
in open-end funds.44 Throughout 2019, net flows into open-end funds averaged approximately$32.4 billion, or 0.2% per month.45 During this same period, fixed-income funds experienced asteady inflow of approximately $41.7 billion, or 0.9% per month on average.46 In March 2020,
however, open-end funds had outflows totaling $329.4 billion, or 1.7% of prior period assets.47

44

Open-end funds also experienced heightened outflows in other stressed periods, such as the lastquarter of 2008, but outflows in March 2020 surpassed those witnessed in these other periods. For
example, during the last quarter of 2008, investors withdrew $65 billion from bond funds. Total
outflows for bond funds during this period never exceeded 1.5% of total net assets. See ICI, 2009
Investment Company Fact Book, Figure 2.10 and accompanying text, available athttps://www.ici.org/system/files/attachments/2009_factbook.pdf (calculating net flows as a threemonth moving average of net flows as a percentage of previous month-end assets, and excluding
high yield bond funds).

45

Open-end funds (excluding ETFs) had average net flows of approximately $4.8 billion (or 0.04%
per month). ETFs had average net flows of approximately $27.7 billion (or 0.7% per month).

46

Fixed-income funds (excluding ETFs) had inflows of $28.8 billion (or 0.7% per month on
average). Fixed-income ETFs had inflows of $12.5 billion (or 1.7% per month on average).

47

Open-end funds (excluding ETFs) had outflows totaling $336.8 billion, or 1.7% of prior period
assets. ETFs had inflows totaling $7.3 billion, or 2% of prior period assets. The majority of ETF
inflows were for equity ETFs, which had $14.7 billion in inflows. Allocation, alternative,
commodity, and miscellaneous/other ETFs had inflows of $13.2 billion. The inflows into some
types of ETFs were partially offset by outflows of $20.6 billion from fixed-income ETFs.

26

The majority of these outflows were from fixed-income funds, which had $286.6 billion in
outflows.48 Taxable bond funds had outflows of $241.7 billion (or 5.2% of prior period assets), of
which, bank loan funds had outflows of $12.4 billion (or 13.4% of prior period assets in thesefunds).49 Municipal bond funds had $44.9 billion in outflows (or 4.9% of prior period assets).50
Figure 3: Open-End Fund and Fixed Income Fund Flows
Open-End Fund (Excluding ETF) Flows

Open-End Fixed-Income Fund (ExcludingETF) Flows

Source: Morningstar

48

Open-end funds (excluding ETFs) had outflows of approximately $266 billion, and ETFs had
outflows of approximately $20.6 billion.

49

For open-end funds (excluding ETFs) this included outflows of $223.3 billion (5.9%) for taxablebond funds (of which, bank loan funds had outflows of $11.4 billion (13.6%)). For ETFs thisincluded outflows of $18.4 billion (2.2%) for taxable bond ETFs (of which, bank loan ETFs had
outflows of approximately $1 billion (11.2%))50

For open-end funds (excluding ETFs) this included outflows of $42.6 billion (5%) for municipal
bond funds. For ETFs this included outflows of $2.2 billion (4.3%) for municipal bond ETFs.

27

ETF Flows

Fixed-Income ETF Flows

Source: Morningstar
During the period of market turmoil, bid-ask spreads spiked by as much as 100 basis
points for high-yield bonds and 150-200 basis points for investment-grade bonds.51 In general,the bond market and bank loan market experienced significant price declines in March 2020. The
price for 10 year U.S. Treasuries increased by roughly 4.6%. The price of corporate bonds
declined by 7%.52 The price of leveraged loans decreased by roughly 13%.53 The heightened
volatility and demand for liquidity drove stress throughout the market, particularly in the bondfund and bank loan fund markets. Price declines were not limited to these markets, however. For
example, the price for U.S. small cap equities decreased by roughly 24%.54
Beginning in mid-March 2020, the Federal Reserve, with the approval of the Departmentof the Treasury, used its emergency powers to intervene by providing timely and sizable
51

See SEC Staff Interconnectedness Report, supra note 38, at 37.

52

The decline in the price of corporate bonds is measured by the BBG U.S. Corporate Bond Index.

53

The decline in the price of leveraged loans was measured by the S&P Leveraged Loan Price
Index.

54

The decline in the price of U.S. small cap equities was measured by the Russell 2000 Total
Return Index.

28

interventions in an effort to stabilize the markets. The official sector interventions included,
among others, the Secondary Market Corporate Credit Facility, introduced on March 23, 2020.
This facility supported market liquidity by purchasing in the secondary market corporate bonds
issued by investment grade U.S. companies, as well as U.S.-listed ETFs whose investment
objective is to provide broad exposure to the market for U.S. corporate bonds.55
After the Federal Reserve announced that it would be using its emergency powers forofficial sector interventions, market stress relating to the COVID-19 pandemic began to subside.
Assets in open-end funds, including fixed income funds, began to increase. By December 2020,
open-end fund assets had increased to $24 trillion, with fixed-income funds (excluding ETFs)
reaching $6 trillion in assets, and fixed-income ETFs surpassing $1 trillion in assets.56 Bank loan
fund assets remained essentially unchanged, however, from March 2020 levels and remained at$68 billion.
Other Observations from March 2020
Beyond data evidencing the liquidity stress funds faced in March 2020, we also observed
the stress through staff outreach to the industry. During this period, fund managers discussed
their liquidity concerns with Commission staff and the potential need for emergency relief. Fundmanagers explored various emergency relief actions. For example, some fund managers
requested emergency relief that would provide additional flexibility for interfund lending and

55

See, e.g., Press Release, Federal Reserve Announces Extensive New Measures to Support the
Economy (Mar. 23, 2020), available athttps://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm;
https://www.federalreserve.gov/monetarypolicy/smccf.htm (describing the Secondary Market
Corporate Credit Facility in particular).

56

From Apr. to Dec. 2020, fixed-income funds averaged $75 billion in inflows, or 1.4% per month.
Ultrashort and short-term bond funds experienced average monthly inflows of $16 billion and 2%of assets over this period.

29

other short-term funding to help meet redemptions, which the Commission provided.57 Somemanagers suggested emergency relief to permit funds to impose redemption fees that exceed 2%
to mitigate dilution, including fees that ETFs can charge authorized participants to coverliquidity and transaction costs.58 Some fund managers that have successfully used swing pricing
in Europe urged the Commission to explore emergency actions to facilitate funds’ ability tooperationalize the Commission’s current swing pricing rule. Some fund managers also suggested
there was a need for Federal Reserve interventions. These discussions indicated that fundmanagers sought additional means to quickly address liquidity and dilution concerns during thisperiod of financial stress.
During these conversations, several fund managers with operations in both the U.S. andEurope discussed their experience with swing pricing in Europe and indicated that swing pricing
would have been a useful tool for U.S. funds to have had in March 2020. Swing pricing was
widely used in several European jurisdictions during the March 2020 stressed period to reduce
dilution from rising transaction costs.59 In these jurisdictions, some funds used partial swing
57

See Order Under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) and 38(b) of the Investment Company
Act of 1940 and Rule 17d-1 Thereunder Granting Exemptions from Specified Provisions of theInvestment Company Act and Certain Rules Thereunder, Investment Company Act Release No.
33821 (Mar. 23, 2020), available at https://www.sec.gov/rules/other/2020/ic-33821.pdf.
Although the Commission provided this relief for a period of time, we understand funds generally
did not use it.

58

ETFs typically externalize the costs associated with purchases and redemptions of shares byredeeming in kind and by charging a fixed and/or variable fee to authorized participants to offset
both transfer and other transaction costs that an ETF (or its service provider) may incur, as wellas brokerage, tax-related, foreign exchange, execution, market impact, and other costs andexpenses related to the execution of trades resulting from such transaction. The amount of these
fixed and variable fees typically depends on whether the authorized participant effects
transactions in kind or with cash and is related to the costs and expenses associated withtransactions effected in kind versus in cash. For example, when an authorized participantsredeems ETF shares by selling a creation unit to the ETF, the fees that the ETF imposes defray
the costs of liquidity the redeeming authorized participant receives. This, in turn, mitigates therisk of diluting non-redeeming authorized participants when an ETF redeems its shares.

59

Funds in countries such as Luxembourg, Ireland, the United Kingdom, and the Netherlands had
implemented swing pricing and it was well-established market practice. In Mar. 2020, funds in30

pricing (where a NAV adjustment occurs only if net flows exceed a swing threshold), somefunds used full swing pricing (where a NAV adjustment occurs any time a fund has net inflows
or net outflows), and some funds did not use swing pricing. Many European funds increased
their use of swing pricing and increased the size of their swing factors during the stressed period.
For example, a voluntary survey conducted by the Bank of England and Financial Conduct
Authority of a subset of fund managers in the United Kingdom (“UK”) indicated that the use ofswing pricing more than doubled from the last quarter of 2019 to the first quarter of 2020.60 Due
to increasing transaction costs, several European funds lowered their swing thresholds in March
2020, with some moving to full swing pricing for net redemptions.61 Funds also increased thesome countries, such as France, Spain, and Germany, had more recently begun to employ swing
pricing as an anti-dilution method. See Lessons from COVID-19: Liquidity Risk Management
and Open-Ended Funds, BlackRock ViewPoint (Jan. 2021), available athttps://www.blackrock.com/corporate/literature/whitepaper/viewpoint-addendum-lessons-fromcovid-liquidity-risk-management-is-central-to-open-ended-funds-january-2021.pdf.
60

See Liquidity management in UK open-ended funds: Report based on a joint Bank of Englandand Financial Conduct Authority survey (Mar. 2021), available athttps://www.bankofengland.co.uk/report/2021/liquidity-management-in-uk-open-ended-funds(“Bank of England Survey”). The increase in the use of partial and full swing pricing included theincrease in the number of funds using swing pricing as well as the increase in the frequency of its
use for funds that already used swing pricing. The survey also found that some funds did not use
swing pricing or other tools during the period because, for example, net outflows of certain funds
were below levels at which they would consider applying swing pricing or other tools.

61

See id. (stating that, out of a total of 202 surveyed funds that were authorized to use swing
pricing, 45 funds decided to reduce their swing threshold during this period, including 18 funds
that switched temporarily to full swing pricing during the market stress); ICI, Experiences ofEuropean Markets, UCITS, and European ETFs During the COVID-19 Crisis (Dec. 2020),
available at https://www.ici.org/doc-server/pdf%3A20_rpt_covid4.pdf (“Respondents reported
that some UCITS lowered their partial swing thresholds during March to take into consideration
the impact flows could have on investors from increased transaction costs in underlying
markets… Some UCITS using partial swing pricing lowered their threshold for redemptions tozero in March (which is equivalent to full swing pricing) in response to market volatility that had
caused bid-ask spreads to widen on underlying securities.”); Claessens, Stijn, and Lewrick, Ulf,
“Open-ended bond funds: systemic risks and policy implications” (Dec. 2021) available athttps://www.bis.org/publ/qtrpdf/r_qt2112c.pdf (stating that, in a survey of 57 Luxembourg
actively managed bond UCITS based on a supervisory data collection, these funds lowered swing
thresholds on average from net outflows of 1% of total net assets before Mar. 2020 to less than
0.5% of total net assets) (“Claessens and Lewrick”). See also CSSF Working Paper: An
Assessment of Investment Funds’ Liquidity Management Tools (June 2022), available athttps://www.cssf.lu/en/2022/06/publication-of-cssf-working-paper-an-assessment-of-investment-

31

size of their swing factors to account for the increase in liquidity and transaction costs. For
example, a survey of Luxembourg UCITS found that while the average swing factor for thesurvey sample hovered around zero before the turmoil, it increased by more than 100 basis points
on average during the market stress.62 The survey of UK-authorized funds similarly found thatthe size of swing factors increased during this period and that some funds that had capped thesize of their swing factors needed to temporarily remove these caps.63 In terms of the effects ofusing swing pricing during March 2020, one study found that swing pricing allowed surveyed
funds to recoup roughly 0.06% of total net assets on average from redeeming investors during
three weeks of elevated redemptions in March 2020.64
We also observed funds’ liquidity risk management in March 2020 through funds’ filings
with the Commission and other staff outreach. Specifically, during and following the market
events of March 2020, Commission staff assessed liquidity-related data reported on Forms NPORT and N-RN, as well as the development of liquidity risk management programs throughstaff outreach to funds, advisers, and liquidity classification vendors.65 Based on review of Formfunds-liquidity-management-tools/ (“CSSF Paper”).
62

See Claessens and Lewrick, supra note 61; CSSF Paper, supra note 61 (stating that “[t]heaverage swing factor of the 42 bond funds participating in the CSSF survey increased by morethan 100 basis points on average during Mar. 2020 (the median and maximum swing factor were
60 and 350 basis points, respectively)”).

63

See Bank of England Survey, supra note 60 (stating that of the 17 surveyed funds that had a capon their swing factors, which ranged from 0.25% to 3%, 13 funds temporarily removed the caps
in response to heightened outflows and a few managers overrode the caps). We also understandthat in response to funds’ requests to use swing factors above their disclosed caps, somejurisdictions provided guidance on when this is permitted. See Commission de Surveillance duSecteur Financier, Swing Pricing Mechanism – FAQ, available athttps://www.cssf.lu/en/Document/cssf-faq-swing-pricing-mechanism/ (providing guidance forincreasing the swing factor above the maximum level identified in a fund’s prospectus undercertain circumstances, and noting that typical maximum swing factors observed in fundprospectuses are between 1% and 3%).

64

See Claessens and Lewrick, supra note 61.

65

The Mar. 2020 data collected on Form N-PORT often was not available to the Commission until
June or July 2020 because a fund files data covering each month of its fiscal quarter on Form N-

32

N-PORT filings for February and March 2020, approximately two-thirds of funds did not appear
to reclassify any investment held in both months despite the market events described above.66 We
saw that reclassifications increased from 25% of funds that held the same investment in both
January and February 2020 to 33% of funds in March 2020, and stayed elevated for April 2020.
We understand that many fund and liquidity vendor classification models use data lookback
periods of 30 days or more that made them slowly adjust to changing market conditions, leaving
these firms unable to consider their classifications and reclassify when market conditions
changed quickly. In addition, we understand that classification models generally tend to assess
liquidity based on relatively small sale sizes that do not necessarily reflect the amount a fundmay need to sell to meet heightened levels of redemptions in stress periods, and most models do
not automatically adjust to a higher trade size when market conditions change. Moreover, ourdata indicate that in March 2020 cash levels in the aggregate increased and relatively few funds
made use of borrowing to meet redemptions, suggesting that funds generally were selling
portfolio assets to meet redemptions and potentially for other purposes, such as to raise cash inanticipation of future redemptions. During March 2020, more than a dozen funds (primarily
fixed-income funds) filed reports on Form N-RN. Most of these Form N-RN filings related tobreaches of the 15% limit on illiquid investments.
Overall, the market events in March 2020 show how liquidity can deteriorate rapidly andsignificantly. In the face of such rapid market changes, liquidity risk management program
features of some funds adjusted slowly, making them less effective during the stress period for
managing liquidity risk. Additionally, tools, such as swing pricing, that may have helped openPORT no later than 60 days after the end of each fiscal quarter.
66

See infra note 128 (discussing that fewer equity funds reported reclassifications of investments
held in both Feb. and Mar. 2020 than fixed-income funds).

33

end funds limit dilution as both transaction costs and redemptions rose were unavailable becauseof operational challenges, although these tools were used in other jurisdictions during this period.
C.

Rulemaking Overview

In March 2020, some open-end funds were not prepared for the sudden market stress that
arose after many years of relative calm and, as the market stress and outflows grew, several
funds began to explore emergency relief requests or suggest a need for government intervention
in an effort to withstand or alleviate liquidity stress, address dilution, and improve overall market
conditions. The period of market stress in March 2020 was relatively brief ending upon Federal
Reserve interventions, and no funds sought to suspend redemptions during this period. We
believe there are meaningful lessons from this period that our rules should reflect, while also
recognizing the possibility that future stressed periods—whether specific to certain funds or themarkets as a whole—may be more protracted or more severe than March 2020, particularly
absent Federal Reserve action. Fundamentally, we believe funds should be better prepared for
future stressed conditions, which can occur suddenly and unexpectedly, and should have wellfunctioning tools for managing through stress without significantly diluting the interests of theirshareholders. We are proposing amendments to rules 22e-4 and 22c-1 that are designed toachieve these key objectives and to reflect our experience with the rules since they were adopted,
as well as supporting amendments to Form N-PORT and other reporting and disclosure forms.
Specifically, recognizing that it can be difficult to predict when market stress will occur,
the proposed amendments to rule 22e-4 would require funds to incorporate stress into theirliquidity classifications by assuming the sale of a stressed trade size, which would be 10% ofeach portfolio investment, rather than the rule’s current approach of assuming the sale of a“reasonably anticipated trade size” in current market conditions. Requiring a fund’s classification

34

model to assume the sale of larger-than-typical position sizes may better emulate the potential
effects of stress on the fund’s portfolio, similar to an ongoing stress test, and help better prepare
a fund for future stress or other periods where the fund faces higher than typical redemptions.
The proposal also would establish other minimum standards for classifying the liquidity of aninvestment, which are designed to improve the quality of classifications by preventing funds
from over-estimating the liquidity of their investments and to provide clearer guideposts forliquidity classifications, reflecting the more effective practices we have observed.
In addition, we propose to remove the less liquid investment category and to treat theseinvestments as illiquid. The less liquid category consists of investments that can be sold in sevencalendar days but that take longer to settle. For example, many bank loans take longer than sevendays to settle. The proposed amendment is designed to reduce the mismatch between the receipt
of cash upon the sale of assets with longer settlement periods and the payment of shareholder
redemptions. This would better position funds to meet redemptions, including in times of stress.
Currently, treating these investments as “less liquid”—as opposed to “illiquid”—allows funds toinvest in these assets beyond the 15% limit on illiquid investments, notwithstanding that “lessliquid” investments settle beyond the statutory seven-day period to pay redemptions. We are also
proposing to amend the definition of illiquid investment to include investments whose fair value
is measured using an unobservable input that is significant to the overall measurement. We
understand many funds classify these investments as illiquid today.
We also propose to require daily liquidity classifications. We believe this change would
promote better monitoring of a fund’s liquidity and an ability to more rapidly understand andrespond to changes that affect the liquidity of the fund’s portfolio, including the fund’s

35compliance with its highly liquid investment minimum and the rule’s limit on illiquid
investments.
As another means to prepare funds for stressed conditions, we are proposing to amend thehighly liquid investment minimum provisions in the rule to require all funds to determine andmaintain a minimum amount of highly liquid assets of at least 10% of net assets. This aspect ofthe proposal is designed to ensure that funds have sufficient liquid investments for managing
heightened levels of redemptions. Finally, we are proposing amendments to how the highly
liquid investment minimum calculation and the calculation of the 15% limit on illiquid
investments take into account the value of assets that are posted as margin or collateral for
certain derivatives transactions to reflect that the fund cannot access the value of posted assets tomeet redemptions until the fund is able to exit the derivatives transactions.
In addition, to reduce shareholder dilution during stress and other periods, we areproposing to amend rule 22c-1 to require all open-end funds, other than ETFs and money market
funds, to implement swing pricing. Today, no fund has implemented swing pricing, and funds
rarely use redemption fees to address dilution other than in the case of short-term trading of fundshares, meaning shareholders may experience dilution both in normal and stressed conditions,particularly when purchases or redemptions are large or when funds invest in markets with hightransaction costs relative to other markets.67 We believe swing pricing is an important andeffective tool for dynamically addressing such dilution by recognizing that costs associated withshareholder purchases and redemptions rise as net flows increase and liquidity and transaction
costs grow.
67

Based on an analysis of fund prospectuses, approximately 551 open-end funds (or around 4.6%of funds) state that they apply redemption fees under certain circumstances for at least one shareclass of the fund. Approximately 3.3% of fund classes have a redemption fee, or 0.6% of net fundassets.

36

In addition to proposing mandatory swing pricing, we are proposing to amend the swing
pricing framework in rule 22c-1 to apply lessons learned from March 2020, including
information about the European experience with swing pricing during that period. Specifically,
we propose to amend both when and how a fund would adjust its NAV, which would varydepending on whether a fund has net purchases or net redemptions. Rather than require funds todetermine their own swing thresholds, we propose to specify the amount of net inflows or net
outflows that would trigger a pricing adjustment in the rule, informed by an analysis of historicalflow amounts.
In addition, we propose a specific method of calculating the swing factor priceadjustment, which would require a fund to make good faith estimates of the transaction costs ofselling or purchasing a pro rata amount of its portfolio investments (or a “vertical slice”) tosatisfy that day’s redemptions or to invest the proceeds from that day’s purchases. Under the
proposal, a fund would be required to apply a swing factor on any day it has net redemptions.
When net redemptions exceed 1% of net assets, the swing factor would also account for market
impacts of selling a vertical slice of the portfolio to capture the dilutive effect of trading in
response to large outflows better. We believe trading in response to small levels of net inflows is
less likely to have a dilutive effect than trading in response to net outflows and, as a result, we
propose to require a fund to apply a swing factor for net purchases only if net purchases exceed
2% of net assets. In addition, we propose to remove the 2% swing factor upper limit from thecurrent rule because we are proposing a more specific framework for determining swing factors,some European funds used swing factors above 2% in order to mitigate dilution in March 2020,
and we received requests for emergency relief in the United States during this period to allow
funds to charge redemptions fees exceeding 2% to mitigate dilution. The proposed swing pricing

37

amendments are designed to reduce the dilution of an investor’s interest in a fund that is causedby the redemption or purchase activity of other investors in the fund and to fairly allocate thecosts associated with redemption and purchase activity. These amendments also may reduce
potential first-mover advantages that might incentivize early redemptions to avoid anticipatedtrading costs and dilution associated with other investors’ redemptions.
To operationalize the proposed swing pricing requirement and provide other benefits, weare also proposing to amend rule 22c-1 to require that the fund, its transfer agent, or a registeredclearing agency receive purchase and redemption orders by an established cut-off time to receive
a given day’s price (a “hard close”). Specifically, for an order to be eligible to receive a day’s
price, these designated parties would have to receive the order before the pricing time, which istypically 4 p.m. ET. The proposed hard close would facilitate the receipt of timely flow
information to inform swing pricing decisions. In addition, we believe it would help prevent latetrading and reduce operational risk.
To promote transparency related to fund liquidity and use of swing pricing, we areproposing amendments to Form N-PORT to require funds to report their aggregate liquidity
classifications publicly, as well as the frequency and amount of swing pricing adjustments. With
respect to liquidity disclosure, this amendment is designed to provide investors with meaningful
information about fund liquidity, taking into account that our proposed amendments to theliquidity classification framework should result in more objective and comparable liquidity
classifications across funds.68 As for the proposed swing pricing reporting requirements, we

68

In certain cases, investors consume reported information indirectly through other data users.
These other data users can include, for example, regulators such as the Commission, fundanalysts, and third-party data providers. Throughout this release, references to consumption of
information by investors include indirect consumption by investors enabled by other data users.

38

believe the proposed frequency and size information would allow investors to better understandthe operation and effects of swing pricing.
We also propose broader changes to Form N-PORT to require all registered investmentcompanies that report on the form, which include open-end funds (other than money-market
funds), registered closed-end funds, and ETFs registered as unit investment trusts, to file monthly
reports with the Commission within 30 days of month-end. These monthly reports would
subsequently be publicly available 60 days after month-end. These proposed amendments would
require filers to provide the Commission with more timely information and would provide
investors with access to monthly rather than quarterly information. We observed in March 2020
that timely and full disclosure can be particularly important during and immediately after stressevents. Finally, we propose amendments to Forms N-PORT, N-CEN, and N-1A to, among otherthings, conform to our other proposed amendments and to improve entity identifiers.
Taken together, these proposed amendments are designed to provide investors withincreased protection regarding how liquidity in their funds is managed, thereby reducing the riskthat funds will be unable to meet redemptions and mitigating dilution of the interests of fundshareholders. These reforms also are intended to give investors information to make more
informed investment decisions, and to give the Commission more timely information to conduct
comprehensive oversight of an ever-evolving fund industry.
II.

DISCUSSION
A.

Amendments Concerning Funds’ Liquidity Risk Management Programs
1.

Amendments to the Classification Framework

Rule 22e-4 currently requires a fund to classify each portfolio investment based on thenumber of days within which it reasonably expects the investment would be convertible to cash,

39

sold or disposed of, without significantly changing its market value.69 Under this framework,
funds must, using information obtained after reasonable inquiry and taking into account relevantmarket, trading, and investment-specific considerations, classify each portfolio investment into
one of four liquidity classifications: highly liquid, moderately liquid, less liquid, and illiquid.70 A
fund may generally classify and review its investments by asset class unless the fund or adviser
has information about any market, trading, and investment-specific considerations that it
reasonably expects to significantly affect the liquidity characteristics of an investment comparedto the fund’s other portfolio holdings within that asset class.71 In classifying its investments, afund must analyze the number of days that it reasonably expects it would take to sell, or convert
to cash, portions of a position in a particular investment or asset class that the fund would
reasonably anticipate trading (the “reasonably anticipated trade size”) without significantly
changing its market value (“value impact”).72 A fund must review its liquidity classifications atleast monthly in connection with reporting the liquidity classification for each investment on
Form N-PORT, and more frequently if changes in relevant market, trading, and investment69

In-kind ETFs are included when we refer to “funds” or “open-end funds” throughout this release
when discussing rule 22e-4, except in the sections discussing classifying the liquidity of a fund’sinvestments and the highly liquid investment minimum requirement, from which in-kind ETFs
are excepted. See proposed rule 22e-4(a) (defining “in-kind ETF” as an ETF that meets
redemptions through in-kind transfers of securities, positions, and assets other than a de minimis
amount of U.S. dollars and that publishes its portfolio holdings daily); see also rule 22e-4(b)(1)(ii) and 22e-4(b)(1)(iii). In-kind ETFs do not present the same kind of liquidity risks as otherfunds because the redeeming shareholder typically bears the direct costs associated with its
liquidity needs. See Liquidity Rule Adopting Release, supra note 8, at paragraphs accompanying
n.842.

70

See rule 22e-4(b)(1)(ii).

71

See rule 22e-4(b)(1)(ii)(A).

72

See rule 22e-4(b)(1)(ii)(B) (requiring a fund to determine whether trading varying portions of aposition in sizes that the fund would reasonably anticipate trading is reasonably expected tosignificantly affect its liquidity). The definition of each liquidity category sets out the number ofdays in which a fund reasonably expects to sell, or convert to cash, an investment without
significantly changing its market value. See rule 22e-4(a)(6), rule 22e-4(a)(8), rule 22e-4(a)(10),and rule 22e-4(a)(12).

40specific considerations are reasonably expected to materially affect one or more of its
investments’ classifications.73
The liquidity classifications are integral to rule 22e-4. Among other things, theseclassifications help a fund monitor its liquidity, including compliance with the fund’s highly
liquid investment minimum and the 15% limit on illiquid investments.74 The fund’sclassifications also provide liquidity information to the Commission and, under our proposal, tothe public.
The current rule allows funds considerable discretion in how funds determine theclassification of investments.75 Funds may choose which investments to classify individually orby asset class, with the composition of asset classes determined by the fund. Funds also may use
different reasonably anticipated trade sizes and have different standards for evaluating value
impact. Through staff outreach, we observed that funds had varied approaches in theirclassifications processes. The proposed amendments to the liquidity classifications are intended
to better prepare funds for future stressed conditions. For example, the reasonably expected tradesizes and value impact standards some funds and liquidity classification vendors used tended toover-estimate a fund’s liquidity in March 2020 because they considered relatively smaller tradesizes or used value impact methodologies with longer lookback periods.
Based on our observations from March 2020 and our review of funds’ liquidity risk
management practices and classifications, we are proposing amendments to the classification73

See rule 22e-4(b)(1)(ii).

74

See rule 22e-4(b)(1)(iii) and rule 22e-4(b)(1)(iv).

75

See Liquidity Rule Adopting Release, supra note 810, at n.163 and accompanying text (statingthat the primary goals of the liquidity rule program requirements were to reduce the risk thatfunds would be unable to meet redemption and other legal obligations, minimize dilution, andelevate the overall quality of liquidity risk management across the fund industry while at the sametime providing funds with reasonable flexibility to adopt policies and procedures that would be
most appropriate to assess and manage their liquidity risk).

41

framework. The proposed amendments would provide additional standards for making liquidity
determinations, amend certain aspects of the liquidity categories, and require more frequentliquidity classifications. Specifically, we propose to provide objective minimum standards thatfunds would use to classify investments, including by: (1) requiring funds to assume the sale of aset stressed trade size, rather than the rule’s current approach of assuming the sale of areasonably anticipated trade size in current market conditions; and (2) defining the value impact
standard with more specificity on when a sale or disposition would significantly change themarket value of an investment. We also propose to remove classification by asset class. These
proposed amendments are designed to improve the quality of classifications by preventing funds
from over-estimating the liquidity of their investments, including in times of stress, and toprovide classification standards that are consistent with more effective practices the staff has
observed. In addition, a more objective and comparable framework for how funds classify theliquidity of their investments would enhance the Commission’s ability to analyze trends acrossfunds’ classifications and establish the groundwork for classification information that investors
could use to analyze and compare funds.
We also propose to remove the less liquid investment category, which would reduce thenumber of liquidity categories from four to three, and expand the scope of the illiquid investment
category. We believe these changes would reduce the risk of a fund not being able to meetshareholder redemptions. Finally, we propose to require daily classifications, which we believe
would promote better monitoring by liquidity risk program administrators of a fund’s liquidity
and an ability to more rapidly understand and respond to changes that affect the liquidity of thefund’s portfolio.76
76

See rule 22e-4(a)(13) (defining “person(s) designated to administer the program”, in part, as theinvestment adviser, officer, or officers responsible for administrating the program).

42

Table 1 sets forth the primary proposed changes to the rule’s liquidity classification
framework, which are described in more detail below.
Table 1: Proposed Changes to the Liquidity Classifications
Liquidity Classifications
and Related Terms

Current Rule 22e-4

Proposed Rule 22e-4

Definitions

Highly Liquid
Investment

Moderately Liquid
Investment

Less Liquid Investment

Any cash held by a fund andany investment that the fundreasonably expects to beconvertible into cash in current
market conditions in threebusiness days or less without
the conversion to cash
significantly changing themarket value of the investment.
Any investment that the fundreasonably expects to beconvertible into cash in current
market conditions in more than
three calendar days but in sevencalendar days or less, without
the conversion to cash
significantly changing themarket value of the investment.
Any investment that the fundreasonably expects to be able tosell or dispose of in current
market conditions in sevencalendar days or less without
the sale or disposition
significantly changing themarket value of the investment,
but where the sale ordisposition is reasonably

43

Any U.S. dollars held by a fundand any investment that thefund reasonably expects to beconvertible to U.S. dollars incurrent market conditions inthree business days or lesswithout significantly changing
the market value of theinvestment.
Any investment that is neither ahighly liquid investment nor an
illiquid investment.

Removed.

Liquidity Classifications
and Related Terms

Current Rule 22e-4

Proposed Rule 22e-4

expected to settle in more thanseven calendar days.

Illiquid Investment

Convertible to Cash /U.S Dollars

Any investment that the fundreasonably expects cannot besold or disposed of in current
market conditions in sevencalendar days or less without
the sale or disposition
significantly changing themarket value of the investment.

The ability to be sold, with thesale settled.

Any investment that the fundreasonably expects not to beconvertible to U.S. dollars incurrent market conditions inseven calendar days or lesswithout significantly changing
the market value of theinvestment and any investment
whose fair value is measured
using an unobservable inputthat is significant to the overallmeasurement.
The ability to be sold or
disposed of, with the sale ordisposition settled in U.S.
dollars.

Related Concepts
Assumed Trade Size

Sizes that the fund would
reasonably anticipate trading
Significantly changing themarket value of the investment

Value Impact Standard

44

10% of the fund’s net assets by
reducing each investment by
10%
Significantly changing themarket value of an investment
means:(1) For shares listed on anational securities exchange ora foreign exchange, any sale ordisposition of more than 20%
of average daily trading volumeof those shares, as measured
over the preceding 20 businessdays.
(2) For any other investment,
any sale or disposition that thefund reasonably expects would
result in a decrease in sale priceof more than 1%.

a.

Stressed Trade Size and Significant Changes in Market Valuei.
Replacing Reasonably Anticipated Trade Size with
Stressed Trade Size

Currently, when a fund makes liquidity classifications under rule 22e-4, it must determine
whether trading varying portions of a position in a particular portfolio investment or asset class,in sizes that the fund would reasonably anticipate trading, is reasonably expected to significantly
affect its liquidity.77 This determination of a reasonably anticipated trade size helps a fundanalyze market depth. For example, if a fund anticipates trading a large investment position
relative to the market’s total trading volume, the size of the trade might affect liquidity andprice.78
Using a small reasonably anticipated trade size to analyze market depth leads to a more
liquid classification, as a smaller position can be sold more quickly without significantly
affecting the investment’s liquidity than a larger position. In contrast, using a larger reasonably
anticipated trade size would often lead to less liquid classifications. Under the current rule, afund may determine its own reasonably anticipated trade size, and we have observed wide
variation in practice.79 From staff outreach, we observed that funds may consider a variety ofdifferent factors, such as their flow history, flow trends of other similar funds, and shareholder
makeup and concentration, and a fund may weigh the importance of those factors differently todetermine what it would reasonably anticipate trading. We believe that using a reasonably
77

See rule 22e-4(b)(1)(ii)(B).

78

See Liquidity Rule Adopting Release, supra note 8, at paragraphs accompanying n.440 and
n.450.

79

See SEC staff Investment Company Liquidity Risk Management Programs Frequently Asked
Questions (Apr. 10, 2019) (“Liquidity FAQs”), available athttps://www.sec.gov/investment/investment-company-liquidity-risk-managementprograms-faq for discussion of factors funds may consider in determining reasonably anticipatedtrading size. The Commission has observed that many funds have set reasonably anticipated tradesize values at 3%. Others have set values of below 3% and up to 100%, signifying wide variation.

45

anticipated trade size based on these, or a subset of these factors, may not help funds prepare for
future stressed conditions. Even if a fund increased its reasonably anticipated trade size during
periods of stress, the resulting adjustments in the fund’s liquidity risk management may be toolate to help the fund prepare for the stressed environment and, thus, may have limited utility.
In response to the variability in funds’ reasonably anticipated trade sizes and the potential
ineffectiveness of small trade sizes in helping a fund prepare for stress, we propose to require
funds to assume the sale of a set stressed trade size. Specifically, for a fund to determine theliquidity classification of each investment, we propose that it must measure the number of daysin which the investment is reasonably expected to be convertible to U.S. dollars without
significantly changing the market value of the investment, while assuming the sale of 10% of thefund’s net assets by reducing each investment by 10%.80 The proposed stressed trade size may
result in funds classifying fewer investments as highly liquid, and may increase the number ofinvestments that are subject to the 15% limit on illiquid investments. These changes, in turn, may
lead some funds to rebalance their portfolio holdings to comply with the proposed changes,
which could negatively affect the performance of these funds. However, a lack of preparation forhigher than normal redemptions also can negatively affect fund performance when such
redemptions occur.81 We believe that requiring a fund’s classification model to assume the saleof larger-than-typical position sizes would better emulate the potential effects of stress on the80

The liquidity classifications define the number of days as business days for highly liquid
investments or calendar days for illiquid investments. See Table 1. See also rule 22e-4(a)(2)(defining “business day” to exclude customary business holidays).

81

See Liquidity Rule Adopting Release, supra note 8, at paragraphs accompanying nn.109 and 110(stating that staff had observed that some funds with more thorough liquidity risk management
practices appeared to be able to better meet periods of higher than typical redemptions without
significantly altering their risk profile or materially affecting their performance, while some fundswith substantially less rigorous liquidity risk management practices experienced particularly poor
performance compared with their benchmark when faced with higher than normal redemptions).

46

fund’s portfolio, similar to an ongoing stress test, and help better prepare a fund for future stressor other periods where the fund faces higher than typical redemptions.
Based on an analysis of weekly flows of equity and fixed-income funds over a period of
more than ten years, outflows greater than 6.6% occurred 1% of the time in a pooled sample
across weeks and funds.82 Based on this analysis, we estimate that a random fund in a random
week has approximately a 0.5% chance of experiencing redemptions in excess of the 10%
stressed trade size, and there were 3.4% of weeks where more than 1% of funds experienced net
redemptions exceeding the proposed stressed trade size. We believe that weekly outflows at the99th percentile is a useful approximation of the level of outflows funds may experience in future
stressed conditions.83 However, because it is difficult to predict future stress events, including theeffect and length of such events—particularly without official sector interventions—we believe it
is appropriate to require funds to use a stressed trade size amount of 10%, which is moderately
higher than the 6.6% weekly outflow figure discussed above. We also considered, during thissame historical period, equity and fixed-income funds had weekly inflows of greater than 8% for
1% of the time in a pooled sample across weeks and funds. In addition, large, concentrated
inflows have the possibility of translating to similarly large outflows. For example, if the large
inflows are the result of investment by an institutional investor or a fund’s inclusion in a model

82

Based on an analysis of historical Morningstar weekly fund flow data for equity and fixedincome funds from 2009 through 2021. See infra sections III.B.4.a and III.C.1.a.i (providing
additional equity and fixed income flow data and discussing this analysis in more detail). Whilesome Morningstar data is available for 2008, we have not included that data in our historical flow
analyses in this release because of gaps in the 2008 data (e.g., the 2008 dataset covers a more
limited set of funds). Other available flow information for 2008, such as from the ICI Fact Book,
is not granular enough for purposes of our analyses.

83

We believe weekly outflows is a better proxy for the stressed trade size than daily outflows
because stressed conditions may take some time to fully present in flows and often result in
outflows that continue over several days or more.

47

portfolio, the fund may experience similarly large outflows if the investor mandate changes or if
the fund is removed from the model portfolio.
Under the proposed approach, a fund would apply its stressed trade size to each
investment to determine its liquidity classifications. We have observed that funds generally
determine and apply a reasonably anticipated trade size to each investment or asset classcurrently (commonly referred to as pro rata or vertical slice methods). We have also observed,
however, that some funds have applied the reasonably anticipated trade size in such a mannerthat the trading would be satisfied largely by selling the fund’s most liquid investments, resulting
in smaller assumed trade sizes for purposes of classifying the fund’s less liquid investments.84 As
recognized above, small assumed sale sizes can result in more liquid classifications generally, as
sales of small amounts are less likely to affect the market value of the investment significantly
and typically can be converted to U.S. dollars more quickly. We are particularly concerned thatuse of small assumed sale sizes for non-highly liquid investments can overstate the liquidity ofthese investments and reduce the effectiveness of a fund’s liquidity risk management program
when a fund needs to sell a larger-than-assumed portion to meet redemptions under stressed
conditions or for any other portfolio management reason. Requiring funds to apply the 10%
stressed trade size to each investment would better prepare funds to manage their liquidity instressed conditions, when a fund may be required to sell positions that are larger than theassumed sale sizes some funds are using currently. The amendments to replace the determinationof a reasonably anticipated trade size with a stressed trade size are designed to enhance a fund’s
preparation for stressed conditions, including the potential for sizeable outflows.

84

See Liquidity Rule Adopting Release, supra note 8, at paragraph accompanying n.1084. We do
not suggest that a fund should only, or primarily, use its most liquid investments to meetshareholder redemptions. See id., at n.661 and accompanying paragraph.

48

We request comment on the proposed requirement for funds to apply a stressed trade size
to each investment in their liquidity classification determinations:
1. Should we require funds to use a stressed trade size, as proposed? Would the change
from reasonably anticipated trade size to stressed trade size materially change theproportion of investments classified in a given liquidity category? If yes, how? Wouldthe proposed stressed trade size affect certain types of funds more than others? Wouldthe proposed stressed trade size be likely to overstate or understate liquidity?
2. Is the proposed stressed trade size of 10% appropriate? If not, what minimum tradesize would be appropriate and why? For example, should we increase or decrease thestressed trade size to, for example, 15% or 5% or some other threshold? Is there otherdata that should factor into setting the stressed trade size?
3. Should the stressed trade size vary for different types of funds and, if so, how? For
instance, should the stressed trade size be a function of the fund’s flow history, suchas the 99th percentile highest week of the fund’s absolute or net flows over a given
period (e.g., 3 years, 5 years, 10 years, or the life of the fund)? Should the stressed
trade size be the higher of a specified value applied to each investment or the 99th
percentile highest week of absolute flows?
4. Should the method of applying the stressed trade size to each investment vary for
different types of funds and, if so, how? Are there types of investments that should be
excluded or use a different stressed trade size? Are there other, more appropriate
methods of applying a stressed trade size across different type of investments andportfolios?

495. Instead of establishing a set stressed trade size, should we set a minimum stressed
trade size and provide factors for determining if a fund should have a higher stressed
trade size? If so, what factors should funds consider in setting their stressed trade
size?
ii.

Determining a Significant Change to Market Value

Currently, when a fund makes liquidity classifications under rule 22e-4, it must analyze
whether a sale or disposition would significantly change the market value of the investment. In
the adopting release for rule 22e-4, the Commission explained that this value impact analysis
captures the risk of a fund only being able to meet redemption requests in a manner thatsignificantly dilutes the non-redeeming shareholders.85 The Commission established the value
impact standard to capture the risk of dilution in cases of inadequate liquidity, while notrequiring funds to account for every possible value movement.86 We propose to establish aminimum value impact standard that defines more specifically what constitutes a significant
change in market value.87 We believe the proposed change would improve the quality of funds’
liquidity classifications by preventing funds from over-estimating the liquidity of theirinvestments and would improve comparability of funds’ liquidity classifications. In addition, theproposed approach is consistent with more effective practices we have observed from somefunds and liquidity classification vendors, as discussed below.
Under the current rule, a fund may determine value impact in a variety of ways,
depending on the type of asset, or vendor, model, or system used. There also is variation in thedepth and sophistication of funds’ analyses. We believe the variation in how a fund may
85

See Liquidity Rule Adopting Release, supra note 8, at paragraph accompanying n.334.

86

See id., at paragraph accompanying n.339.

87

See proposed rule 22e-4(a) (definition of “Significantly changing the market value of aninvestment”).

50

determine value impact leads to differences in the quality of funds’ classifications, limits
comparability of funds’ classifications across the same or similar investments, and may cause
funds to over-estimate the liquidity of their investments.
The proposed definition of a significant change in market value would require a fund to
consider the size of the sale relative to the depth of the market for the instrument.88 This would
vary depending on the type of investment. For shares listed on a national securities exchange or aforeign exchange, we believe selling or disposing of more than 20% of the security’s average
daily trading volume would indicate a level of market participation that is significant.89 We
understand that if a fund sold more than 20% of the average daily trading volume of a listed
equity security, such a large sale is likely to result in a significant change in the security’s market
value, which would dilute remaining investors in the fund. We have observed that a standard
based on average daily trading volume is consistent with practices many funds and vendors apply
for assessing value impact for listed equity investments today.90 To determine average daily88

The proposed rule would continue to provide that an investment’s classification is based on afund’s reasonable expectations in current market conditions. See Liquidity Rule Adopting
Release, supra note 8, at section III.C.1.d (discussing comments and suggestions on theconsideration of market conditions). Thus, a fund would be able to rely on its reasonable
expectations at the time it makes the value impact assessment. Although we are proposing torequire funds to assume an element of stressed conditions in their liquidity classifications throughthe stressed trade size, a broader requirement to predict how an investment may trade in stressedmarket conditions would introduce additional variables into the classification process that could
increase the risk of misclassifications and decrease the data quality of funds’ liquidity-related
reporting and disclosure.

89

Under this proposal, the sale or disposition must be below 20% of the security’s average daily
trading volume. A fund may choose to impose a stricter limitation of any percentage under 20%,for example, 15% of average daily trading volume.

90

Through staff outreach, we observed many funds using some percent of average daily trading
volume (e.g., 15%, 20%, or 25%) that the fund’s investment can represent if it wants to be able tosell into daily volume without affecting market prices. In practice, this meant funds would
estimate the number of days it would take to sell or dispose of the reasonably anticipated tradesize without approaching the set percentage of average daily trading volume to avoid impacting
the value significantly. We observed funds calculating the average daily trading volume taking
into account different sources, and for different time periods, ranging from 10 days to 6 months.

51

trading volume, we propose to require funds to measure the average daily trading volume overthe preceding 20 business days. We believe using a period of 20 business days provides anappropriate measure of daily trading volume, which would reflect current market conditions aswell as consider a period of recent market history. The 20 business day period is intended to
strike a balance between longer periods that are less reflective of current conditions and shorter
periods that can be skewed easily by an abnormally high or low volume day. For purposes ofmeasuring average daily trading volume, the preceding 20 business days include those days
where U.S. markets are open but where one or more international markets are closed, such as“Golden Week,” a week in Japan including multiple Japanese public holidays. A fund would
count these and any other trading days where shares were not traded as zero volume days for the
relevant investment.
For any investments other than shares listed on a national securities exchange or a foreignexchange, such as fixed-income securities and derivatives, we propose to define a significant
change in market value as any sale or disposition that a fund reasonably expects would result in adecrease in sale price of more than 1%. Funds currently use a variety of methods to determine
significant changes in market value in fixed-income securities, taking into account different
groups of comparable securities, asset class characteristics and volatility, number and depth ofmarket makers, bid-offer spread size, volume of the security or similar securities, and elasticity
of prices in the security or similar securities. For purposes of the proposed rule, a decrease of
more than 1% would indicate a level of value impact that is significant because the fund isselling or disposing of a relatively large position or because the market for the investment hasconstricted, and bid-ask spreads have widened. We also understand that several commonly
employed liquidity models currently use this price decrease measure. We acknowledge that not52

all liquidity models specify a price decrease explicitly as the determination for a significant
change in market value and some funds would have to make changes to convert to this moreobjective threshold. The proposed value impact standard would improve funds’ abilities toperform quality checks and back testing and would allow the Commission to better analyzeclassification data across funds.
In considering whether a sale is reasonably expected to result in a price decrease of morethan 1%, the fund would be required to consider the size of the sale relative to the depth of themarket for the instrument. As part of that analysis, we believe a fund generally should consider,among other things, the width of bid-offer spreads. This is because the width of bid-offer spreads
is an important consideration in analyzing the costs of selling a security and thus whether a salewould result in a price decrease exceeding 1%. For example, a sale would be more likely toresult in a price decline of more than 1% if the trade size is large in relation to the market for that
instrument or if bid-ask spreads are wide, or if both are the case. Wide, or widening, bid-ask
spreads may indicate a lower level of demand for the instrument, which makes it more likely thata sale of the instrument would result in a price decline of more than 1%.
We request comment on our proposed definition of significant change in market value:
6. Would funds have to make significant changes to their liquidity classification
methodologies to reflect the proposed amendments to the value impact standard? If
so, what effect would those changes have on a fund’s liquidity risk management
program?
7. Should we define value impact through average daily trading volume or price decline,
as proposed? Should we use a different definition of value impact instead, and if so,53

should it depend on the type of investment? Should different types of funds havedifferent value impact standards? If yes, what standards, and for what types of funds?
8. For shares listed on a national securities exchange or a foreign exchange, should we
define a significant change in market value as selling or disposing of more than 20%of the average daily trading volume, as proposed? Are there other types ofinvestments for which an average daily trading volume test would be appropriate? For
example, is there data available for fixed-income securities that funds could use
objectively to analyze market participation under a value impact standard?
9. Should the percent of average daily trading volume be higher or lower (e.g., 15% or25%)? Should the measurement period for the average daily trading volume be longer
or shorter than the proposed 20 business days (e.g., 10, 30, or 40 business days)?
Should days where shares were not traded be counted as zero volume days as
proposed or in some other manner? Are there circumstances in which the average
daily trading volume test should vary by instrument, type of instrument, or trading
venue?
10. For investments that are not listed on a national securities exchange or foreignexchange, should we define a significant change in market value as any sale ordisposition that the fund reasonably expects would result in a price decline of morethan 1%, as proposed? Should the identified percentage be higher or lower (e.g., 0.5%
or 2%)? Should this standard for determining a significant change in market value
apply to all investments? Would funds need additional guidance or parameters tomeasure this standard consistently, including what inputs or comparable investments
may be used in determining the price decline?

5411. Should the 1% price decline definition of value impact be applied against the fund’s
last valuation of an investment, which would include both the effect of the fund’s saleand market moves?
iii.

Removing Asset Class Classification

Under current rule 22e-4, a fund may generally classify and review its portfolio
investments (including the fund’s derivatives transactions) according to their asset class.
However, a fund must separately classify and review any investment within an asset class if
the fund or its adviser has information about any market, trading, or investment-specificconsiderations that are reasonably expected to significantly affect the liquidity characteristics ofthat investment as compared to the fund’s other portfolio holdings within that asset class.91 The
current provision was intended to strike a balance between reducing operational burdens
associated with classification and providing reasonably precise liquidity classifications thatappropriately reflect investments’ liquidity characteristics.92 The burden to determine individual
investment classifications may have decreased since the adoption of the rule for many funds asthese funds became more familiar with and developed their liquidity risk management programs
and, in some cases, developed automated processes for classifying investments or employedsophisticated liquidity classification vendors that provide economies of scale. In addition, in
practice there may be weaknesses in asset class level classifications that may result in a lack ofreasonably precise classifications. Therefore, we propose to remove the asset class method ofclassification from the rule.

91

See rule 22e-4(b)(1)(ii)(A).

92

See Liquidity Rule Adopting Release, supra note 8, at section III.C.3.a. The current approach
was also intended to leverage fund managers’ current practices and to recognize that many
investments within an asset class may be considered interchangeable from a liquidity perspective.

55

Through outreach, we understand that asset class level classifications are not widely usedby many funds. But, where these asset class level classifications are used, this method runs therisk of over-estimating the liquidity of a fund’s investments and not adjusting quickly in times ofstress. After a fund has begun to use asset class level classifications, and particularly ifclassifications are reviewed only on a monthly basis, it might be difficult for a fund to identify
instances where a given investment’s liquidity characteristics do not align with the characteristics
of other investments in the asset class because individual investment liquidity data is not being
collected and analyzed. Through outreach, we observed that funds generally established aprocess and timing for liquidity assessments and did not change those processes or timing as
market conditions changed, and particularly were unlikely to do so under stressed conditions. For
example, during a stress event like March 2020, a fund using asset class level classifications may
not be equipped to re-classify a subset of investments in an asset class adeptly in response tochanging conditions that affect those investments directly. Also, because funds classify asignificant portion of their holdings as highly liquid, we believe this potential gap in identifying
investments that a fund should classify differently from other investments in the asset class ismore likely to over-estimate, rather than under-estimate, the liquidity of a fund’s investments.
These tendencies run counter to the premise of the current rule’s classification system, which
presumed that a fund would use efficiencies such as asset class level classifications and monthly
review of classifications only when market conditions or other factors did not indicate that a shift
to a more granular or frequent classification is appropriate.93 Therefore, we are proposing to93

See rule 22e-4(b)(1)(ii) (identifying the circumstances in which a fund must review its portfolio
investments’ classifications more frequently than monthly); rule 22e-4(b)(1)(ii)(A) (identifying
the circumstances in which a fund must separately classify and review an investment within an
asset class instead of classifying according to the investment’s asset class).

56

remove asset class level classifications to provide more precise liquidity classifications thatappropriately reflect investments’ liquidity characteristics.
Moreover, asset class level classifications are not compatible with the other changes weare proposing to the classification framework, including the proposed definitions of the value
impact standard. It would also be difficult for a fund to meaningfully apply at the asset classlevel a standard based on average daily trading volume or a price decline in a given investment
because the average trading volume, or market depth generally, can vary from investment toinvestment even within the same asset class. Classifying each investment separately therefore
allows a more precise assessment of that investment’s liquidity. In addition, because theproposed rule would include specific minimum standards for classifying investments, it may
reduce burdens of classifying investments while improving the quality of classifications relative
to the current rule, consistent with the Commission’s objectives in originally allowing asset classlevel classifications. Finally, staff has observed through outreach that liquidity risk management
programs have developed so that specific and individual portfolio investment liquidity
classifications are widely used and the removal of asset class level classifications is consistent
with that approach.
We request comment on the proposed removal of the provision permitting funds toclassify the liquidity of their investments by asset class.
12. Should we preserve the ability of funds to use asset classes for liquidity
determinations, as currently permitted? To what extent do funds currently rely on theprovision allowing liquidity classifications by asset class? Would it be more or lessburdensome for funds to classify investments individually under the proposal’s
specific minimum standards (such as the stressed trade size and the defining the value

57

impact standard) than to separately classify any investment within an asset classwhenever the fund or its adviser has market, trading, or investment-specificinformation indicating that the investment should be classified separately rather thanas part of the relevant asset class?
13. Would the operational burden of individually classifying be balanced by the
improved quality of data for each individual investment as compared to classifying byasset class? To what extent would investment-by-investment classifications differ
compared to asset class level classification? Are there other benefits to removing
asset class level classification, such as timely, useful, improved, or increased data?
14. Is reliance on this provision more common for certain types of funds or certain asset
classes? Should asset class level classifications be limited to specific types of funds or
asset classes?
15. If we permitted asset class level classifications, how should the stressed trade size andvalue impact standard in the proposal apply to asset class level classifications?
b.

Amendments to Liquidity Classification Categories

We are proposing changes to the liquidity classification categories to improve funds’
abilities to make timely payment on shareholder redemptions, without the sale of portfolio
investments resulting in the dilution of outstanding fund shares. Section 22(e) of the Act
establishes a right of prompt redemption in open-end funds by requiring such funds to makepayments on shareholder redemption requests within seven days of receiving the request. In
March 2020, in connection with the economic shock from the onset of the COVID-19 pandemic,
open-end funds faced a significant amount of investor redemptions, and we believe additional

58

changes to rule 22e-4 would assist funds in managing investor redemptions in future stressed
conditions.
Rule 22e-4 currently allows funds to classify as less liquid investments those that thefund reasonably expects to be able to sell or dispose of in seven calendar days or less without
significantly changing the market value of the investment, but that are reasonably expected tosettle in more than seven calendar days.94 Under the current rule, an investment is classified as
illiquid if it cannot be sold or disposed of in seven calendar days or less without significantly
changing the market value of the investment.95 We propose to eliminate the less liquidclassification category and amend the definition of illiquid investment to include thoseinvestments that a fund reasonably expects not to be convertible to U.S. dollars in current market
conditions in seven calendar days or less without significantly changing the market value of theinvestment, as well as those investments whose fair value is measured using an unobservable
input that is significant to the overall measurement.96 Under the proposal to eliminate the lessliquid classification category, the rule would therefore have only three liquidity classifications:highly liquid investments, moderately liquid investments, and illiquid investments. We also
propose to amend the term “convertible to cash” to “convertible to U.S. dollars,” codifying priorCommission statements.97 Finally, we propose to specify how to count the identified number ofdays an investment is convertible to U.S. dollars for purposes of the liquidity categories.

94

See rule 22e-4(a)(10) (defining “less liquid investment”).

95

See rule 22e-4(a)(8) (defining “illiquid investment”).

96

See proposed rule 22e-4(a).

97

See Liquidity Rule Adopting Release, supra note 8, at n.848 (“Cash means cash held in U.S.
dollars, and would not include, for example, cash equivalents or foreign currency.”).

59

i.
Removing the Less Liquid Investment Category andClassifying these Investments as Illiquid
We propose to eliminate the less liquid classification category and amend the definitionof illiquid investment to include investments, in part, that a fund reasonably expects not to beconvertible to U.S. dollars in seven calendar days or less without significantly changing themarket value of the investment. Investments that funds currently classify as less liquid would
become illiquid investments under the proposed amendments, absent changes to shorten thesettlement time of many of those investments. Section 22(e) of the Act requires open-end funds
to make payment on shareholder redemption requests within seven days of receiving the request.
The proposed amendment to define an investment as illiquid if it does not settle to U.S. dollars inseven calendar days is designed to reduce the mismatch between the receipt of cash upon the saleof assets with longer settlement periods and the payment of shareholder redemptions. This would
help prepare funds for future stressed conditions by reducing the risk of a fund not being able tomeet shareholder redemptions. Unlike the current rule, the proposed rule would directly limit to
15% the amount of fund assets that are not reasonably expected to be convertible to U.S. dollars
in seven days.
While funds may classify different types of investments as less liquid investments today,
the most common type of investment in this category is bank loans.98 Fund investments make up
approximately 15% of the bank loan market.99 Filings on Form N-PORT show that over 90% of98Based on Form N-PORT data, bank loans made up 77% and 60% of investments reported as lessliquid in Feb. and Mar. 2020, respectively. In addition to bank loans, a smaller number of fixedincome securities, mortgage-backed securities, and equities are categorized as less liquid
investments.

99

See Leveraged Loan Primer (last visited Oct. 4, 2022), available athttps://pitchbook.com/leveraged-commentary-data/leveraged-loan-primer#market-size (statingthat the Morningstar LSTA U.S. Leveraged Loan Index, which is used as a proxy for market sizein the U.S., totaled approximately $1.375 trillion as of Feb. 2022). As of Dec. 2021, there are 746
open-end funds that classified approximately $204 billion in bank loan interests as reported on
Form N-PORT. Using this data, we estimate that funds held approximately 15% of the bank loan

60

bank loan investments reported by open-end funds are classified as less liquid.100 In 2015,
commenters addressing concerns about liquidity in the bank loan market stated that significant
efforts were then underway to materially improve settlement times in the bank loan market,
which are typically longer than other asset classes.101 Bank loans are not standardized and haveindividualized legal documentation. This provides flexibility of terms for bank loans, but also
increases the time for a fund to settle a bank loan trade and receive proceeds from the sale, thusincreasing the risk of the fund not being able to meet shareholder redemptions.102
Around the time that the Commission adopted the liquidity rule, the median settlement
time for a loan sale was about 12 days.103 In the Liquidity Rule Adopting Release, theCommission stated that a fund may need to consider re-classifying an investment as illiquid in
the event of an extended settlement period.104 By July 2021, the average time to settle a bank loan
par trade in the secondary market increased to a then seven-year high of T+23, and the median
was at T+15.105 While median settlement time for bank loans in which funds invest has generally
market.
100

Based on Form N-PORT data, in 2021, more than 90% of the gross value of loans reported byopen-end funds were classified as less liquid. This was also the case in Feb. and Mar. 2020.

101

See, e.g., Comment Letter of the Loan Syndications and Trading Association on 2015 Proposing
Release, supra note 31, File No. S7-16-15, available at https://www.sec.gov/comments/s7-1615/s71615-57.pdf (“LSTA Comment Letter”) (stating the goal of transforming syndicated loan
settlement to a similar settlement period as most other asset classes).

102

See id.

103

See LSTA Comment Letter.

104

See Liquidity Rule Adopting Release, supra note 8, at n.380 and accompanying text.

105

See LSTA, Secondary Trading & Settlement: Monthly July Executive Summary (Aug. 19,2021), available at https://www.lsta.org/news-resources/secondary-trading-settlement-monthlyjuly-executive-summary/?utm_source=rss&utm_medium=rss&utm_campaign=secondarytrading-settlement-monthly-july-executive-summary. In addition, fewer trades settled within T+7,
(just 20% of trades settled within the LSTA guideline during July, a nine-percentage point
reduction from the previous year’s monthly average) and settlements wider than T+20 increased
10-percentage points as of July 2021, to a 39% market share, nearly double that of the T+7
distribution.

61

increased, Form N-PORT data has not shown funds reclassifying these investments to take into
account extended settlement times.
We are proposing changes to remove the less liquid investment classification to reduce
the risk that funds that invest significantly in less liquid investments may not be able to meetshareholder redemptions. While bank loan funds were able to meet redemption requests during
March 2020, a period of significant outflows, we are concerned that they may not be able to meetshareholder redemptions in future stressed conditions, especially as investments in this asset
class increase. During the month of March 2020, bank loan funds experienced outflows ofapproximately 13% of assets, more than any other type of fund. In addition, since March 2020,
total registered investment company investments in bank loans have increased 50% toapproximately $200 billion.106 We understand that in past times of large outflows, the medianbuy-side settlement time for bank loans generally decreased and funds had a degree of success ineffecting shorter settlement periods for these investments to help meet redemptions.107 We areconcerned, however, that in future stress events these attempts to shorten settlement times may
fail since loans are not standardized, have individualized legal documentation, and rely on
manual processes for settlement. We also understand that funds with significant extended
settlement investments have used borrowing through lines of credit to meet redemptions, butlines of credit may not be available to all funds and borrowing imposes costs that can dilute thevalue of the fund for remaining investors. Based on Form N-CEN filings, several bank loan

106This is based on Form N-PORT information as of Jan. 31, 2022.

107

See LSTA Comment Letter (stating that settlement times have decreased in periods of large
outflows, for example, in Aug. 2011, when bank loan funds experienced $8 billion of outflows(approximately 13% of assets). Similarly, in Mar. 2020, when bank loan funds experienced $12
billion of outflows (approximately 13% of assets), we understand that settlement times also
generally decreased.

62

funds have accessed their lines of credit in their most recent reporting period.108 We understandthat the costs of borrowing have risen and credit has become more difficult to obtain over time.
We believe that investments that funds currently classify as less liquid should beclassified as illiquid investments and be subject to the 15% limit on illiquid investments, so thatfunds may be better prepared to satisfy redemptions in future stressed conditions without delay
and without significant dilution. Using Form N-PORT data, we estimate that approximately 200
funds during March 2020 would have had illiquid investments over the 15% limit if this
proposed change had been in effect, with bank loan funds being the largest type of affected
fund.109 As a result of the proposed amendments, more bank loan funds may contract forexpedited settlement, which would involve costs. Alternatively, advisers with strategies that have
15% or more of assets in investments classified as less liquid and illiquid may change thosestrategies, close funds, or consider using a closed-end fund or other investment vehicle structurethat is not subject to rule 22e-4. Further, potential additional demand for these investments could
provide incentives to shorten the settlement cycle for bank loans more generally, which may
reduce trading costs.110 We believe that these amendments would reduce the risk of a fund not
being able to satisfy redemptions without diluting the interests of remaining shareholders while
waiting for the proceeds from the sale of an investment with extended settlement.
ii.
Additional Amendments to the Definition of Illiquid
Investment
We also propose to amend the definition of illiquid investment to include investments
whose fair value is measured using an unobservable input that is significant to the overall
108

See infra note 459 and accompanying text (providing information about bank loan funds’ use oflines of credit as of Dec. 2021).

109

The number of funds is estimated by dividing the aggregate gross value in the relevant categories
by the aggregate gross value reported.

110

See infra section III.C.1.b.

63

measurement. U.S. GAAP establishes a fair value hierarchy that categorizes into three levels the
inputs to valuation techniques used to measure fair value.111 The fair value measurements ofinvestments are categorized in accordance with this three-level hierarchy. The highest-levelmeasurements are those developed using quoted, observable inputs in active markets for
identical assets and liabilities (Level 1), such as prices for identical investments on a securities
exchange; the lowest are those developed using unobservable inputs (Level 3).112 We
acknowledge that observability is a valuation concept and may not always correspond toliquidity. The proposed amendment would require those funds not already classifying
investments valued using unobservable inputs that are significant to the overall measurement as
illiquid to change their classification practices and may change the liquidity profile for those
funds under the rule to be less liquid. To the extent there is a liquid market for affected
investments, this proposed amendment would cause funds to over-estimate the illiquidity of theirportfolios. As of December 2021, 2,006 open-end funds held investments that were valued using
unobservable inputs that are significant to the overall measurement (Level 3 investments),
comprising $76.3 billion, or 0.27% of all open-end fund assets.113 Among these, $16.9 billion
111

See FASB ASC 820-10-35-37, which sets out a fair value hierarchy for accounting purposes, ascompared to rule 2a-5, which provides a framework for fund valuation practices and determining
fair value (including applying an appropriate methodology consistent with the principles of FASB
Accounting Standard Codification Topic 820: Fair Value Measurement (“ASC Topic 820”)) for
purposes of the Act. See Good Faith Determinations of Fair Value, Investment Company Act
Release No. 34128 (Dec. 3, 2020) [86 FR 748 (Jan. 6, 2021) (“Valuation Adopting Release”)].

112

See ASC Topic 820. U.S. GAAP requires funds to maximize the use of relevant observable
inputs and minimize the use of unobservable inputs in valuing any asset or liability. In somecases, the inputs used to measure fair value might be categorized within different levels of the fairvalue hierarchy. In those cases, the fair value measurement is categorized in its entirety in thesame level of the fair value hierarchy as the lowest level input that is significant to the overallmeasurement. See ASC 820-10-35-16AA and 820-10-35-37A. Examples of particular assets andliabilities that may be measured using Level 3 inputs include long-dated currency swaps, threeyear options on exchange-traded shares, interest rate swaps, asset retirement obligations at initialrecognition, and reporting units. See FASB ASC 820-10-55-22.

113

See infra note 424 and accompanying paragraph. We observed that the investments classified ashighly liquid that were Level 3 investments primarily were mortgage-backed securities.

64

were classified as highly liquid investments and $2.1 billion as moderately liquid investments.114
Accordingly, we estimate that approximately 0.07% of all open-end fund assets would be
affected by this amendment.
Where an investment is valued using unobservable inputs that are significant to theoverall measurement, this may indicate that an active, liquid, and visible market for theinvestment does not exist. Where there is no active, liquid, and visible market for an investment,
there may be a corresponding risk that the fund cannot sell the investment in time to meet
redemptions without dilution. The proposal defines investments whose fair value is measured
using unobservable inputs that are significant to the overall measurement as illiquid for purposesof this rule, which is intended to reduce this risk. By classifying these investments as illiquid, theproposal would establish a minimum standard for classifying the liquidity of an investment,
which is designed to provide more consistent guideposts for liquidity classifications.
iii.
Other Amendments Related to Liquidity Classification
Categories
Amendments to the Definition of Moderately Liquid Investment
We propose to simplify the definition of moderately liquid investment to mean any
investment that is neither a highly liquid investment nor an illiquid investment.115 The
moderately liquid investment category would continue to provide information about the portion

114

We recognize that, in light of the proposed removal of the less liquid category, only thoseinvestments valued using unobservable inputs that are significant to the overall measurement thatare classified as highly liquid or moderately liquid would be affected by this proposed
amendment.

115

We also are proposing to remove a provision that addresses how to classify an investment that
could be viewed as either a highly liquid investment or a moderately liquid investment because
the ambiguity in classification that provision addresses is no longer present under the proposed
amendments to those classifications. See note to paragraph (b)(1)(ii) introductory text in current
rule 22e-4.

65

of a fund’s portfolio that is not on the most liquid end of the spectrum, but that still is sufficiently
liquid to meet redemption requests within the statutory seven day period.
Amendments to the Definition of Convertible to Cash and References to Cash
We propose to amend the term “convertible to cash” to “convertible to U.S. dollars” andto make conforming amendments to the definition of this term to refer to the ability for a fund tosell or dispose of an investment, and for it to settle in U.S. dollars.116 These amendments codify
prior Commission statements. In the adopting release for rule 22e-4, the Commission stated thatcash means “cash held in U.S. dollars, and would not include, for example, cash equivalents orforeign currency.”117 The Commission also provided an example in that release in which theperiod of time it took to repatriate or convert a foreign currency to dollars factored into theanalysis of how quickly a foreign security could convert to cash.118 Some funds are classifying
foreign investments as highly liquid taking into account solely the time it would take to convert
the proceeds of a sale to the foreign currency. Similarly, some funds classify foreign currency as
highly liquid without further analysis about the time that would be needed to convert thatcurrency to U.S. dollars. We believe it is important to view the liquidity of fund investments interms of convertibility to U.S. dollars within a specified period so that a fund is able to satisfy

116

See proposed rule 22e-4(a) (defining “convertible to U.S. dollars” as the ability to be sold or
disposed of, with the sale or disposition settled in U.S. dollars) (emphasis added). We also
propose to amend the definition of convertible to U.S. dollars to refer to disposition of aninvestment, and not only sales. This is a conforming amendment, as current rule 22e-4
classifications otherwise refer to the ability to sell or dispose of an investment.

117

See Liquidity Rule Adopting Release, supra note 8, at n.848.

118

See id., at paragraph accompanying n.379 (providing an example where certain foreign securities
may be able to be sold in seven calendar days or less, but may be subject to capital controls thatwould limit the extent to which the foreign currency could be repatriated or converted to dollars
within this time frame and explaining that these securities would be considered to be less liquid
investments because they would be reasonably expected to settle in more than seven calendardays).

66

redemption requests in U.S. dollars.119 This amendment is intended to promote the ability offunds to meet redemptions without diluting the interests of the remaining shareholders andincrease consistency in how funds classify the liquidity of investments, including in foreign
investments and foreign currencies. In addition to the definition of convertible to cash, we also
propose to amend other references in rule 22e-4 to refer to U.S. dollars instead of cash forconsistency and clarity.120
Method for Counting the Number of Days
We propose to specify when a fund must start to measure the identified number of days inwhich it reasonably expects a stressed trade size of an investment would be convertible to U.S.
dollars without significantly changing its market value. Currently, the rule does not directly
specify when to begin counting the number of days an investment would be convertible to U.S.
dollars, and funds have inconsistent practices as to when they begin this measurement. This
inconsistency may lead certain funds to overestimate their liquidity classifications, and reduce
their ability to meet redemptions. This also detracts from comparability when analyzing trends
across funds. For example, some funds may consider an investment highly liquid if it could be
converted to U.S. dollars three business days after the date of the classification analysis, whileothers include the date of classification when counting the number of days. Those funds thatbegin counting after the date of the classification would have the advantage of counting an
additional day as compared to those funds that include the date of classification, and theirliquidity classifications may appear to be more liquid than a similar fund that begins counting on
119

See id., at n.105 and accompanying text (noting concerns about the potential mismatch between
the timing of receipt of cash for sales of fund assets and the payment of cash for shareholder
redemptions).

120

See proposed rule 22e-4(a) (defining “highly liquid investment” and “in-kind exchange tradedfund”); and proposed rule 22e-4(b)(1)(i)(C) (listing liquidity risk factors).

67

the date of classification. Therefore, we propose to specify that funds must count the day ofclassification when determining the period in which an investment is reasonably expected to beconvertible to U.S. dollars.121 For example, in order for a fund to classify an investment as highly
liquid on Monday, it would need to reasonably expect that the investment could be sold andsettled to U.S. dollars by Wednesday at the latest.
We request comment on the proposed amendments to the liquidity classification
categories:
16. As proposed, should we eliminate the less liquid investment category and amend theilliquid investment definition to include an investment that a fund reasonably expects
can be sold within seven calendar days without significantly changing the market
value but is not convertible to U.S. dollars within that period (i.e., investments thatare currently classified as less liquid under the rule)? What effect would these
proposed amendments have and how would those funds that significantly invest insuch less liquid investments likely change?
17. Would the proposed amendment cause funds that currently hold less liquid
investments to contract for expedited settlement for such investments? What are theadvantages or limitations of contracting for expedited settlement? Would the
proposed amendments provide an incentive to reduce settlement times in bank loan
and other relevant markets more generally? If so, how long might it take to reduce
settlement times in response to the rule and what would be the burdens associatedwith this change? Are there certain categories of bank loans or other investments forwhich market participants may be unable to reduce the settlement time to seven121

See proposed rule 22e-4(b)(1)(ii)(A).

68

calendar days or less? Which investments and why? What other effects may occur,for example, would some funds change their strategies, liquidate, or choose to be
structured as a different investment vehicle, such as a closed-end fund? If some funds
would convert to closed-end funds, what type of closed-end fund would they likely
choose (e.g., interval fund, or a closed-end fund listed on an exchange)? Should weamend other rules, or provide relief from any specific rules or provisions of theFederal securities laws, to expedite changes to strategies or conversions to closed-end
funds or other investment vehicles?
18. Some funds classify certain bank loans as highly liquid or moderately liquid today.
What characteristics of these bank loans lead to a reasonable expectation that they
will be convertible to cash in seven days or less without significantly changing themarket value? Are funds considering contracts for expedited settlement? Would funds
need additional guidance on how to assess the period in which a bank loan or otherinvestment is reasonably expected to be convertible to U.S. dollars? For example,
should we revise the proposed rule to require that funds consider, or provide guidancesuggesting that funds may wish to consider: settlement time history for the individual
or similar investments, average settlement times for the market, and guarantees forsettlement or expedited settlement, as well as the contractual settlement period?
19. Have the costs of borrowing risen and has credit become more difficult to obtain overtime for bank loan funds, particularly during stressed periods?
20. As proposed, should we remove the less liquid category and require funds to use athree category classification framework? Would the proposed changes simplify
classifications and reduce burdens over time, after funds updated systems to reflect69the change? Would the proposed changes appropriately reflect the liquidity of a fund,or would the current framework be more appropriate? Should funds be permitted toinvest above 15% in less liquid investments if there are other methods or mechanisms
to reduce the mismatch between the receipt of cash upon the sale of assets with longer
settlement periods and the payment of shareholder redemptions or to address potential
dilution associated with this mismatch? If so, what other methods or mechanisms
should these funds be required or permitted to use (for example, swing pricing, gatesto suspend redemptions, redemption fees, redemptions in kind, additional limits onless liquid investments, notice periods, or lengthening the settlement period forpaying redemptions)?122 If we permit (to the extent not already permitted) or require
use of one or more of these tools, how should they be used (individually, in somecombination with each other, or with other protections, such as disclosure, board
approval, and Commission reporting)? Should we amend other rules, or provide relief
from any specific rules or provisions of the Federal securities laws, to expedite or
permit use of these methods and mechanisms?123
21. Should we provide that an investment is illiquid if it is not reasonably expected to beconvertible to U.S. dollars in a shorter or longer period than seven calendar days?
How would a shorter or longer period align with the requirement in section 22(e) of
the Act for a fund to satisfy redemptions within seven days? If we provided a longer
122

With a notice period, an investor’s redemption request would not be processed until the end of anotice period (e.g., after 2 to 5 days). The investor would receive the next calculated price after
the notice period ends, with payment occurring at the end of a settlement period. With alengthened settlement period, a redeeming investor would receive the price next calculated after
submitting the redemption order but would not receive payment until the end of a lengthened
settlement period (e.g., 5 to 7 days after trade date).

123

See, e.g., section 22(e) of the Act (providing the conditions under which a registered investmentcompany may suspend the right, or postpone the date, of redemption for more than seven days).

70period of time to convert to U.S. dollars before an investment is classified as illiquid,
how would funds prepare for the potential mismatch during stressed situations
between the amount of available cash and the size of shareholder redemptions?
Should we provide additional exemptions to allow funds to delay redemptions toshareholders under certain limited circumstances and conditions, such as independent
director approval?
22. Are there circumstances in which an investment is fair valued using an unobservable
input that is significant to the overall measurement, but the investment should not betreated as illiquid for purposes of the rule? Please explain and provide supporting
data. Should we permit a fund to classify certain types of investments that are fairvalued using unobservable inputs that are significant to the overall measurement as
highly liquid or moderately liquid and, if so, which types? Should we instead treat
investments that are fair valued using unobservable inputs that are significant to theoverall measurement as presumptively illiquid, but permit funds to rebut thispresumption? If so, what process should we require for rebutting the presumption?
For example, should we require funds to maintain records describing why they did
not classify such an investment as illiquid? Should we require funds to disclose on
Form N-PORT any circumstances in which they did not classify such an investment
as illiquid?
23. Are there other types or characteristics of investments that we should include in thedefinition of illiquid investment? If so, which ones?
24. Should we amend the definition of moderately liquid investment, as proposed?
Alternatively, should we retain the details in the current definition that specify the71number of days in which a fund must reasonably expect an investment to beconvertible to U.S. dollars in order to classify it as moderately liquid?
25. Would the proposed changes to the liquidity classifications affect investment options
available to investors? For example, would bank loan funds only be available in nonopen-end investment vehicles? What effect would these proposed changes have on
those asset classes that are less available for investment by open-end funds forliquidity reasons, the availability of credit to borrowers, and more generally, on
capital formation?
26. Should we amend the definition of convertible to cash and other references to cash inrule 22e-4 to refer to U.S. dollars, as proposed? Would these amendments raise issues
for specific types of funds? If so, which ones and how? Would these amendments
affect funds’ investment strategies, including their allocation to foreign investments
and U.S. dollars, or their performance?
27. Are there circumstances in which a fund would pay redemptions in a different
currency than U.S. dollars? If so, would it be appropriate for that fund to be able toassess the time in which an investment could convert to that other currency for
purposes of the rule?
28. In addition to sale and disposition, are there other ways an investment may be
converted to U.S. dollars that should be included in the definition of convertible to
U.S. dollars? If so, what are they?
29. Would the amendment to refer to U.S. dollars instead of cash in the definitions ofhighly liquid investment and convertible to cash materially change how funds classify
highly liquid investments currently? If so, how?

72

30. Should we require funds to include the day of classification when counting thenumber of days to convert to U.S. dollars as proposed, or should we require funds tobegin to count the number of days to convert to U.S. dollars on the following day?
What are the advantages and disadvantages of this alternative? Would this alternative
result in less conservative liquidity classifications for some funds or investments (i.e.,
by causing some investments that otherwise would have been classified as moderately
liquid to be classified as highly liquid) or impair a fund’s ability to meet redemptions?
31. Instead of using the days an investment would be convertible to U.S. dollars in theliquidity classifications as proposed, should we separately set the number of days to:(1) make the trade; and (2) settle the trade or otherwise dispose of an investment, in
determining liquidity classifications? Why or why not? Is there a different way therule should measure the period that an investment is convertible to U.S. dollars?
c.

Frequency of Classifications

Rule 22e-4 currently requires that funds review their liquidity classifications at least
monthly in connection with reporting on Form N-PORT, and more frequently if changes in
relevant market, trading, and investment-specific considerations are reasonably expected tomaterially affect one or more of their investments’ classifications.124 The current rule also
requires a fund to monitor and take timely actions related to the liquidity of its investments,
including changes to its liquidity profile. Specifically, the rule prohibits a fund from acquiring
any illiquid investment if, immediately after the acquisition, the fund would have invested morethan 15% of its net assets in illiquid investments that are assets.125 In addition, the rule requires afund to provide timely notice to its board, and to the Commission on Form N-RN, if the fund124

See rule 22e-4(b)(1)(ii).

125

See rule 22e-4(b)(1)(iv).

73exceeds the 15% limit on illiquid investments, or if there is a shortfall of the fund’s highly liquid
investments below its highly liquid investment minimum for seven consecutive calendar days.126
We propose amendments to require a fund to classify all of its portfolio investments eachbusiness day instead of at least monthly.127 Daily classification would reflect current market
conditions more accurately and would provide funds with more data for analysis to prepare for
future stressed conditions. We believe that daily classifications would assist liquidity risk
program administrators in better monitoring of a fund’s liquidity and enhance a fund’s ability tomore rapidly respond to changes that affect the liquidity of the fund’s portfolio, reflecting more
effective practices we have observed. In addition, daily classifications would help ensure thatfunds timely report shortfalls below the highly liquid investment minimum or breaches of the
15% limit on illiquid investments to the fund’s board and to the Commission, which would better
achieve the goals of the current provisions to provide board and Commission oversight of thefund’s liquidity risk management program and its effectiveness.
Most funds did not report reclassifications of their portfolio investments despiteextraordinary liquidity constraints in March 2020.128 Based on the liquidity classification
126

See rule 22e-4(b)(1)(iv)(A) and rule 22e-4(b)(1)(iii)(A)(3); Form N-RN Parts B through D.

127

See proposed rule 22e-4(b)(1)(ii). Although rule 22e-4 currently requires funds to classify eachof the fund’s portfolio investments (including each of the fund's derivatives transactions), we
have observed that some funds are not classifying all investments in their portfolios, such as
positions in to-be-announced (TBA) contracts to trade mortgage-backed securities or thereinvestment of cash collateral received in securities lending arrangements.

128

Despite the liquidity constraints in Mar. 2020, we observed through Form N-PORT filings thatroughly 75% of funds did not reclassify any investment held in both Feb. and Mar. 2020.
Specifically, roughly 80% of U.S. equity funds did not reclassify any holding that was held in
both Feb. and Mar. 2020, while roughly 10% reclassified at least one investment into a more
liquid category and roughly 13% reclassified at least one investment into a less liquid category.
Roughly 55% of taxable bond funds reclassified on average 4% of their portfolios, with themedian fund reclassifying 1% of its portfolio. Of the funds that reclassified, roughly 30%
reclassified at least one investment into a more liquid category and roughly 44% reclassified atleast one investment into a less liquid category. More funds did, however, reclassify in Mar. 2020
period than for either Feb. or Apr. 2020.

74

practices we observed in March 2020 and on filings covering this period, we are concerned thatsome funds effectively are equipped to classify their investments primarily on a monthly basis tomeet reporting requirements and are not prepared to review classifications intra-month. Because
intra-month analyses for these funds would be out of the ordinary and only occur when a funddetermines that changes in relevant market, trading, and investment-specific considerations arereasonably expected to materially affect one or more of their investments’ classifications, it may
be especially challenging during stressed conditions for these funds to reclassify theirinvestments intra-month. Requiring daily classification, while involving costs, may ultimately
lead to a more efficient classification process for funds than monitoring trading conditions todetermine if and when intra-month classifications are required. For example, a dailyclassification requirement, in combination with the minimum standards we propose for trade sizeand value impact, may lead funds to modify their liquidity classification processes, which would
make the process more standardized, timely, and efficient.
We request comment on the proposed amendments to require funds to classify theliquidity of their investments on a daily basis.
32. Should we require funds to classify all portfolio investments on a daily basis, as
proposed? Would this proposed amendment result in a material change to how funds
are currently classifying? To what extent do funds already classify the liquidity of
their investments on a daily basis or collect the information they would need toclassify daily? Would this proposed amendment better integrate liquidity risk
management and portfolio management systems?
33. We also are proposing that funds use a stressed trade size and a defined value impact
standard in determining liquidity classifications. Would those changes affect the75

burdens of classifying on a daily basis? Would those effects be different for different
types of funds? For example, would it be easier to determine on a daily basis whether
the sale of a stressed trade size of shares listed on an exchange would exceed 20% of
the average daily trading volume for those shares than to determine whether the saleof a stressed trade size of other investments would result in a price decline of morethan 1%?
34. Instead of classifying on a daily basis, should we require funds to classify theliquidity of their investments at some other frequency (e.g., weekly, biweekly, ormonthly)? If so, should we maintain the requirement for a fund to classify more
frequently if changes in relevant market, trading, and investment-specificconsiderations are reasonably expected to materially affect one or more of its
investments’ classifications? Is there a different approach we should use effectively torequire a fund to classify its investments in response to changing conditions? Are
there certain types of funds that should be excluded from daily classifications? If so,which funds?
35. If we require funds to classify on a non-daily frequency, how would they monitor forcompliance with the 15% limit on illiquid investments and the highly liquid
investment minimum? How are those limits monitored for compliance now?
2.

Highly Liquid Investment Minimumsa.
Proposed Scope of the Requirement and Determination of the
Minimum

Rule 22e-4 currently requires a fund to determine a highly liquid investment minimum if
it does not primarily hold assets that are highly liquid investments. Funds that are subject to thehighly liquid investment minimum requirements must determine a highly liquid investment
76

minimum considering several factors, review the minimum at least annually, and adopt policies
and procedures to respond to a shortfall of the fund’s highly liquid investments below theminimum required.129 We propose to require all funds to determine and maintain a highly liquid
investment minimum of at least 10% of the fund’s net assets, which is equivalent to the stressed
trade size. In connection with this proposed requirement, we would remove the exclusion forfunds that primarily invest in highly liquid investments (the “primarily exclusion”). The
proposed amendments are designed to ensure that funds have sufficient liquid investments for
managing stressed conditions and heightened levels of redemptions.
We assessed liquidity-related data reported on Forms N-PORT, as well as thedevelopment of liquidity risk management programs, through staff outreach to funds andadvisers. Based on Form N-PORT filings, most funds do not determine a highly liquid
investment minimum and instead rely on the primarily exclusion.130 For those funds that havehighly liquid investment minimums, the rule currently requires that they consider various
liquidity factors, such as their investment strategy and cash-flow projections, in both normal andreasonably foreseeable stressed conditions.131 We understand that those funds additionallyconsider factors such as asset class, market volatility, and shareholder concentration in theirdeterminations.
As discussed above, by requiring fund liquidity classifications to assume the sale ordisposition of a set stressed trade size, the proposal is intended to better prepare all funds for

129

See rule 22e-4(b)(1)(iii).

130

Approximately 83% of funds holding 85% of net assets do not report setting a highly liquid
investment minimum on Form N-PORT.

131

For these purposes, funds are required to consider certain factors during stressed conditions only
to the extent they are reasonably foreseeable during the period until the next review of the highly
liquid investment minimum. See rule 22e-4(b)(1)(iii)(A)(1).

77

future stressed conditions.132 To help further prepare a fund for heightened levels of redemptions
in stressed conditions, we are proposing to require the highly liquid investment minimum to beequal to or higher than the assumed stressed trade size. In setting the highly liquid investment
minimum to be at least the stressed trade size, we considered data on fund flows for setting thestressed trade size as well as data reported on Form N-PORT on funds’ current highly liquid
investment minimums. As of March 2020, for funds that had determined a highly liquid
investment minimum, the majority of those funds reported setting a highly liquid investment
minimum of less than 10% of the fund’s net assets. In contrast, approximately 8% of those funds
reported setting a highly liquid investment minimum of more than 50% of the fund’s net assets.
Thus, while there is a wide divergence in highly liquid investment minimums, most of thesefunds have a minimum that is lower than the proposed 10% level. Given the level of weekly
outflows some funds have experienced and the difficulty in predicting future stress events, we
believe that a regulatory minimum of 10% for the highly liquid investment minimum would
benefit investors by improving the ability of funds to meet shareholder redemptions in stressed
scenarios.
In addition, the proposal’s requirement for funds to both assume a stressed trade size todetermine liquidity classifications and also maintain an equal or higher minimum of highly liquid
investments is intended to work together to better prepare them for future stressed conditions andto reduce the risk of dilution. Not only would funds have highly liquid investments in an amountneeded to meet the stressed trade size, they would also have more highly liquid assets to meet
redemptions without having to sell less liquid investments at discounted prices. Funds would132

See supra section II.A.1.a.i for discussion of the stressed trade size and of fund flow data.

78

continue to be required to periodically review the highly liquid investment minimum and havepolicies and procedures to address any shortfall in highly liquid investments below the minimum.
While the proposed minimum of 10% of a fund’s net assets may be a suitable highly
liquid investment minimum for most funds, certain funds may find a higher amount appropriate
depending on a fund’s liquidity risk factors and investment objectives. Consistent with thecurrent rule, a fund would be required to consider a specified set of liquidity risk factors todetermine whether its highly liquid investment minimum should be above 10%.133 We continue
to believe that the liquidity risk factors funds must consider in determining a highly liquid
investment minimum under the current rule and the associated guidance the Commission
provided in the Liquidity Rule Adopting Release regarding these factors are appropriate for afund to take into account for these purposes.134
A broad variety of investments, as well as cash, may qualify towards the highly liquid
investment minimum.135 Since approximately 83% of funds currently rely on the primarily
exclusion, we would not expect this proposal to affect their strategies. We recognize, however,that imposing a highly liquid investment minimum of at least 10% would require some otherfunds to hold a larger amount of highly liquid assets than they currently do, and thus may affectthese funds’ performance or strategies.136 For funds with strategies focused on investments thatwould not be considered highly liquid, they would have to determine how to constitute a

133

See Liquidity Rule Adopting Release, supra note 8, at paragraph following n.669.

134

See id., at section III.B.2.

135

See id., at n.663 and accompanying text.

136

As recognized above, being unprepared for higher than normal redemptions also can affect afund’s performance when such redemptions occur. See supra note 81. For instance, although lessliquid assets generally offer a higher return, the trading costs associated with selling these assets
during periods of increased redemptions may offset this risk premium, potentially resulting in alower overall return for fund investors. See infra note 351 and accompanying text.

79

portfolio of investments that would allow the fund to meet its strategy and investing parameters
while maintaining a highly liquid investment minimum of at least 10%. All funds would be
subject to the same highly liquid investment minimum of at least 10%, which would minimize
any competitive advantage for similar funds associated with the proposed highly liquid
investment minimum requirements. We believe it is important that all funds be prepared to meet
redemptions in future stressed scenarios, and that funds would be better able to do so with theproposed highly liquid investment minimum requirements.
In establishing a uniform floor for the highly liquid investment minimum, we are also
proposing to remove the exclusion for funds that invest primarily in highly liquid investments.
The Commission adopted the primarily exclusion because it believed the benefits associated withrequiring such funds to determine and review a highly liquid investment minimum, or to adopt
shortfall procedures, would not justify the associated burdens.137 Since that time, however, wehave observed that a fund relying on the primarily exclusion may experience significant declines
in its liquidity that result in the fund holding less than 50% of its portfolio in highly liquid
investments for a period of time. For example, a fund that invests significantly in a given foreign
market and that generally classifies those investments as highly liquid can experience substantial
declines in the amount of its highly liquid investments if, for example, there is political or
economic turmoil in or an extended holiday closure of that foreign market. Funds that currently
use the primarily exclusion instead of determining and maintaining a highly liquid investment
minimum do not have the benefit of shortfall procedures, including board oversight, to respondto events or market conditions that may cause the fund to fall under its previously determined
level of primarily held highly liquid investments. By requiring a highly liquid investment
137

Liquidity Rule Adopting Release, supra note 8, at paragraph accompanying n.724.

80

minimum for all funds, investors would enjoy the benefit of policies and procedures that aredesigned to ensure not only oversight by the liquidity risk program administrator but also thefund’s board.
Moreover, the burdens of complying with highly liquid investment minimum
requirements for funds that currently use the primarily exclusion may be reduced because many
fund complexes already have experience developing highly liquid investment minimum shortfall
policies and procedures. It may be possible for funds in the same complex to leverage thisexperience to reduce the burdens of developing these policies and procedures for funds that
previously qualified for the primarily exclusion. As liquidity risk management programs havematured, and continue to mature, many fund complexes continue to gain experience with highly
liquid investment minimum shortfall policies and procedures, which may also reduce burdens.
By requiring all funds to adopt a highly liquid investment minimum, we are seeking to help
ensure that funds would be better prepared to handle future stressed conditions, which may occur
suddenly and unexpectedly, as they would have sufficient liquid investments for managing
heightened levels of redemptions.
We request comment on the proposed amendments to highly liquid investment minimum
requirements.
36. Should we require all funds to determine and maintain a highly liquid investment
minimum, as proposed? What effect would this proposal have on funds? For example,
would some funds have to change their strategies or expect effects on performance?
37. Should some types of funds be excluded from the requirement to have a highly liquid
investment minimum? If yes, which ones and why? For example, should we preserve
the exclusion for funds that primarily hold highly liquid assets? Alternatively, should81funds currently using the primarily exclusion have a higher highly liquid investment
minimum requirement? Would funds using the primarily exclusion be as prepared tomeet redemptions in stressed scenarios without a highly liquid investment minimum
and its corresponding policies and procedures?
38. If the primarily exclusion is kept, should we define the amount of highly liquid assets
a fund must maintain under this standard (e.g., investing at least 51% of the fund’s net
assets in highly liquid assets, or a higher or lower amount)?
39. Should we establish a regulatory minimum for the amount of highly liquid
investments of 10%, as proposed, or should it be set at 15% or 5% (or some otherhigher or lower amount)? Would establishing a regulatory minimum reduce theburdens associated with determining and periodically reviewing the fund’s highly
liquid investment minimum?
40. Rather than propose a regulatory minimum with factors that a fund must consider todetermine whether its own highly liquid investment minimum should be higher,
should we require all funds to use the same highly liquid investment minimum?
Would this set a level playing field for all funds and diminish any competitive
advantage for a fund with a lower highly liquid investment minimum? If so, whatamount would be appropriate for a uniform highly liquid investment minimum for all
funds (e.g., 5%, 10%, 15%, or a higher or lower amount)?
41. Would providing more detail or guidance on the liquidity risk factors be helpful? If
so, which factors?
42. Would funds that do not currently have a highly liquid investment minimum be able
to leverage policies and procedures already developed for highly liquid investment

82

minimums, for example by other funds in the same complex, to reduce the burdens ofdeveloping these policies and procedures? If not, what costs would funds incur toadopt and implement highly liquid investment minimum policies and procedures?
b.

Calculation of the Highly Liquid Investment Minimum

We are proposing amendments to rule 22e-4 that are designed to help ensure that thehighly liquid investments a fund holds to meet its highly liquid investment minimum areavailable to support the fund’s ability to meet redemptions. A key aim of the highly liquid
investment minimum requirement is to decrease the likelihood that funds would be unable tomeet their redemption obligations.138 Building on existing aspects of rule 22e-4, the proposed
amendments would require that, when determining the amount of assets a fund has classified ashighly liquid that count toward the highly liquid investment minimum, the fund account forlimitations in its ability to use some of those assets to meet redemptions.139 Specifically, inassessing compliance with the fund’s highly liquid investment minimum, the fund would be
required to: (1) subtract the value of any highly liquid assets that are posted as margin orcollateral in connection with any derivatives transaction that is classified as moderately liquid or
illiquid; and (2) subtract any fund liabilities.140
138

See Liquidity Rule Adopting Release, supra note 8, at text following n.117.

139

As the Commission explained at the time it adopted rule 22e-4, this is not meant to suggest that afund should only, or primarily, use highly liquid investments to meet shareholder redemptions.
Instead, we believe that a fund holding sufficient highly liquid assets will support the fund inmeeting redemption requests in a non-dilutive manner, and assist it in readjusting its portfolio intimes of market stress, heightened volatility, and managing its obligations to derivatives
counterparties. See Liquidity Rule Adopting Release, supra note 8, at n.680 and accompanying
text.

140

Proposed rule 22e-4(b)(1)(iii)(B)(1); 22e-4(b)(1)(iii)(B)(2). Rule 22e-4 currently refers to a“pledge” of margin or collateral, rather than “posting.” We are proposing to use the term “post”
because we believe this term is more commonly used within the industry and by other regulators
to refer to instances where a party provides margin or collateral to its counterparty to meet theperformance of its obligation under one or more derivatives transactions as a result of a change inthe value of such obligations since the trade was executed or the last time such collateral wasprovided (commonly referred to as variation margin) or is provided to secure potential future83

i.
Margin or collateral of moderately liquid and illiquid
derivatives
The requirement for a fund to reduce the value of its highly liquid assets by the amountposted as margin or collateral in connection with a non-highly liquid derivatives transaction
reflects that this amount of highly liquid assets is not available for the fund to use to meet
redemptions.141 This is because, where a fund enters into a moderately liquid or illiquid
derivative and posts highly liquid assets as margin or collateral, the posted collateral is highly
liquid, but the fund cannot access the value of posted assets unless the fund exits the derivatives
transaction. Since the fund has classified the derivative as moderately liquid or illiquid, it does
not reasonably expect to be able to exit the derivatives transaction within three business days.
We recognize that the fund may be able to access the specific assets posted as margin orcollateral by replacing them with other assets acceptable to the fund’s counterparty. But
regardless of the specific assets posted, the value of collateral posted in connection with amoderately liquid or illiquid derivative would not be convertible to U.S. dollars within threebusiness days or less.
Under the current rule, a fund is required to identify the percentage of the fund’s highly
liquid investments that it has posted as margin or collateral in connection with derivatives
transactions that the fund has classified as less than highly liquid.142 The Commission believed
exposure following default of a counterparty (commonly referred to as initial margin). See, e.g.,
Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 86
FR 6850 (Jan. 25, 2021).
141

See Liquidity Rule Adopting Release, supra note 8, at nn.727-730 and accompanying text. This
aspect of the proposed rule would only require an adjustment to the amount of a fund’s highly
liquid investments that are assets, since investments that are in a liability position are unable to be
used to meet redemption requests. See proposed rule 22e-4(b)(1)(iii)(B)(1).

142

Rule 22e-4(b)(1)(ii)(C). In addition, funds currently also are required to exclude highly liquid
assets that are posted as margin or collateral in connection with non-highly liquid derivatives
transactions when determining whether the fund primarily holds highly liquid assets. Rule 22e4(b)(1)(iii)(B).

84

that this approach struck an appropriate balance between providing transparency and reducing
burdens on funds.143 The Commission observed that a fund generally would not need to
specifically identify particular assets that are posted as margin or collateral to cover particularderivatives transactions, but instead would calculate the percentage of highly liquid investments
posted as margin or collateral for derivatives transactions classified in each of the otherclassification categories.144 Under the rule, a fund that has posted both highly liquid investments
and non-highly liquid investments as margin or collateral in connection with a non-highly liquid
derivatives transaction should reduce its highly liquid investments, rather than assume thatposted non-highly liquid investments would first cover the derivatives transaction, unless thefund specifically identifies non-highly liquid investments as margin or collateral in connection
with a derivatives transaction.145 Finally, the Commission observed that the current approach
responds to commenters’ concerns that linking the liquidity of specific assets posted as margin orcollateral to the liquidity of a fund’s derivatives transactions could understate the liquidity of
those assets, since a fund may be able to readily substitute another liquid asset for the asset
posted as margin or collateral.146
143

See Liquidity Rule Adopting Release, supra note 8, at n.476 and accompanying text.

144

Id. at n.489 and accompanying text.

145

Note 1 to proposed rule 22e-4(b)(1)(iii)(B)(1). Cf. Note 1 to rule 22e-4(b)(1)(ii)(C). See also
Liquidity Rule Adopting Release, supra note 8, at nn.489-490 and accompanying text (explainingthat in the absence of such an instruction, some funds might instead take the opposite approach,and assume that posted non-highly liquid investments first cover these less liquid derivatives
transactions, creating inconsistencies between funds).

146

We recognize that margin or collateral may be determined and paid by funds on the basis of agroup of derivatives transactions, with the fund posting or receiving a net amount of margin orcollateral. When a fund pays margin or collateral in connection with a group that includes
derivatives transactions that are highly liquid and non-highly liquid, funds already must
determine the amount of margin or collateral attributable to the non-highly liquid derivatives
under the current rule. For example, a fund must perform this attribution in order to identify thepercentage of the fund’s highly liquid investments that it has posted as margin or collateral inconnection with derivatives transactions that are not themselves highly liquid.

85

The proposed approach is intended to enhance investor protection while continuing to
strike an appropriate balance with the potential increased burdens on funds. The proposed
approach would not require funds to identify and reclassify specific assets posted as margin orcollateral, but rather to reduce the value of the fund’s highly liquid assets available to meet thefund’s highly liquid investment minimum by the value of the assets posted as margin orcollateral. We also propose to maintain, with conforming changes, the explanatory note
discussed above guiding the allocation of amounts posted as margin or collateral.147 By reducing
the fund’s highly liquid investments by the value of amounts posted as margin or collateral, theproposed approach would avoid burdens associated with tracking specific securities posted as
margin or collateral and reclassifying investments as they are posted as margin or collateral andrecalled. It also would not understate the liquidity of specific securities that are posted as margin
or collateral because each security would continue to be classified based on its own
characteristics, and instead the adjustments would only be made at the aggregate level.148
Moreover, many of the operational concerns commenters raised when rule 22e-4 was proposed,
which led the Commission to adopt the current approach, related to the treatment of assets
segregated under the Commission’s Investment Company Act Release 10666, which theCommission has since rescinded, effective August 19, 2022.149 We therefore believe theproposed amendments would enhance investor protections by helping to ensure a fund’s highly147

See supra note 145. In connection with the proposed amendments to the rule’s highly liquid
investment minimum provisions, we propose to re-number certain existing paragraphs and to add
paragraphs to the rule. As a result, we propose to update cross-references to the highly liquid
investment minimum provisions within the rule. See proposed rule 22e-4(b)(1)(iii)(C) through (E)and proposed rule 22e-4(b)(3)(iii).

148

See Liquidity Rule Adopting Release, supra note 8, at n.491 and accompanying text.

149

See Liquidity Rule Adopting Release, supra note 8, at nn.468-472 and accompanying text
(operational concerns); Derivatives Adopting Release, supra note 21, at section II.L (withdrawalof Investment Company Act Release 10666).

86liquid assets are in fact available to meet redemptions, while continuing to balance the value ofthe provision against the operational burdens to implement it.
ii.

Fund liabilities

Under the proposal, a fund would also be required to reduce the amount of highly liquid
assets that count toward the fund’s highly liquid investment minimum by the amount of thefund’s liabilities. This proposed change is intended to result in a more accurate calculation of thehighly liquid investment minimum.150 The proposed approach would include any liabilities, as
defined in 17 CFR 210.6-04 (rule 6.04 of Regulation S-X). For example, this would include
investment liabilities and amounts payable for investment advisory, management, and service
fees. Reducing the amount of highly liquid assets by fund liabilities reflects that fund liabilities
are generally paid in cash, meaning that highly liquid assets may need to be liquidated in order tosatisfy those liabilities rather than to meet redemptions.
Based on staff outreach, it is our understanding that the proposal reflects many funds’
existing practices. For example, when a fund has significant liabilities, they generally will be
incurred in connection with derivatives transactions or other investments that give rise to a fundliability. Because funds are required to classify all investments, including liabilities, investments
such as highly liquid derivatives in a liability position will reduce the value of the fund’s highly
liquid investments that are assets. To enhance investor protection by preventing assets that a fundmay in the future use to pay liabilities from also being counted toward the fund’s highly liquid
investment minimum, and to promote consistency in how funds calculate their highly liquid

150

The highly liquid investment minimum is the percentage of a fund’s net assets that it invests inhighly liquid assets that are eligible to count toward the minimum under the rule. See rule 22e4(a)(7) (defining highly liquid investment minimum). Because this calculation uses net assets as
the denominator (which reflects the amount of assets less any liabilities), we believe thenumerator of eligible highly liquid assets similarly should be net of liabilities.

87investment minimum, we are proposing to require that all funds reduce their highly liquid assets
used to satisfy their highly liquid investment minimum by the amount of the fund’s liabilities.151
We request comment on these aspects of the proposal, including:
43. Should we, as proposed, require a fund to reduce the amount of its highly liquid
investments computed for the purposes of determining compliance with its highly
liquid investment minimum by the value of any highly liquid assets that are posted as
margin or collateral in connection with any derivatives transaction that is classified asmoderately liquid or illiquid? Why or why not? Should we also require that amounts
posted as margin or collateral in connection with derivatives transactions that areclassified as highly liquid be treated in this way? Alternatively, should we exempt
amounts posted as margin or collateral in connection with certain types or categories
of derivatives transactions from this requirement?
44. How frequently do funds calculate the percentage of their highly liquid assets posted
as margin or collateral in connection with non-highly liquid derivatives transactions
today? Would the proposed requirement to calculate this value on a daily basis
present new challenges?
45. Should we, as proposed, require a fund to reduce the amount of its highly liquid
assets computed for the purpose of determining compliance with its highly liquid
investment minimum by the value of any liabilities? Do funds already make thisreduction when determining compliance with highly liquid investment minimums?

151

Depending on the rules of any applicable exchange and local law, a variation margin payment
with respect to a derivatives transaction may be deemed to settle the fund’s liability for the daily
mark-to-market loss on the transaction. In that case or any other case where a fund does not havea liability in connection with a given transaction, the fund would not be required to reduce its
highly liquid investments in connection with that transaction under the proposal.

88

Should we instead require a fund to reduce the amount of its highly liquid assets by adifferent amount, such as the percentage of the fund’s total assets that its liabilities
represent? Are there certain classes or types of fund liabilities that should not becounted? For example, should we provide an exception for liabilities associated withfund borrowings that are used to meet redemptions in order to avoid a disincentive forfunds to borrow for this purpose under appropriate circumstances?
46. We propose that, for these purposes, the amount of a fund’s liabilities would becomputed in the same manner as a fund computes its liabilities for purposes of rule 604 of Regulation S-X. If we use this standard, as proposed, would the amount bywhich funds should reduce their highly liquid assets be clear? Are there any issues
that may arise from using the standard funds use to prepare their balance sheets?
Would a different definition of “liabilities” be more appropriate?
3.

Limit on Illiquid Investments

Rule 22e-4 currently limits a fund’s ability to acquire illiquid investments. Specifically,
the rule prohibits a fund from acquiring any illiquid investment if, immediately after theacquisition, the fund would have invested more than 15% of its net assets in illiquid investmentsthat are assets.152 We are proposing to amend the rule’s limitation on illiquid investments toprovide that the value of margin or collateral that a fund could only receive upon exiting an
illiquid derivatives transaction would itself be treated as illiquid for these purposes.153 As theCommission stated in 2016, the potential effects of a fund’s use of derivatives are relevant toassessing, managing, and periodically reviewing a fund’s liquidity risk.154 The potential effects
152

See rule 22e-4(b)(1)(iv). A fund also must notify its board, and report confidentially to theCommission on Form N-RN, if its illiquid investments that are assets exceed 15% of net assets.

153

See proposed rule 22e-4(b)(1)(iv).

154

See Liquidity Rule Adopting Release, supra note 8, at text accompanying nn.218-223.

89

may be heightened when the derivatives transaction is itself illiquid, and thus may be difficult fora fund to exit quickly enough to use the associated margin or collateral to meet redemption
requests, or at all. Funds’ use of illiquid derivatives is subject to several limitations but, for openend funds, the risks associated with illiquid derivatives may be heightened as a result of thefunds’ redeemability.155
Under the proposal, for purposes of determining whether the fund is in compliance withthe limitation on illiquid investments, the fund would treat as illiquid the amount of margin orcollateral it has posted in connection with a derivatives transaction that is classified as an illiquid
investment and that the fund would receive if it exited the derivatives transaction (“excess
collateral”).156 This proposed requirement recognizes that, because a fund does not reasonably
expect to be able to convert an illiquid derivatives investment to U.S. dollars within seven days,
the fund likewise would not be able to convert to U.S. dollars the value of excess collateralposted as margin or collateral in connection with the derivatives transaction within seven days.
Therefore, the proposal would require a fund to include the value of the excess collateral or
margin when it determines the amount of illiquid assets it holds for purposes of the 15% limit on
illiquid investments.

155

The limitations on funds’ issuance of senior securities, which include derivatives creating certain
payment or delivery obligations, in section 18 of the Act and 17 CFR 270.18f-4 (rule 18f-4)
provide certain protections to investors, and the proposed amendments are designed tocomplement those protections. See Derivatives Adopting Release, supra note 21 (stating that afund’s derivatives risk management program would be part of an adviser’s overall managementof portfolio risk and would complement—but would not replace—a fund’s other risk
management activities, such as a fund’s liquidity risk management program adopted under rule22e-4).

156

This does not mean that the investment acting as margin or collateral would need to be classified
as an illiquid investment under the rule. A fund would classify the relevant investment according
to the rule’s classification framework. In order to aid understanding of the reported data, we
propose to require a fund to report the value of investments treated as illiquid as a result of thisprovision. See section II.E.1.d, infra and Item B.8.b of proposed Form N-PORT.

90

As with the proposed amendments related to the amounts posted as margin or collateralfor non-highly liquid derivatives, a fund would not be required to specifically identify particularassets that it posted as margin or collateral to cover specific derivatives transactions. Instead, afund would calculate the value of its assets posted as margin or collateral in connection with
illiquid derivatives transactions and treat that value of assets as illiquid.157
We request comment on this aspect of the proposal, including:
47. Should we, as proposed, require funds to treat as illiquid investments the value ofexcess collateral the fund has posted in connection with a derivatives transaction thatis classified as an illiquid investment? Are there circumstances where a fund would
have ready access to the value of such collateral even though the associatedderivatives transaction is illiquid?
48. Are there challenges to identifying and monitoring the amount of excess collateral afund has posted in connection with a derivatives transaction that is classified as anilliquid investment? If so, are there ways to address those challenges?
49. Are there other instances where we should treat an investment as illiquid for purposesof the rule’s limit on illiquid investments that the current rule and the proposal do notcontemplate?
50. Should we amend any other aspects of the illiquid investment limitations in the rule?
For example, should we change the amount of the limit on illiquid investments from
15% to a lower amount, such as 10% or 5%, or a higher amount, such as 20% or
25%?

157

See Item B.8.b of proposed Form N-PORT.

91

B.

Swing Pricing

We are proposing amendments to rule 22c-1 that would require all registered open-end
management investment companies to engage in swing pricing under certain conditions, except
for money market funds and ETFs (the latter, “excluded funds”).158 Swing pricing is a process ofadjusting a fund’s current NAV when certain conditions are met, such that the transaction priceeffectively passes on costs stemming from shareholder inflows or outflows to the shareholders
engaged in that activity. Trading activity and other changes in portfolio holdings associated withpurchases and redemptions may impose costs, including trading costs and costs of depleting afund’s liquidity. These costs, which currently are borne by the non-transacting shareholders in
the fund, can dilute the interests of these shareholders. In addition, this can create incentives forshareholders to redeem quickly to avoid losses, particularly in times of market stress. Ifshareholder redemptions are motivated by this first-mover advantage, they can lead to increasing
outflows, and as the level of outflows from a fund increases, the incentive for remaining
shareholders to redeem may also increase.159 By imposing the costs associated with net purchases
158

See proposed rule 22c-1(b). We refer to registered open-end management investment companies
other than excluded funds as “funds” or “open-end funds” when discussing the swing pricing
requirement. We continue to believe it is appropriate to limit swing pricing to these funds and to
not include other fund types, such as unit investment trusts or closed-end funds. See Swing
Pricing Adopting Release, supra note 8, at nn.62-72 and accompanying text. With respect to
excluded funds, the Commission recently proposed to require certain money market funds toengage in swing pricing under rule 2a-7, but those money market funds would not be subject tothe proposed swing pricing requirement under rule 22c-1(b). See Money Market Fund Reforms,
Investment Company Act Release No. 34441 (Dec. 15, 2021) [87 FR 7248 (Feb. 8, 2022)](“Money Market Fund Proposing Release”). ETFs, including an ETF share class of any fund thatissues multiple classes of shares representing interests in the same portfolio, would not be subject
to the swing pricing requirement, as discussed below. See definition of “Exchange-traded fund”
in proposed rule 22c-1(d).

159Some research suggests that a first-mover advantage in open-end funds may lead to cascading
anticipatory redemptions akin to traditional bank runs. This research generally models an
exogenous response to negative fund returns and not trading costs. However, these results may
extend to trading costs to the degree that cost based dilution may reduce subsequent fund returns,
which would trigger runs in these models. See, e.g., Chen, Qi, Itay Goldstein, and Wei Jiang.
2010. “Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund92

or net redemptions on the shareholders who are purchasing or redeeming from the fund at thattime, swing pricing can more fairly allocate costs, reduce the potential for dilution of investors
who are not currently transacting in the fund’s shares, and reduce any potential first-moveradvantages.
1.

Proposed Swing Pricing Requirement

Under the proposal, every open-end fund other than an excluded fund would be required
to establish and implement swing pricing policies and procedures that adjust the fund’s current
NAV per share by a swing factor either if the fund has net redemptions or if it has net purchasesthat exceed an identified threshold.160 We are proposing to require these funds to use swing
pricing as an anti-dilution tool, in contrast to the optional framework that currently exists in rule22c-1. Based on our observations from the events in March 2020, including in other jurisdictions
where swing pricing is a common tool, requiring funds to use swing pricing could result in
benefits for investors, as discussed below.161 However, at present no U.S. funds have
implemented swing pricing. One reason funds have not implemented swing pricing is that they
Outflows.” Journal of Financial Economics 97(2): 239-262. See also Goldstein, Itay, Hao Jiang,
and David Ng. 2017. “Investor Flows and Fragility in Corporate Bond Funds.” Journal of
Financial Economics 126(3):592-613. See also Morris, Stephen, Ilhyock Shim, and Hyun SongShin. 2017. “Redemption Risk and Cash Hoarding by Asset Managers.” Journal of Monetary
Economics 89: 71-87. See also Zeng, Yao. 2017. “A Dynamic Theory of Mutual Fund Runs andLiquidity Management.” Working Paper. See also Ma, Yiming, Kairong Xiao, and Yao Zeng.
2021. “Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity.” Working Paper.
See also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. “Bank Debt versus Mutual Fund
Equity in Liquidity Provision.” Working Paper. See also Christof W. Stahel. 2022. “Strategic
Complementarity Among Investors with Overlapping Portfolios”, available athttps://ssrn.com/abstract=3952125 (positing that investors behave similarly regardless of whether
they hold assets indirectly through a fund or directly through a separately managed account andthe general explanation for investor decisions to sell assets is that all market participants compete
for finite market liquidity).
160

See proposed rule 22c-1(b)(1) and definition of “Inflow swing threshold” in proposed rule 22c1(d).

161

See supra notes 59 to 63 and accompanying text (stating that some fund managers with both U.S.
and European operations indicated to the staff that swing pricing would have been a useful toolfor U.S. funds to have had to combat dilution in Mar. 2020).

93

lack timely flow information to operationalize this anti-dilution tool. However, even if all funds
had access to sufficient flow information in order to implement swing pricing, some may
nonetheless choose not to implement it due to implementation costs or because investors in U.S.
funds are unfamiliar with swing pricing. Therefore, funds may not be incentivized to be the firstto adopt swing pricing. We believe that a regulatory requirement, rather than a permissiveframework, would accrue benefits to investors that justify the implementation costs and would
overcome these collective action problems that may have prevented swing pricing
implementation. In addition, we continue to believe the information a fund that uses swing
pricing must disclose in its prospectus will improve public understanding regarding a fund’s useof swing pricing.162
Some academics and market participants have suggested that swing pricing has provided
significant benefits to long-term investors in funds in other jurisdictions, reducing dilution
attributable to the transaction costs associated with shareholder activity.163 As an example, one
foreign fund industry group has suggested that funds using swing pricing exhibit superior
performance returns over time compared to funds with identical investment strategies and trading
162

See Swing Pricing Adopting Release, supra note 11, at n.360 and accompanying text. In 2016,
when the Commission adopted the optional swing pricing rule for open-end funds that are notexcluded funds, it also adopted certain amendments to Form N-1A to enhance disclosure related
to a fund’s use of swing pricing, if applicable. Among other things, these amendments requiredthat a fund that uses swing pricing explain the fund’s use of swing pricing, including its meaning,
the circumstances under which the fund will use it, the effects of swing pricing on the fund andinvestors, and the upper limit it has set on the swing factor. See Item 6(d) of Form N-1A.
Although no funds currently use swing pricing, and therefore do not provide swing pricing
disclosures to their investors, under the proposed rule all funds other than excluded funds would
be required to provide these disclosures, other than the swing factor upper limit disclosure, totheir investors.

163

See, e.g., Dunhong Jin, Marcin Kacperczyk, Bige Kahraman, and Felix Suntheim, Swing Pricing
and Fragility in Open-end Mutual Funds, The Review of Financial Studies, 35(1) (2022),
available at https://academic.oup.com/rfs/article/35/1/1/6162183 (“Jin, et al.”); BlackRock,
Swing Pricing - Raising the Bar (Sept. 2021), available athttps://www.blackrock.com/corporate/literature/whitepaper/spotlight-swing-pricing-raising-thebar-september-2021.pdf (“BlackRock Swing Pricing Paper”).

94patterns that do not employ anti-dilution measures.164 In terms of performance benefits, one study
found that, for a 10% rise in monthly outflows, the associated decline in monthly returns relative
to a fund’s benchmark was double the amount for a fund that does not use swing pricing incomparison to a fund that uses swing pricing (a 6 basis point decline versus a 3 basis point
decline, respectively).165 And one investment manager reviewed the effects of swing pricing fortwenty of its European funds in 2019 and found that the anti-dilution effect of swing pricing
improved annual performance for these funds by around 10 to more than 60 basis points.166
In addition, in March 2020, many European funds that used swing pricing lowered theirswing thresholds and increased the size of their swing factors, suggesting there was a need tomake more frequent and significant adjustments to the funds’ NAVs at that time to avoid
substantial dilution that otherwise would have occurred.167 One study found that surveyed funds
using swing pricing during a three week period of elevated redemptions in March 2020 recoupedroughly 6 basis points of total net assets on average from redeeming investors.168 The swing
pricing policies that the proposed rule would require, which are similar to those used by someforeign funds, are designed to mitigate dilution arising from shareholders’ purchase andredemption activity, particularly during times of stress when those dilution costs may increase. In
addition to reducing dilution, some studies also suggest that swing pricing dampens redemption

164

See Association of the Luxembourg Fund Industry, Swing Pricing Brochure (July 2022),
available at https://www.alfi.lu/getattachment/3154f4f7-f150-4594-a9e3-fd7baaa31361/
app_data-import-alfi-alfi-swing-pricing-brochure-2022.pdf.

165

See CSSF Paper, supra note 61.

166

See BlackRock Swing Pricing Paper, supra note 163.

167

See notes 59 to 63 and accompanying text.

168

See Claessens and Lewrick, supra note 61.

95

pressure, although some have found this effect to be minimal or nonexistent during certain
periods of market stress.169
Consistent with our current optional swing pricing framework, the proposed swing
pricing requirement for open-end funds would apply to both net purchases and net redemptions.
Although liquidity and transaction costs associated with meeting net redemptions can present
heightened risks of dilution, particularly in stress periods, we continue to believe that net
purchases also may cause shareholder dilution.170 However, when a fund has net purchases, we
propose to require swing pricing only if the amount of net purchases exceeds a specified
threshold.
While the proposed swing pricing requirement generally would apply to all registeredopen-end funds other than excluded funds, we propose to retain the current provision that does
not permit feeder funds in a master-feeder fund structure to use swing pricing.171 The use ofswing pricing would generally be inappropriate for feeder funds, because that level of a fundstructure does not actually transact in underlying portfolio assets as a result of net purchase or net
redemption activity. A master fund, however, generally would be subject to the swing pricing
requirement. The master fund may purchase portfolio assets to invest purchasing shareholders’cash (as transferred through the feeder fund) or sell portfolio assets to pay redemption proceeds(reducing the feeder fund’s interest in the master fund). Thus, to the extent that net purchases
into or redemptions from the master fund by one or more feeder funds, or any other investors in

169

See CSSF Paper, supra note 61 (stating that funds applying swing pricing are less exposed toredemption pressure during episodes of elevated market volatility, but this dampening effectappears to vanish during episodes of severe market volatility, such as in Mar. 2020); see also
infra notes 354 to 355 and accompanying text.

170

See Swing Pricing Adopting Release, supra note 13, at paragraph accompanying n.166.

171

See proposed rule 22c-1(b)(5) and current rule 22c-1(a)(3)(iv).

96the master fund, would trigger the application of swing pricing under the proposed rule, theswing factor would be applied at the level of the master fund.
Consistent with current rule 22c-1, we propose to exclude ETFs from the swing pricing
requirement because ETFs often impose fees in connection with the purchase or redemption ofcreation units that are intended to defray operational processing and brokerage costs to prevent
possible shareholder dilution.172 We also are not including ETFs within the scope of the proposed
requirement because we believe that swing pricing could impede the effective functioning of an
ETF’s arbitrage mechanism. Additionally, notwithstanding section 18(f)(1) of the Act, a fundwith a share class that is an exchange-traded fund is subject to the swing pricing requirement
only with respect to any share classes that are not exchange-traded funds.173 The proposed ruleprovides this exemption to allow funds with both mutual fund and ETF share classes to apply
swing pricing to only their mutual fund share classes. Absent an exemption, differences between
the ETF and mutual fund share classes created by swing pricing could result in a fund being
deemed to issue a senior security, which would otherwise be prohibited under the Act.174 Thus, afund with an ETF share class would exclude the ETF share class’s flow information when
determining whether and how to apply swing pricing, and would not adjust the NAV of the ETF
share class by the swing factor in computing the share price of that class.
We request comment on our proposal to require any fund that is not an excluded fund to
implement swing pricing.

172

See Swing Pricing Adopting Release, supra note 13, at paragraph accompanying n.68.

173

See proposed rule 22c-1(b)(6).

174

Section 18(f)(1) of the Act generally makes it unlawful for any registered open-end company toissue any class of senior security. Section 18(g) defines senior security to include any stock of aclass having a priority over any other class as to distribution of assets or payment of dividends.

9751. As proposed, should we require any fund that is not an excluded fund to implement
swing pricing? Should we provide any additional exclusions from the swing pricing
requirement? For example, should funds that invest solely or primarily in highly
liquid investments be permitted, but not required, to use swing pricing? If we provide
an exclusion for funds that primarily invest in highly liquid investments, how should
we define primarily for these purposes (e.g., more than 50%, 66%, or 75%)? Should
we use the same definition of highly liquid investment as the liquidity rule for these
purposes? If not, how should we define highly liquid investments for purposes of an
exclusion from the swing pricing requirement? If a fund primarily invested in highly
liquid investments were to no longer qualify for this exclusion, when should it berequired to adopt swing pricing (e.g., immediately or within a certain grace period)?
Alternatively, should we limit the exclusion from swing pricing to funds that do notinvest more than a certain percentage of assets in illiquid investments? Whatmaximum level of illiquid investments would be appropriate to qualify for the
exclusion (e.g., 1%, 2%, 5%, or 10%)? When should a fund be required to adopt
swing pricing if it no longer complies with this exclusion (e.g., immediately or withina certain grace period)? Should we use the same definition of illiquid investments as
the liquidity rule for these purposes?
52. Should we limit the swing pricing requirement to only certain types of mutual funds
and retain an optional framework for other mutual funds? If so, how should we
identify by rule the types of mutual funds that would most benefit from a swing
pricing requirement? As an example, would it be appropriate to require swing pricing
for fixed-income mutual funds only, and to retain an optional approach for other98

funds? If so, how would a fixed-income fund be defined for this purpose (e.g., amutual fund that invests at least a certain percentage in fixed-income investments,
such as 50%, 75%, or 80%)? How would fixed-income investments, or any other typeof portfolio investment, be defined for this purpose?
53. Should we adopt swing pricing as a default tool, with a requirement that an open-end
fund, other than an excluded fund, implement swing pricing unless certain conditions
are met? For example, should a fund be required to implement swing pricing unless
its board of directors makes certain determinations (e.g., that the fund and its
shareholders are unlikely to experience significant dilution in connection withinvestor purchases and redemptions) and the fund maintains records of suchdeterminations? Should a fund be required to report information about the reasons forsuch a determination publicly?
54. Should swing pricing remain an optional tool for all mutual funds, other than
excluded funds? If so, how likely are funds to use the tool if we adopt the proposed
hard close requirement or take other steps to facilitate a fund’s ability to determine its
daily flows before the NAV is finalized? Are certain types of funds more likely to use
swing pricing if it remained an optional tool? If so, why are these funds more likely touse swing pricing than others? Are the funds that would use swing pricing if it
remained optional the same funds that would benefit most from addressing dilution
associated with shareholder transactions?
55. As proposed, should we retain the current provision in the rule that does not allow
feeder funds in a master-feeder structure to engage in swing pricing?

9956. Under the proposal, ETFs, the shares of which are listed and traded on a national
securities exchange, and that are formed and operate under an exemptive order underthe Investment Company Act or in reliance on rule 6c-11, would not be subject toswing pricing. Is the proposed definition of ETF appropriate? If we adopt the swing
pricing requirement, would mutual funds seek to convert to an ETF structure? Are
there any actions or exemptive relief that the Commission should take or grant tofacilitate the conversion of mutual funds to ETFs? If ETFs were to become thepredominant form of open-end fund under the Investment Company Act, would that
affect the need to impose swing pricing? And likewise, if ETFs were to become thepredominant form of open-end fund, would that benefit or harm investors, and if so,
how and to what extent?
57. Should we provide that funds with an ETF share class must exclude the ETF shareclass from the application of swing pricing, as proposed? What, if any, operational
challenges would exist for such funds under this approach? Should we instead requirethat ETF share classes be subject to the swing pricing requirement, which would
result in authorized participant purchases and redemptions being effected at an
adjusted NAV?
58. Should we require swing pricing for both net redemptions and net purchases, as
proposed, or only for net redemptions? Do dilution and liquidity concerns exist for
open-end funds in both scenarios?
59. What would be the operational challenges and costs for funds to adopt and implement
swing pricing, as proposed? If funds operationalized swing pricing in March 2020,
would it have been an effective tool to address dilution during that period? To what100

extent were funds selling portfolio assets and incurring transaction costs to meet
redemptions, or in anticipation of future redemptions, during that period?
60. Will the existing swing pricing disclosures required in Form N-1A be sufficient tohelp investors understand swing pricing? How familiar are U.S. investors with swing
pricing? Are there any amendments we should make to the swing pricing disclosure
requirements in Form N-1A that would help investors better understand the conceptof swing pricing? For example, should funds be required to disclose in theirregistration statements the frequency they have applied, or would have applied, aswing factor over a specified period of time (e.g., 1, 3, or 5 years) based on historicalflow information? Should we require a fund to provide additional disclosure about
swing pricing to investors outside of the registration statement? For example, should
we require funds to disclose the effects of swing pricing in shareholder reports (e.g.,
in management’s discussion of fund performance)?
61. Is the experience with swing pricing in certain foreign jurisdictions relevant to an
analysis of whether swing pricing would be an effective tool for U.S. funds? Beyond
the operational differences identified in this release, are there differences inregulatory frameworks, markets, fund investors, or other factors between the U.S. andthese other jurisdictions that might cause U.S. funds’ experiences with swing pricing
to differ?175
62. Rule 2a-4 under the Act requires a fund, when determining its current NAV, to reflectchanges in holdings of portfolio securities and changes in the number of outstanding

175

See infra note 225 (discussing that European jurisdictions in which funds use swing pricing
generally already have a hard close, which results in European funds receiving order flow muchearlier than U.S. funds).

101

shares resulting from distributions, redemptions, and repurchases no later than thefirst business day following the trade date. Are there any changes we should make torule 2a-4 to address dilution? For example, should we amend that rule to require thatfunds reflect these changes on trade date?
2.

Amendments to Swing Threshold Framework

The current rule permits a fund to determine its own swing threshold for net purchases
and net redemptions, based on a consideration of certain factors the rule identifies.176 We areproposing to specify when a fund must use swing pricing to adjust its current NAV, which would
differ depending on whether the fund has any net redemptions or has net purchases above a
specified threshold on a given day.
When the Commission adopted the swing pricing provisions in 2016, it determined torequire a swing threshold and not to prescribe a swing threshold floor applicable to all funds
because it believed that different levels of net purchases and net redemptions would create
different risks of dilution for funds with different strategies, shareholder bases, and otherliquidity-related characteristics.177 At that time, the Commission believed consideration of theswing threshold factors—which took into account these different liquidity-related characteristics—would lead a fund to set a threshold at a level that would trigger the fund’s investment adviser
to trade portfolio assets in the near term to a degree or of a type that may generate material
liquidity or transaction costs for the fund. We further believed that after considering these176

The factors a fund currently must consider in determining the size of its swing threshold are: (1)the size, frequency, and volatility of historical net purchases or net redemptions of fund shares
during normal and stressed periods; (2) the fund’s investment strategy and the liquidity of thefund’s portfolio investments; (3) the fund’s holdings of cash and cash equivalents, and borrowing
arrangements and other funding sources; and (4) the costs associated with transactions in themarkets in which the fund invests. See rule 22c-1(a)(3)(i)(B).

177

For considerations relating to the swing threshold in the current rule, see generally Swing Pricing
Adopting Release, supra note 11, at nn.150-155 and accompanying text.

102

factors, a fund would be unable to set the swing threshold at zero. Thus the current rule does notcontemplate full swing pricing, but assessment of the swing threshold factors could lead certain
funds to set low swing thresholds approximating full swing pricing.
In the intervening period, however, we have observed that the size of funds’ swing
thresholds in certain other jurisdictions has depended more on uniform decisions by the manager
of a fund complex than on an individual fund’s liquidity-related circumstances.178 In addition, we
considered our experience with the liquidity rule discussed above, where currently allowed
discretion has led to favorable liquidity assessments that tend to over-estimate funds’ liquidity
during stressed market conditions and that fail to change dynamically during stressed market
conditions. A similar experience translated to swing pricing could cause high swing thresholds
set during calm market conditions that do not adjust downward as may be appropriate in somecases during stressed market conditions. As a result of these experiences, we are concerned thatretaining the principles-based framework for setting swing thresholds under the current rulewould not result in the level of fund-specific tailoring the Commission contemplated and,instead, would simply result in undue variation among similarly situated funds and, in somecases, swing thresholds high enough that swing pricing does not adequately address dilution.
In the case of net redemptions, the proposed rule would require a fund to apply swing
pricing always (i.e., without a swing threshold).179 Because every net redemption can potentiallyinvolve trading or borrowing costs that dilute the value of the fund, as well as depletion of afund’s liquidity for remaining shareholders that increases the likelihood of future dilution, the178

See Bank of England Survey, supra note 60 (“In most cases we observed that funds withdifferent primary strategies and assets, but managed by the same fund manager, used both thesame thresholds for applying swing pricing, and the same calculation of the standardised swing
factor. This appears to indicate that managers may not be fully considering specific factors suchas in the investor base or asset-specific factors for individual funds.”).

179

See proposed rule 22c-1(b)(1)(i).

103

proposal, in setting a uniform approach to triggering swing pricing in all circumstances, would
require a fund to apply a swing factor regardless of the size of its net redemptions, which isintended to fairly allocate costs and reduce dilution. Applying swing pricing regardless of thesize of net redemptions may help reduce any potential first-mover advantage associating withredeeming before other investors. However, the types of costs the swing factor must take into
account would depend on the size of net redemptions. Specifically, the proposed rule would
require a fund to include market impacts in its swing factor only if net redemptions exceed 1% of
the fund’s net assets (the “market impact threshold”).180 Market impact costs are the costs
incurred when the price of a security changes as a result of the effort to purchase or sell the
security.181
We understand that there may be operational challenges and complexities to estimating
market impact costs. Recognizing these difficulties, and that market impacts are likely to beminimal or even negligible when redemptions are not significant, the proposal sets a market
impact threshold below which estimates of market impact would not be necessary. Based on our
analysis of historical daily flow data over a period of more than 10 years for equity and fixedincome mutual funds, a given fund had daily outflows of more than 1% on slightly more than 1%of trading days.182 We propose a 1% market impact threshold to balance the operational
challenges of frequently estimating market impacts with the goal of reducing dilution,
particularly in times of stress (i.e., when a fund is more likely to experience redemptions of more

180

See proposed rule 22c-1(b)(2)(i)(C) and definition of “Market impact threshold” in proposed rule22c-1(d).

181Market impact costs reflect price concessions (amounts added to the purchase price or subtracted
from the selling price) that are required to find the opposite side of the trade and complete thetransaction.

182

Based on Morningstar data for the period of Jan. 2009 through Dec. 2021.

104than 1% of net assets and market impacts are likely to be larger). We recognize that smaller
funds may be less likely than larger ones to have market impacts at a 1% threshold, because theygenerally would be selling smaller investment sizes than larger funds would at that threshold.
However, there are circumstances in which smaller funds may also experience market impact
costs at the 1% threshold; for example, if the fund holds substantial illiquid investments or
during periods of market stress. Therefore, the proposal requires all funds to assess whether
market impact costs would occur when net redemptions exceed a 1% threshold and, if they dooccur, to include such costs in the swing factor. A uniform market impact threshold for all funds
would provide a consistent and objective threshold for all funds to consider market impacts.
When a fund has net purchases, we propose to only require swing pricing—including
market impact—if the amount of net purchases exceeds 2% of the fund’s net assets (the “inflow
swing threshold”).183 We recognize that smaller levels of net purchases are less likely to result in
dilution than net redemptions. This is because funds, while required to pay redemptions withinseven days, are not required to invest cash inflows within a specified period. Therefore, if bidask spreads have widened on a day that the fund receives the cash inflows, the fund manager
generally can wait to invest the cash to reduce transaction costs.184 In addition, while investing
the cash inflows could decrease the liquidity of the fund, particularly if the cash is used topurchase illiquid investments, the liquidity rule curbs this possibility by limiting the amount of
illiquid investments a fund can acquire.

183

See definition of “Inflow swing threshold” in proposed rule 22c-1(d).

184

Regardless of bid-ask spreads, a fund manager also may choose to use cash inflows to invest inderivatives to obtain market exposure quickly while strategizing where to invest that cash on alonger-term basis. Funds may be incentivized to invest promptly in an effort to avoid reduced
returns and tracking error.

105

For these reasons, the proposal sets a swing threshold for net purchases but not one for
net redemptions. We also recognize that low levels of net purchases are less likely to result in
dilution, but that higher levels of net purchases are more likely to result in dilution absent
appropriate tools for mitigating it. Based on our analysis of historical daily flow data over a
period of more than 10 years for equity and fixed-income mutual funds, a given fund had daily
inflows of approximately 2% on about 1% of trading days.185 Therefore, similar to the proposed
market impact threshold, we propose an inflow swing threshold of 2% to balance the operational
challenges of frequently implementing swing factors for net purchases with the goal of reducing
dilution, particularly when a fund has significant inflows.
Although the proposed rule would identify a market impact threshold that would apply to
net redemptions and an inflow swing threshold for net purchases, the rule would permit thefund’s swing pricing administrator to use smaller thresholds than the rule identifies in either ofthese instances as the administrator determines is appropriate to mitigate dilution.186 Flexibility to
use a smaller threshold is designed to recognize that there may be circumstances in which asmaller threshold than the rule requires would help reduce dilution, such as when the fund holdsa larger amount of investments that are less liquid, in times of market stress, or in the case of alarge fund (i.e., because a large fund is selling or purchasing a larger amount of instruments thana small fund at a 1% market impact threshold for net redemptions or a 2% inflow swing

185

Based on Morningstar data for the period of Jan. 2009 through Dec. 2021.

186

See definitions of “Inflow swing threshold” and “Market impact threshold” in proposed rule 22c1(d). Under the proposed rule, the term “swing pricing administrator” has the same meaning as
the term “person(s) responsible for administering swing pricing” under the current rule. See
proposed rule 22c-1(d); current rule 22c-1(a)(3)(ii)(C). The swing pricing administrator is thefund’s investment adviser, officer, or officers responsible for administering the fund’s swing
pricing policies and procedures. The proposed rule specifies that the swing pricing administrator
may consist of a group of persons. As with the current rule, the fund’s board of directors mustdesignate this person or group of persons.

106threshold for net purchases). For example, a fund might elect to implement swing pricing if thefund experiences net purchases of any amount.
We understand that in having the option to set a lower market impact threshold for net
redemptions and inflow swing threshold for net purchases, the swing pricing administrator would
have discretion that it potentially could use to enhance fund performance in a misleading mannerby adjusting the fund’s NAV more frequently or more substantially than is needed to address
dilution. To help address this risk, under the proposal the administrator would be required toinclude in its written reports to the board the information and data supporting its determination touse lower thresholds.187 Additionally, consistent with the current rule, a fund’s portfolio manager
could not be designated as the swing pricing administrator.188
We request comment on our proposed amendments to the swing pricing threshold.
63. Should we adopt a framework that, in the case of net redemptions, requires a fund toadjust its NAV by a swing factor only when those net redemptions exceed an
identified threshold (i.e., as we propose for net purchases)? If so, should thatthreshold be the same size as the 1% market impact threshold, or a lower or higher
amount (e.g., 0.5%, 1.5%, or 2%)?
64. Should we require the application of the swing factor regardless of the size of net
purchases or net redemptions, or only when they exceed a certain percentage of afund’s net assets? Should funds have discretion to set their own thresholds? If so,

187

See proposed rule 22c-1(b)(3)(iii)(C). Consistent with the current rule, a fund would be required
to maintain a written copy of the report provided to the board for six years, the first two years inan easily accessible place. See rule 22c-1(a)(3)(iii); proposed rule 22c-1(b)(4).

188

See rule 22c-1(a)(3)(ii)(C) and proposed rule 22c-1(b)(3)(ii). See also Swing Pricing Adopting
Release, supra note 11, at n.269 and accompanying text.

107

should that discretion be based on the swing threshold factors currently in the rule orshould we adjust those factors?
65. Should we include a market impact threshold for net redemptions, as proposed? Is 1%
an appropriate level for the market impact threshold? Should it be a lower or higher
amount (e.g., 0.5%, 1.5%, or 2%)? Is there different data or analysis that we shouldtake into account to determine the market impact threshold?
66. Should we include an inflow swing threshold for net purchases, as proposed? Is 2%
an appropriate level for the inflow swing threshold? Should it be a lower or higher
amount (e.g., 0.5%, 1%, 1.5%, or 3%)? Is there different data or analysis that weshould take into account to determine the inflow swing threshold?
67. Would the proposed inflow swing threshold, or a requirement to use swing pricing in
the case of net purchases more generally, cause a fund to limit the total amount an
investor can invest in the fund? If so, what effects would this have on investors?
68. Should we permit the swing pricing administrator to use discretion to establish asmaller market impact threshold for net redemptions or a smaller inflow swing
threshold for net purchases if the administrator determines a smaller threshold isappropriate to mitigate dilution, as proposed? Should we prescribe the circumstancesin which a smaller threshold would be permitted, the timing of such a determinationby the swing pricing administrator (e.g., if a swing pricing administrator mustformally establish a smaller threshold that will remain in place for a period of time),
disclosure of such a determination to the fund’s investors, and recordkeeping
requirements in support of the determination? Should we require the fund’s board,
instead of the swing pricing administrator, to approve use of a smaller threshold?

108

Should we permit the swing pricing administrator to exclude certain types of costs
from the swing factor if it uses a lower-than-required threshold? For example, shoulda swing pricing administrator be permitted to exclude market impact estimates fromthe swing factor if it uses an inflow swing threshold that is lower than 2%, andinstead only include market impact estimates when inflows also exceed 2%?
69. Should the swing pricing administrator or the board have flexibility to establish larger
thresholds than proposed (i.e., to apply a swing factor only when net redemptions
exceed a specified percentage, to include market impacts in the swing factor when net
redemptions are an identified amount that is greater than 1%, or to apply a swing
factor only when net purchases exceed an identified amount that is greater than 2%)?
If so, what are the circumstances in which a fund board or the swing pricing
administrator should have flexibility to use larger thresholds that the proposed rule
identifies?
70. Should we allow certain types of funds to use different thresholds than those theproposed rule identifies? For example, should we permit or require smaller funds touse larger thresholds? If so, how should we identify smaller funds for these purposes?
Should the rule identify larger thresholds for smaller funds, or should smaller funds
have flexibility to determine their own thresholds? As another example, should wepermit or require funds that hold significant amounts of highly liquid investments to
use larger thresholds? If so, how should we identify funds that hold significant
amounts of highly liquid investments for these purposes? Should the rule identify
larger thresholds for these funds, or should they have flexibility to determine theirown thresholds?

109

3.

Determining Flows

Consistent with the current rule, the swing pricing administrator must review investor
flow information to determine if the fund has net purchases or net redemptions and the amount of
net purchases or net redemptions.189 For these purposes, investor flow information means
information about the fund investors’ daily purchase and redemption activity. Investor flow
information may consist of individual, aggregated, or netted eligible orders, and excludes any
purchases or redemptions that are made in kind and not in cash.190 Currently it would be difficult
to determine investor flow information on a given day because some intermediaries do notprovide order flow until after the fund has finalized its NAV. In recognition of these challenges,
the current rule permits a swing pricing administrator to make swing pricing determinations
based on receipt of sufficient investor flow information to allow the fund to estimate reasonably
whether it has crossed a swing threshold with high confidence.191 While the hard close provisionin the proposed rule is intended to result in funds generally having flow information in a timely
manner, and therefore greatly reduce the need for estimation, we recognize some estimation may
still be required. The proposed rule would, therefore, continue to permit the swing pricing
administrator to make swing pricing determinations based on reasonable, high confidence
estimates of investor flows.192

189

See rule 22c-1(a)(3)(i)(A) and proposed rule 22c-1(b)(1)(i).

190

See definition of “Investor flow information” in proposed rule 22c-1(d). See also infra section
II.C.2 (discussing the proposed definition of “eligible order” for purposes of the hard closerequirement).

191

See rule 22c-1(a)(3)(i)(A).

192

Under the current rule, the swing pricing administrator is permitted to make swing thresholddeterminations based on receipt of sufficient flow information “to allow the fund to reasonably
estimate whether it has crossed the swing threshold(s) with high confidence.” See rule 22c-1(a)(3)(i)(A).

110

Under our proposal, the swing pricing administrator would be required to review investor
flow information on a daily basis to determine: (1) if the fund experiences net purchases or net
redemptions; and (2) the amount of net purchases or net redemptions. We propose to permit theswing pricing administrator to make these determinations based on “reasonable, high confidence
estimates.” While there would be less of a need to estimate flows under the proposed hard closerequirement, we understand that a swing pricing administrator still would need to use estimatesin some cases. For instance, if an investor submits an exchange order to redeem its shares from
Fund A and simultaneously invest the proceeds in Fund B, the swing pricing administrator for
Fund B may need to estimate the incoming cash by multiplying the number of shares redeemedfrom Fund A by an estimate of Fund A’s NAV, which may be the prior day’s transaction price.
In this situation, we recognize it will not be possible for the swing pricing administrator todetermine the exact size of the related flow information until a later time. Therefore, we propose
to permit the use of reasonable, high confidence estimates to make swing pricing determinations.
Furthermore, some funds groups with both U.S. and European operations may already haveexperience with this type of estimation, because European funds that have adopted swing pricing
generally use the prior day’s price to estimate today’s flows.
We request comment on our proposal requirements related to shareholder flow
information.
71. Should we permit a swing pricing administrator to make reasonable, high confidence
estimates of investor flows, as proposed? Are there operational complexities to thisapproach? Is the rule’s reference to reasonable, high confidence estimates of investor
flows sufficiently clear? If not, how should we revise the rule to provide greater
clarity about permitted estimates?

11172. As proposed, should we remove references to receipt of sufficient investor flow
information in the rule in light of the proposed hard close requirement?
73. Is the proposed definition of “investor flow information” clear and understandable?
Should the rule continue to exclude any purchases or redemptions that are made inkind and not in cash, as proposed?
74. Should we provide additional guidance about circumstances in which a swing pricing
administrator may need to use estimates in connection with arriving at a reasonable,high confidence estimate of the fund’s investor flow information and how theadministrator should arrive at those estimates? Are there other types of investor
orders, beyond orders that identify the number of shares to be purchased or sold andexchanges, that would still require estimation under a hard close approach? Should
funds be able to use the prior day’s transaction price for purposes of estimating flows
where the amount of such flows are dependent on having a transaction price? Should
funds be permitted to make adjustments to the prior day’s price for these purposes(e.g., to reflect market movements relative to fund benchmarks that occurred after theprior day’s NAV was struck)? If so, under what circumstances should we permit suchadjustments?
75. If we adopt the proposed hard close requirement, would there be scenarios in which aswing pricing administrator would be unable to arrive at a reasonable, highconfidence estimate of investor flows? If so, when would this occur? How should afund comply with the swing pricing requirement if the administrator is unable toarrive at a reasonable, high confidence estimate of investor flows on a given day?

112

76. Would the use of reasonable, high confidence estimates of investor flows subject
swing pricing determinations to abuse? Should the use of estimates be limited to
specific circumstances? Are there other ways for the swing pricing administrator to
make swing pricing determinations without the use of reasonable, high confidence
estimates of investor flows?
77. Do fund groups with both U.S. and European operations already have experience withinvestor flow estimation? If so, would experience with European operations help
these fund groups use estimates in their U.S. funds? What changes to the proposed
rule, if any, would help fund groups without prior experience with investor flow
estimation?
4.

Swing Factors

In determining the swing factor, the proposed rule would require a fund’s swing pricing
administrator to make good faith estimates, supported by data, of the costs the fund would incur
if it purchased or sold a pro rata amount of each investment in its portfolio to satisfy the amountof net purchases or net redemptions (i.e., a vertical slice).193 The current swing pricing
framework requires that the swing factor take into account only the near-term costs expected to
be incurred by the fund as a result of net purchases or net redemptions that occur on the day theswing factor is used, as well as borrowing-related costs associated with satisfying redemptions.194
Under our proposal, a fund would be required to assume it would purchase or sell a pro rata
amount of each investment in its portfolio, rather than consider the specific investments it wouldpurchase to invest the proceeds from subscriptions or sell to meet redemptions.195 Because a fund193

See proposed rule 22c-1(b)(2).

194

These near-term costs include spread costs, transaction fees and charges arising from asset
purchases or asset sales resulting from those purchases or redemptions. See rule 22c-1(a)(3)(i)(C).

195

See proposed rule 22c-1(b)(2).

113

would need to calculate its costs based on the purchase or sale of a vertical slice of its portfolio,
rather than selecting specific investments or borrowing to meet redemptions, we have proposed
to remove borrowing costs from the swing factor calculation. We recognize that there are many
ways a fund could pay redemptions or invest proceeds from investor purchases, and a fund may
not necessarily sell or purchase a vertical slice of its portfolio holdings to do so. However, we
believe analyzing costs based on an assumed purchase or sale of a vertical slice of the fund’s
portfolio would more fairly reflect the costs imposed by redeeming or purchasing investors thanan approach that focuses solely on the costs associated with the instruments that the fund expects
to buy or sell (or expected borrowing costs, in the case of redemptions). For example, under thecurrent rule, if a fund sells only highly liquid investments to meet redemptions, the swing factor
would typically reflect relatively low transaction costs of selling those investments and any nearterm rebalancing, and generally would not account for the effect of leaving remaining investors
with a less liquid portfolio or potential longer-term rebalancing costs. In contrast, the proposed
requirement that a fund calculate costs to purchase or sell a vertical slice of the portfolio isdesigned to recognize the potential longer-term costs of reducing the fund’s liquidity under thesecircumstances.
In addition, using a vertical slice is more objective than the current approach, because theswing factor administrator does not need to anticipate what actions the fund will take to pay
redemptions or invest proceeds from investor purchases, which may vary from day to day. Thisshould make the swing factor easier to administer. Further, under the proposed swing pricing
framework and consistent with the current rule, a swing factor could generally be determined ona periodic basis, as long as developments that should affect the swing pricing administrator’sgood faith estimates of spreads, market impact, and other transaction costs, such as significant

114

market developments, prompt a quicker reevaluation.196 A quicker reevaluation would be
required to comply with the proposed amendments where developments would otherwise preventthe prior swing factor from reflecting the cost the fund would incur if it purchased or sold a pro
rata amount of each portfolio investment under current market conditions. Accordingly, we
believe a fund would have the incentive to reevaluate promptly its swing factor in thesecircumstances because having an accurate and fair transaction price is crucially important toinvestors. We believe that funds would address the frequency of swing factor determinations
when designing their policies and procedures relating to swing pricing.
Calculating the swing factor would differ depending on whether the fund is experiencing
net purchases or net redemptions. In the case of net redemptions, the good faith estimates must
include, for selling a pro rata amount of each investment in the fund’s portfolio to satisfy theamount of net redemptions: (1) spread costs; (2) brokerage commissions, custody fees, and anyother charges, fees, and taxes associated with portfolio investment sales; and (3) if the amount of
the fund’s net redemptions exceeds the market impact threshold, the market impact.197 In the caseof net purchases, swing pricing would only be applied if the amount of the fund’s net purchases
exceeds 2%.198 In such cases the good faith estimates must include, for purchasing a pro rata
amount of each investment in the fund’s portfolio to invest the proceeds from the net purchases:(1) spread costs; (2) brokerage commissions, custody fees, and any other charges, fees, and taxes
associated with portfolio investment purchases; and (3) the market impact.199 We believe thesecomponents of the swing factor for both net redemptions and net purchases, taken together,196

See Swing Pricing Adopting Release, supra note 11, at paragraph accompanying n.268.

197

See proposed rule 22c-1(b)(2)(i).

198

See proposed rule 22c-1(b)(2)(ii).

199

Id.

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approximate the aggregate costs associated with dilution. We also believe that providing astandard for calculating swing factors, including the vertical slice approach and the identificationof the categories of costs funds must include, would help avoid the variability in how funds
calculate swing factors, as observed in some other jurisdictions where funds use swing pricing.200
We understand that in calculating the swing factor, fund managers may have incentives toover-estimate costs in order to improve fund performance. However, doing so would be
misleading. To help address this risk, under the proposal funds would be required to report theirswing factor adjustments publicly on Form N-PORT. We believe this public transparency should
reduce a fund’s incentive to over-estimate costs. Additionally, a fund’s portfolio manager, whoarguably might have the strongest incentives to over-estimate costs, could not be designated as
the swing pricing administrator.201
The method for calculating a fund’s spread costs would differ depending on how the fundvalues its portfolio holdings. We understand that funds may value portfolio holdings at the bid
price or the mid-market price when striking their NAVs.202 If a fund values its portfolio holdings

200

See Bank of England Survey, supra note 60. This report states that in calculating swing factors,some surveyed UK funds only considered bid-ask spreads, some other funds also considered
explicit transaction costs such as commissions, and a few funds considered market impact aswell. Moreover, in reviewing the size of swing factors applied in Mar. 2020, the report found that
corporate bond funds with net outflows applied swing factors ranging between -5% and +0.5%
from Mar. 10 to 23. The report states that the scale of variation suggests that fund-specificexperiences are not the sole explanation for differences in swing factors and that different
approaches fund managers took in applying swing pricing also contributed to these variations.

201

See proposed rule 22c-1(b)(3)(ii).

202

See FASB ASC 820-10-35-36C (providing that if an asset measured at fair value has a bid priceand an ask price, the price within the bid-ask spread that is most representative of fair value in thecircumstance shall be used to measure fair value, and that the use of bid prices for asset positions
is permitted but not required for these purposes); FASB ASC 820-10-35-36D (stating that use of
mid-market pricing as a practical expedient for fair value measurements within a bid-ask spread
is not precluded). Since a seller generally asks for a higher price for a security than a buyer bids
for that security, the mid-market price is incrementally higher than the bid price for a security, but
lower than its ask price.

116

at the bid price, it would not need to include spread costs in its swing factor when the fund has
net redemptions. In contrast, if the fund has net purchases exceeding 2%, the fund would need toinclude spread costs, which would reflect the full bid-ask spread. For a fund that uses midmarket pricing, it would need to include spread costs in its swing factor any time it applies swing
pricing. When a fund using mid-market pricing has net redemptions, or net purchases exceeding
2%, the spread cost component of its swing factor would reflect half of the bid-ask spread.
The proposal would require a fund to include market impact in its swing factor only if theamount of net redemptions exceeds the market impact threshold, and in all cases where theamount of net purchases exceeds the inflow swing threshold. The market impact component of
the swing factor would reflect good faith estimates of the market impact of selling (in the case of
net redemptions) or purchasing (in the case of net purchases) a vertical slice of a fund’s portfolio
to satisfy the amount of net redemptions or net purchases. The fund would estimate market
impacts for each investment in its portfolio by first estimating the market impact factor. Thisfactor is the percentage change in the value of the investment if it were purchased or sold, perdollar of the amount of the investment that would be purchased or sold. Then, the fund would
multiply the market impact factor by the dollar amount of the investment that would bepurchased or sold if the fund purchased or sold a pro rata amount of each investment in its
portfolio to meet the net redemptions or net purchases.203
We understand that it may be difficult to produce timely, good faith estimates of themarket impact of purchasing or selling a pro rata portion of each instrument the fund holds.
Recognizing these difficulties, and because some securities held by mutual funds may have
similar characteristics and would likely incur similar costs if purchased or sold, the proposed rule203

See proposed rule 22c-1(b)(2)(iii).

117

would permit the swing pricing administrator to estimate costs and market impact factors foreach type of investment with the same or substantially similar characteristics and apply thoseestimates to all investments of that type rather than analyze each investment separately.204
The existing swing pricing framework currently in rule 22c-1 does not permit a fund toinclude market impact costs relating to transacting in the fund’s investments in the swing factor
calculation. At the time of the rule’s adoption, the Commission stated that it may be difficult for
many funds to estimate readily market impact costs, and that subjective estimates of market
impact costs could grant excessive discretion in a fund’s determination of a swing factor.205 We
understand that it may continue to be difficult to determine market impact costs with precision,
while a fund would be able to determine other relevant factors more precisely.206 However, we
believe the experiences of European funds that employed swing pricing through March 2020
have highlighted the importance of considering market impact costs, given the stressed nature ofmarkets at that time, the level of those funds’ redemptions, and the size of those funds’ swing
factors. We understand that only some European funds consider market impact costs when
determining their swing factors.207 A recent survey conducted by the Association of the
Luxembourg Fund Industry (“ALFI”), however, observed an increase in asset managers

204

See proposed rule 22(c)-1(b)(iv).

205

See Swing Pricing Adopting Release, supra note 11, at paragraph accompanying n.240.

206

Methodologies used to estimate market impact are often created by liquidity measurement
vendors. These vendors typically create a model to gauge what size of trade will have a market
impact on a security (using various factors such as bid-offer spreads, issue sizes, recent daily
average volumes, and recent trade sizes), back-test the model to check its accuracy, and thenadjust the weights of the various factors used in the model accordingly.

207

See Bank of England Survey, supra note 60 (stating that most surveyed fund managers did notfactor market impact explicitly into their swing factors, and few had models in place to estimate
spreads when needed).

118

including market impact in their swing factors, with 35% of surveyed asset managers including
this component in the factor calculation.208
To address the concern that market impact estimation may be difficult, and that
subjective estimates of market impact costs could grant excessive discretion in the determinationof a swing factor, we are providing additional parameters for estimating market impact to makethe calculation more objective as discussed above. These prescriptive requirements should help
to limit subjectivity, and recordkeeping requirements would require funds to document theirmarket impact factors, facilitating our staff’s review and oversight of mutual fund swing
pricing.209
The current swing pricing framework requires the establishment of an upper limit on theswing factor used.210 The Commission included a 2% upper limit in the current rule to make surethat swing pricing would not operate as a “de facto gate.”211 We are not including an upper limiton the swing factor under our proposed framework. We propose to remove the requirement forthe board to review and approve the fund’s swing threshold and the upper limit on the swing
factor(s) used, as well as any charges on these items, to conform to our proposed swing pricing
208

See ALFI Swing Pricing Survey 2022 (July 2022), available athttps://www.alfi.lu/getattachment/8417bf51-4871-41da-a892-f4670ed63265/app_data-importalfi-alfi-swing-pricing-survey-2022.pdf.

209

See rule 31a-2(a)(2) (requiring funds to preserve for a period of not less than six years allschedules evidencing and supporting each computation of an adjustment to the fund’s NAV basedon swing pricing policies and procedures). A fund’s records under the proposed amendments
should generally include the fund’s unswung NAV, the level of net purchases or net redemptions
that the fund encountered (and estimated) that triggered the application of swing pricing, theswing factor that was used to adjust the fund’s NAV, and relevant data supporting the calculationof the swing factor, including the components of the swing factor such as market impact.

210

See rule 22c-1(a)(3)(i)(C). Additionally, a fund’s board of directors, including a majority of
directors who are not interested persons of the fund must approve the fund’s swing threshold(s)and the upper limit on the swing factor(s) used, and any changes to the swing threshold(s) or theupper limit on the swing factor(s) used. See rule 22c-1(a)(3)(ii).

211

See Swing Pricing Adopting Release, supra note 13, at text accompanying nn.253-254.

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framework.212 The more specific parameters in this proposal for determining a fund’s swing
factor are intended to sufficiently mitigate the concerns that led to an upper limit in the existing
swing pricing regime. In addition, although the current rule does not prescribe which investments
a fund would purchase or sell, the current upper limit may provide an incentive for funds to sell
their most liquid assets first, which may increase the risk of dilution when the fund later
rebalances its portfolio. Furthermore, we understand that in certain other jurisdictions, several
funds experienced costs and dilution that led to swing factors above 2% in March 2020.213 Those
cases suggest that the swing factors helped mitigate dilution and did not constitute a de facto
gate, given that they reflected market conditions at that time. We recognize that liquidity costs
could vary widely across funds and under different market conditions, and we do not wish tolimit the extent to which swing pricing could mitigate dilution. Finally, the policies andprocedures for determining the swing factor would be required to be approved by the fund’sboard, which has an obligation to act in the best interests of the fund.
Additionally, Form N-1A currently requires funds that use swing pricing to disclose afund’s swing factor upper limit.214 Because we propose to remove the swing factor upper limit in
the rule, we also propose to remove the requirement to provide an upper limit on the swing factor
from Item 6(d) of Form N-1A.215
We request comment on our proposed calculation of a fund’s swing factor.
212

See proposed rule 22c-1(b)(3). We also propose to modify the board’s review of a fund’s swing
pricing policies and procedures to include “their effectiveness at mitigating dilution” rather than“the impact on mitigating dilution.” See proposed rule 22c-1(b)(3)(iii)(A).

213

See, e.g., Commission de Surveillance du Secteur Financier, Swing Pricing Mechanism – FAQ,
available at https://www.cssf.lu/en/Document/cssf-faq-swing-pricing-mechanism/ (providing
guidance for increasing the swing factor above the maximum level identified in a fund’s
prospectus under certain circumstances, and noting that typical maximum swing factors observedin fund prospectuses are between 1% and 3%).

214

Item 6(d) of Form N-1A.

215

See Item 6(d) of proposed Form N-1A.

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78. Does our proposed requirement that a fund calculate the swing factor by assuming it
would sell or purchase a pro rata amount of each investment in its portfolio properly
account for liquidity costs? Are there other considerations related to liquidity costs
that the swing pricing framework should take into account, such as shifts in the fund’sliquidity management or other repositioning of the fund’s portfolio?
79. Should funds calculate the swing factor by estimating the costs of purchasing or
selling only the investments the fund plans to buy or sell to satisfy shareholder
purchases or redemptions (consistent with the current rule), rather than calculating theswing factor based on the costs the fund would incur if it sold a pro rata amount ofeach investment in its portfolio (as proposed)? Which approach would more fairly
reflect the costs imposed by redeeming or purchasing investors?
80. Should we permit a fund not to use the vertical slice assumption when doing so would
require the fund to assume that it is purchasing or selling an amount of a given
instrument that would not be permissible under other rules (e.g., if it would result inan assumption that a fund would purchase an amount of illiquid investments thatexceeds 15%)? If so, how should we modify the assumption for these purposes?
Should we require a vertical slice assumption in all cases for administrative ease andconsistency in calculations?
81. As proposed, should the swing factor calculation take into account spread costs;
brokerage commissions, custody fees, and any other charges, fees, and taxes
associated with portfolio investment sales; and the market impact under certain
circumstances? Should we remove any of these types of costs from the calculation?
Are there other types of costs we should include?

12182. Should the swing factor calculation take into account borrowing costs like under thecurrent rule? Should the proposed rule only include borrowing costs for certain assets,such as illiquid assets? Should illiquid investments be defined for this purpose using
the same definition as in rule 22e-4?
83. Should the way in which a fund calculates spread costs depend on whether it uses
midpoint or bid pricing when valuing its holdings? Should we allow a fund that uses
bid pricing not to apply a swing factor when it has net redemptions unless the amountof net redemptions exceeds a threshold (e.g., the market impact threshold)? Should
we require all funds to use bid pricing, either instead of or in combination with aswing pricing requirement? Would use of bid pricing effectively address dilution,
particularly when net redemptions are small? Instead of requiring swing pricing as
proposed, should we require a fund to use bid pricing to compute its share price orotherwise adjust its price to reflect spread costs on days the fund estimates that it has
net redemptions? If so, should the fund also use ask pricing on days the fundestimates that it has net purchases? Should we require a fund to use bid pricing tocompute its share price on all days, regardless of whether the fund has net
redemptions or purchases?
84. Should we require the swing factor to include market impact under certain
circumstances, as proposed? Do some or all funds already estimate market impact
factors, or perform similar analyses, to inform trading decisions or liquidity ruleclassifications? If so, would these funds’ prior experience smooth the transition to
making a good faith estimate of the market impact factor under the proposal? Wouldthe proposed amendments to the liquidity rule further enhance funds’ ability to122estimate market impacts? What difficulties might funds experience in developing aframework to analyze market impact factors and in producing good faith estimates ofmarket impact factors for purposes of the proposed swing pricing requirement? What
are the specific operational challenges in estimating market impact? Are there ways
we could reduce those difficulties, while still requiring redeeming investors to bear
costs that reasonably represent the costs they would otherwise impose on the fund andits remaining shareholders?
85. Should we permit funds to calculate swing factors on a periodic basis, as long as
developments such as significant market developments prompt a quicker reevaluation, as proposed? Does this approach have any effect on the goals of reducing
dilution, improving fairness, and addressing potential first-mover advantages? Are
there other circumstances in which a fund should be required to re-evaluate its swing
factors or certain swing factor components, such as changes in the fund’s investment
strategy or liquidity? Should we instead require funds to calculate swing factors (orcertain components of swing factors) on a daily basis or at some other definedminimum frequency (e.g., weekly or monthly) unless developments prompt a quicker
re-evaluation?
86. Should the rule permit, rather than require, funds to follow the identified inflow
swing threshold, market impact threshold, and swing factor calculations set forth in
the rule? If so, what considerations or factors should the rule require a fund to
consider when determining thresholds and swing factors if the fund determines not tofollow the threshold or calculations set forth in the rule? For example, instead of
removing the factors a fund must consider when setting swing threshold(s) under the123current rule, should we maintain those or similar factors for purposes of determining afund’s market impact threshold or the inflow swing threshold?216
87. Should funds be subject to a numerical limit on the size of swing factors? If so,should we retain the current rule’s 2% swing factor upper limit and the disclosure of
the limit in Form N-1A? Alternatively, should the limit be higher or lower (e.g., 1%
or 3%)?
88. Should we allow a fund to use a set swing factor, such as 2% or 3%, in times ofmarket stress when estimating a swing factor with high confidence may not be
possible? How would we define market stress for this purpose? Should a fund’sswing pricing administrator, adviser, or a majority of the fund’s independent
directors, be permitted to determine market conditions were sufficiently stressed suchthat the fund would apply the set swing factor? Are there other circumstances inwhich we should permit or require a fund to use a default swing factor? For example,
should the rule establish a default swing factor that would apply when a fund has
illiquid investments that exceed 15% or when a fund drops below its highly liquid
investment minimum under rule 22e-4?
89. Should the rule permit a fund to apply a market impact factor of zero for certain
investments or under certain circumstances? For example, should a fund be able touse a market impact of zero for certain categories of investments, such as Treasuries
or other investments that the fund classifies as highly liquid investments under rule22e-4? Are there particular circumstances in which it would not be reasonable for the216

See rule 22c-1(a)(3)(i)(B).

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rule to permit a fund to use a market impact factor of zero, such as in stressed market
conditions?
90. Instead of specifying swing factor calculations and thresholds in the rule, should werequire a fund to adopt policies and procedures that specify how the fund would
determine swing pricing thresholds and swing factors based on principles set forth in
the rule? If so, should the policies and procedures include the methodologies from themarket impact factor calculation we proposed? Should the policies and procedures berequired to include the swing factor calculation? Should the policies and procedures
be required to define the market impact threshold with reference to a metric otherthan net purchases or net redemptions? If we require policies and procedures, should
we specify the market impacts and dilution costs that a fund’s swing pricing program
must address, rather than specifying specific principles and calculation
methodologies?
91. Are there circumstances in which it would not be possible to estimate the market
impact factor with a high degree of accuracy? If so, what modifications should we
make to the proposal?
92. Would our proposed swing pricing requirement cause or incentivize investors tomove their assets out of the funds that must implement swing pricing into otherinvestment vehicles that do not use swing pricing, such as ETFs, collective
investment trusts (“CITs”), or separately managed accounts? What are the potential
effects associated with these decisions? For example, when would such movements
occur (e.g., before the end of the compliance period for a swing pricing requirement,
if adopted, or over a longer time horizon)? Would retirement plan sponsors or others

125

remove mutual funds as investment options if swing pricing is required? In the caseof separately managed accounts, should the Commission take any action with respect
to how the Investment Company Act may apply to investment advisory programs
seeking to provide the same or similar professional management services on adiscretionary basis to a large number of advisory clients having relatively small
amounts to invest?217
93. Would a swing pricing requirement change the behavior of funds? For example,
would it cause any changes to fund strategies or practices?
94. How might swing pricing affect investor behavior in a period of liquidity stress?
Would swing pricing increase fund resilience by reducing the first-mover advantagethat some investors may seek during periods of market stress? Would swing pricing
encourage investors to redeem smaller amounts over a longer period of time because
investors will not know whether the fund’s flows during any given pricing period will
trigger swing pricing and, if so, the size of the swing factor for that period?
95. Based on historical data, how would our swing pricing framework affect funds’
transaction prices under normal market conditions?
96. Rather than requiring funds to adopt a swing pricing requirement, should we provide
more than one approach to mitigate dilution and require each fund to implement ananti-dilution tool, but permit each fund to determine its own preferred approach? If
so, which anti-dilution tool options should the rule provide? Should we, for example,
allow a fund to adopt swing pricing, a liquidity fee (i.e., purchase and/or redemptionfees), or dual pricing?218 Are there other options that would be appropriate under this217

See, e.g., 17 CFR 270.3a-4.

218

See infra section II.D for a discussion of potential liquidity fee or dual pricing frameworks.

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approach? Would funds’ use of different approaches benefit investors by increasing
investor choice or, conversely, would these differences confuse investors or make it
more difficult for them to compare funds with each other?
97. The current rule requires a fund’s board of directors to approve the fund’s swing
pricing policies and procedures and to designate the persons responsible for swing
pricing. Should we require board involvement in the day-to-day administration of afund’s swing pricing program in addition to its compliance oversight role? How
might funds maintain segregation between portfolio management and swing pricing
administration? Should a fund’s chief compliance officer have a designated role inoverseeing how the fund applies the proposed swing pricing requirement?
98. The current rule requires a fund’s board to review, no less frequently than annually, areport prepared by the swing pricing administrator on the fund’s use of swing pricing,including the effectiveness of the fund’s policies and procedures and any materialchanges to them since the last report. Should we require board review of a swing
pricing report more or less frequently than annually? Should we require less frequentboard review over time (e.g., every quarter for the first year after implementation andthen less frequently in following years as the fund gains experience implementing theswing pricing program under various market conditions)? Should we require the fundto disclose any material inaccuracies in the swing pricing calculation to the board(e.g., as they arise, no less frequently than quarterly, or at some other frequency)?
Would this disclosure requirement be additive, or would fund boards already receive127

information about material inaccuracies in the swing pricing calculation in the courseof existing board oversight?219
99. In addition to the proposed requirement that funds would publicly report their swing
factor adjustments on Form N-PORT, should funds also be required to post that same
information on their websites? If so, how promptly should website reporting be
required (e.g., weekly, monthly, quarterly, annually)? Are there other ways to provide
this information to investors?
C.

Hard Close

Currently if an investor submits an order to an intermediary to purchase or redeem fundshares, that order will be executed at the current day’s price as long as the intermediary receives
the order before the time the fund has established for determining the value of its holdings andcalculating its NAV (typically 4 p.m. ET).220 The fund, however, might not receive information
about that order until much later, sometimes as late as the next morning. We are proposing
amendments to rule 22c-1 under the Act to require a hard close for those funds that are required
to implement swing pricing.221 The proposed hard close requirement would provide that a
direction to purchase or redeem a fund’s shares is eligible to receive the price established at the219

See, e.g., 17 CFR 270.38a-1 (requiring the fund’s chief compliance officer to provide a written
report to the board addressing each material compliance matter occurring since the date of thechief compliance officer’s last report to the board); Compliance Programs of Investment
Companies and Investment Advisers, Investment Company Act Release No. 26299 (Dec. 17,
2003) [68 FR 74713 (Dec. 24, 2003)] (“Rule 38a-1 Adopting Release”), at n.84 (“Serious
compliance issues must, of course, always be brought to the board’s attention promptly, andcannot be delayed until an annual report.”).

220

Although not all funds calculate their NAVs as of 4 p.m. ET, throughout this release we use
4 p.m. ET as the time as of which a fund calculates its NAV unless otherwise noted.

221

As discussed above in section II.B, swing pricing would be required for all registered open-end
management investment companies other than money market funds and ETFs. The proposal
would not affect the operation of current rule 22c-1 for money market funds or ETFs, as well as
unit investment trusts (which are also subject to rule 22c-1).

128

current day’s price solely if the fund, its designated transfer agent, or a registered securities
clearing agency (collectively, “designated parties”) receives an eligible order before the pricing
time as of which the fund calculates its NAV.222 Orders received after the fund’s establishedpricing time would receive the next day’s price.223 In 2003, the Commission proposed a similar
hard close requirement but did not adopt the proposed amendments.224 The proposed hard close
amendments would serve multiple goals, such as facilitating mutual funds’ ability tooperationalize swing pricing by ensuring that funds receive timely flow information,
modernizing and improving order processing, as well as helping to prevent late trading.
1.

Purpose and BackgroundWe are proposing to require all registered open-end funds (other than money market
funds and ETFs) to implement swing pricing in order to combat dilution. Our hard close proposal
is designed to support the proposed swing pricing amendments by facilitating the more timely
receipt of fund order flow information. To implement the proposed swing pricing requirement,
mutual funds need sufficient net order flow information to determine whether to apply a swing
factor, and the size of that swing factor, before they finalize that day’s price. Based on staff
outreach with foreign regulators and asset managers that operate in Europe, we understand that a
hard close is common in other jurisdictions in which funds currently implement swing pricing,and use of a hard close in those jurisdictions facilitates the receipt of timely flow information to222

See proposed rule 22c-1(a)(3).

223

Funds generally compute their NAVs once per day, although some funds compute their NAVs
multiple times per day. For simplicity, this discussion assumes that a fund computes its NAV
once per day.

224

See Amendments to Rules Governing Pricing of Mutual Fund Shares, Investment Company Act
Release No. 26288 (Dec. 11, 2003) [68 FR 70388 (Dec. 17, 2003)] (“2003 Hard Close Proposing
Release”).

129

inform swing pricing decisions.225 The proposed hard close requirement would facilitate the more
timely receipt of order flow information by requiring that the fund, its transfer agent, or aclearing agency receive all orders that are eligible to receive that day’s price before the fundcomputes its NAV.
Beyond facilitating swing pricing, our proposed hard close amendments to rule 22c-1
also would help prevent late trading of fund shares. Because a financial intermediary currently
can submit an order that it received before 4 p.m. ET to a designated party after 4 p.m. ET for
execution at that day’s NAV, there is a risk that an intermediary could unlawfully alter orders
using after-hours information to benefit the intermediary or its clients. The Commission andothers uncovered several instances of late trading in the early 2000s.226 While the Commission
adopted rules to address concerns about late trading, we believe that the hard close proposal,
when coupled with our current rules, would more effectively prevent late trading.227 For example,
some fund intermediaries are not subject to examination by the Commission and staff, and weare unable to examine whether those intermediaries permit or engage in unlawful late trading. By
proposing to require that all purchase and redemption orders be received by the fund, its transfer
225

We understand that the hard close employed in these other jurisdictions is not necessarily thesame as the hard close approach we are proposing. For example, we understand it is common insome other jurisdictions for the required time of receipt of orders by the fund to be several hours
before the time as of which the fund values its holdings.

226

See, e.g., 2003 Hard Close Proposing Release, supra note 224 (discussing investigations by
Commission staff of suspected late trading, which suggested that, at the time, late trading of fundshares was not an isolated event). See, also, e.g., In the Matter of Steven B. Markovitz,
Investment Company Act Release No. 26201 (Oct. 2, 2003); In the Matter of Theodore Charles
Sihpol, III, Investment Company Act Release No. 27113 (Oct. 12, 2005); In the Matter of Legg
Mason Wood Walker, Inc., Investment Company Act Release No. 27071 (Sept. 21, 2005); In the
Matter of Canadian Imperial Holdings, Inc. and CIBC World Markets Corp., Investment
Company Act Release No. 26994 (July 20, 2005); In the Matter of Brean Murray & Co., Inc.,
Investment Company Act Release No. 26761 (Feb. 17, 2005).

227

See, e.g., Rule 38a-1 Adopting Release, supra note 219 (adopting rule 38a-1 under the Act,
which requires written policies and procedures reasonably designed to prevent violation of the
securities laws, oversight of compliance by the fund’s service providers, and designation of achief compliance officer).

130

agent, or a registered clearing agency by 4 p.m. ET, the proposal would prevent intermediaries
from altering orders after 4 p.m. ET or unlawfully misrepresenting that an order was received
before 4 p.m. ET and entitled to that day’s price. We believe that the proposed amendments
would aid in the elimination of late trading through intermediaries by requiring certain SECregulated parties to receive orders before the NAV is computed to receive that day’s price. The
proposed hard close requirement would also modernize and improve order processing and reduce
operational risks, as discussed below.
2.

Pricing Requirements

Under the proposed rule, an eligible order to purchase or redeem would receive the pricefor the next pricing time after a designated party receives the order.228 We propose to define theterms “pricing time” and “eligible order” for purposes of the rule.229 Eligible orders would
receive a price based on the current NAV as of the next pricing time, which would include an
adjustment to the NAV to include the swing factor, as applicable. Consistent with the current
rule, the fund’s board of directors would be required to establish a “pricing time,” which would
be defined as the time or times of day as of which the fund calculates the current NAV of its
redeemable shares pursuant to the rule (typically 4 p.m. ET). The price of a fund’s shares would
typically be finalized several hours after the pricing time, giving funds time to calculate thecurrent NAV, apply any swing factor, and finalize and publish the fund share price.
For purposes of the proposed hard close requirement, an eligible order to purchase orredeem fund shares would have to supply certain information about the size of an investor’s
intended trade. This approach is intended to facilitate swing pricing by providing mutual fundswith information they can use to calculate investor flows. In addition, this approach requires that228

See proposed rule 22c-1(a)(3).

229

See definitions of “Eligible order” and “Pricing time” in proposed rule 22c-1(d).

131trading intentions are clear before 4 p.m., which would further help prevent late trading.
Specifically, we propose to define the term “eligible order” to mean a direction to purchase orredeem a specific number or value of fund shares. For example, an eligible order would include
the direction to purchase or sell either (1) a specific number of shares of a fund (e.g., 100 shares,or all the shares held in the account), or (2) an indeterminate number of shares of a specific value(e.g., $10,000 of shares of the fund).
The proposed definition of eligible order also would include exchange orders. An
exchange refers to the process in which an investor initiates an order to purchase shares of a fundusing the proceeds from a contemporaneous order to redeem shares of another fund. When an
exchange is initiated, two transactions are created—a redemption of securities and a purchase.
We understand that exchanges are often between funds in the same fund complex, however,exchanges can occur between funds in different complexes. In either case, exchanges often areprocessed as a single transaction so that both the redemption and purchase components of theexchange receive same-day pricing. For exchanges involving a fixed number of shares on theredemption leg, the amount and number of shares of the second fund to be purchased will not beknown until the NAV of the first fund is determined, which will be after the NAV is struck after
4 p.m. ET. For example, if an investor submits an order to redeem 100 shares of Fund A andinvest the redemption proceeds in Fund B, the amount of the redemption proceeds from Fund A
is not known until Fund A determines its price for that day and, likewise, the purchase amountfor Fund B is not known until that time.230 Under our proposed rules, this exchange transaction

230

See supra section II.B.3 (discussing how a fund whose shares are purchased in an exchangetransaction can estimate the size of the inflow for purposes of the proposed swing pricing
requirement).

132

would qualify as an eligible order so that these contemporaneous transactions may continue tooccur.
To receive that day’s price, a designated party must receive the eligible order before thepricing time.231 The fund’s designated transfer agent is a registered transfer agent that isdesignated in the fund’s registration statement filed with the Commission.232 Currently, NSCC is
the only registered clearing agency for fund shares, which operates its Fund/SERV service forprocessing fund transactions. The proposed rule would specify that eligible orders are
irrevocable as of the next pricing time after a designated party receives the order. The proposed
requirement of irrevocability of an eligible order is designed to prevent the cancellation or
modification of orders by investors or intermediaries after the pricing time applicable to theorder.233 Preventing the cancellation or modifications of orders after the pricing time would help
avoid continuing adjustments to the investor flow information that a fund uses to make swing
pricing decisions. In addition, the alteration or cancellation of fund orders after the pricing time
may be used as a means to facilitate late trading as fund investors may become aware of newmarket information after the order has been submitted and after the pricing time. We request
comment on the proposed approach to implementing the hard close requirement, including:100.

Should we make any changes to the definitions included in the proposed rule? Is

the definition of “eligible order” clear and understandable? Is the definition of231

Although orders would have to be received by Fund/SERV or the designated transfer agent by 4
p.m. ET to ensure same-day pricing, the clearing agency and designated transfer agent each may
complete its processing after the pricing time.

232

See proposed rule 22c-1(d). The term “transfer agent” has the same meaning as in section 3(a)(25) of the Exchange Act [15 U.S.C. 78c(a)(25)] and does not include underlying or sub-transfer
agents. A fund may designate more than one transfer agent in its registration statement.

233

The irrevocability of an order does not prevent a fund from rejecting an order and does not affectthe ability of a fund to maintain policies and procedures for correcting bona fide errors.

133

“designated transfer agent” clear and understandable? Is the definition of “pricing
time” clear and understandable”? Are there other terms we should define?
101.

Should the proposed hard close requirement permit exchanges, as proposed? If

not, what goals of the proposed hard close requirement would be supported by nolonger permitting exchanges?
102.

Should the definition of “eligible order” require orders to be irrevocable as of thepricing time, as proposed? Should funds be permitted to correct bona fide errors
under a hard close, as proposed? If not, how should errors be resolved? Are there
other reasons why an eligible order should not be considered irrevocable as of thepricing time?
103.

Should the definition of “eligible order” include directions to purchase or redeem

a specific percentage of fund shares in an account or a specific percentage of an
account’s value?
104.

To what extent do designated parties already time stamp orders based on the timeof receipt? Should we include new requirements for each designated party to timestamp order information for purposes of the hard close requirement?
105.

Should we include funds, designated transfer agents, and registered clearing

agencies as designated parties, as proposed? Would allowing registered clearing
agencies to receive eligible orders for purposes of the hard close delay the ability of
the fund’s swing pricing administrator to assess investor flow information to makeswing pricing decisions? If so, how long would this delay be?
106.

Beyond the proposed designated parties, are there other parties involved inprocessing order information that should be eligible to receive eligible orders before

134the pricing time so that orders may receive that day’s NAV? For example, should afund’s principal underwriter qualify as a designated party and, if so, why? To what
extent do direct investors or intermediaries today place orders with a fund’s principal
underwriter or directly with the fund’s transfer agent?
107.

Should we limit the proposed hard close requirement to funds that must

implement swing pricing under the amendments to rule 22c-1, as proposed?
108.

The proposed amendments to rule 22c-1 would establish different requirements

for money market funds, transactions by authorized participants with ETFs, and unit
investment trusts than for all other open-end funds, which would be required to
implement a hard close. Would investors, funds, or intermediaries be confused by thedifferent pricing requirements that would be created by the proposed amendments torule 22c-1? If so, what confusion would be created? What party to a transaction
would bear that confusion? Would additional burdens be created by having different
pricing requirements under proposed rule 22c-1 for these different types of registeredinvestment companies?
3.
Effects on Order Processing, Intermediaries and Investors, andCertain Transaction Types
The proposed hard close would require changes to current order processing practices.
Although modernizing these practices is intended to reduce operational risk and enhance
resilience, in addition to the benefits related to swing pricing and helping deter late trading, we
recognize these changes would also involve costs.234

234

See infra section III.C.3 discussing the estimated costs of the hard close proposal on funds,
designated parties, intermediaries, and investors.

135

a.

Order Processing Improvements

The system updates that would support the implementation of a hard close may provide
additional benefits by requiring modernization of how orders are processed. Today, someintermediaries net their customers’ purchase and redemption orders in a given fund against eachother, meaning that an intermediary combines and offsets the value of purchase and redemption
activity across multiple customer accounts. Instead of netting purchases and redemptions
together, some other intermediaries maintain separation between purchase orders and redemption
orders. After aggregating customers’ orders, intermediaries then submit orders in one or morebatches, with most orders submitted to the designated party after 4 p.m. ET. As a result of the
proposed hard close requirement, some intermediaries may opt to discontinue infrequent or evenonce-a-day batch processes for submitting orders and instead adopt more frequent batchprocessing approaches that result in more frequent order submission throughout the business day.
Some intermediaries may even elect to utilize message-based communications for order flow, inwhich orders are submitted on a near-real-time basis.235 We understand based on industry
outreach that some intermediaries currently do not submit orders throughout the day to facilitatecustomers’ ability to cancel or correct orders intra-day, before the orders are submitted to a
designated party. If intermediaries continue to provide this capability to customers under a hardclose, they would likely either: (1) need to develop a process with designated parties forcancelling and correcting orders submitted to a designated party before the pricing time (aseligible orders are irrevocable under the proposal as of the pricing time, but not before); or (2)235Intermediaries that take advantage of netting likely would be unable to eliminate batchprocessing altogether since netting necessitates definition of a period over which trades are netted
and a process that collects eligible customer orders and nets them together into a single order for
submission to a fund. Message-based communication is less likely to be implemented when
netting is utilized.

136submit orders to a designated party relatively close in time to the pricing time, instead ofthroughout the day.
If an intermediary submits orders more often or earlier in the day, it would be lessvulnerable to an intra-day disruption within its own operational environment. Orders that havebeen submitted prior to a disruption are able to be accepted and acknowledged by a fund, even if
the intermediary experiences delays in its own processing. This improves the intermediary’s
operational resilience, since some operational activities on which the intermediary is dependent
will be able to continue. Similarly, earlier order submission should also result in earlier
confirmations from the fund.236 As such, the chances increase for an intermediary to submit anorder and receive a confirmation even if the fund’s transfer agent has a disruption later in theday. This reduces an intermediary’s vulnerability to disruptions in others’ operational processing,further improving the intermediary’s operational resilience. Collectively, as all intermediaries,
funds, and fund transfer agents process orders more frequently, operational resilience across all
market participants improves.237
The proposed hard close would also eliminate cancellations and corrections that are
submitted after the pricing time. As a result, an investor or intermediary would bear the cost, if
any, of the errors leading to a cancel or correct order. We believe it would be unfair for a fund’s
shareholders to bear the cost of an error in this case, as the investor or intermediary was thecause of that error. For errors that were the intermediary’s responsibility, the intermediary should236

The term “confirmation,” for the purposes of this release, unless otherwise indicated, refers to
the process by which a fund accepts a purchase or redemption order. The confirmation process
discussed in this section is different from the confirmations required by 17 CFR 240.10b-10(Exchange Act rule 10b-10). Confirmations under rule 10b-10 require broker-dealers to provide
specific disclosures in writing to customers at or before the completion of a transaction. See rule10b-10 under the Exchange Act.

237

See infra section II.C.3.b for additional complexity and possible points of failure in current orderprocessing practices.

137be solely accountable for correcting the error and, if necessary, compensating the investor. We
understand that currently some intermediaries and funds have complex processes for posting
cancellations and corrections, including processes for funds to bill intermediaries for errors.
In addition, the proposed hard close requirement would improve the confirmation process
for funds. The confirmation process helps ensure the accuracy of the trade that will be settled.
Until the fund provides a confirmation, an intermediary does not know whether the order will be
accepted or rejected. Under current practice, we understand that because of the delay inintermediaries submitting orders, funds likewise issue order confirmations on a delayed basis.
When an intermediary must submit all orders by a certain time under the hard close proposal,
funds would be able to issue confirmations to intermediaries earlier. We believe that timelier
confirmations by funds would support the reduction of operational risks and improve market
resiliency by providing certainty to intermediaries and investors about whether orders are
accepted or rejected at an earlier point in the process, meaning they have more time to work
toward settlement of the trade or determine how to manage a rejected order.238 Further,intermediaries similarly may be able to issue trade confirmations required by rule 10b-10 of the
Exchange Act to their customers on a timelier basis, although an intermediary will need to wait
until the price is published before it can calculate the net money or number of shares to issue thetrade confirmation to its customer. Requiring a hard close may also facilitate settlement
modernization. Many funds settle purchases and redemptions on a T+1 basis, and the proposed
hard close could help improve the settlement process by providing complete information about
eligible orders on the trade date.

238

An order may be rejected for a variety of reasons including, among others, the intermediary is
not set up to transact with a particular fund, an order to sell is for more than the number of shares
held, or an order to purchase is less than the fund’s investment minimum.

138

In addition, providing funds with more timely and accurate information about the fund’s
daily flows under the proposed hard close would allow funds to make portfolio and risk
management decisions based on more complete and accurate flow information than is available
under current practices. Currently, some funds may rely on projected flows when making
investment decisions, though these projections may be unreliable because of orders that the funddoes not receive until the next day, including cancellations and corrections. Other funds may
instead rely on flow information posted at the custodian because of its accuracy, but thisinformation is delayed. For example, for a fund that settles on T+1, the custodian often will post
the flow at the end of the day on T+1, which may not be visible to the portfolio manager until themorning of T+2. With a hard close, however, flow information should be available from thetransfer agent on the night of the trade date. In addition, by eliminating the possibility that thefund could receive additional orders after the pricing time, including cancellations andcorrections, the data available that night would be more reliable. Similarly, a fund managing its
risk would be able to do so more effectively by having access to accurate flow data more
quickly. Ultimately, the proposed hard close requirement is designed to further theCommission’s mission to protect investors and reduce risk by improving the timeliness of order
flow information communicated to the fund.
b.

Effects on Intermediaries

The proposed amendments would require changes in the ways funds and intermediaries
process fund purchase and redemption orders. As discussed above, intermediaries generally
submit aggregated and, in some cases netted, orders in one or more batches, often after 4 p.m.
ET. Some intermediaries submit orders directly to the fund’s transfer agent or to Fund/SERV,
while some intermediaries rely on other intermediaries, such as clearing brokers or retirement

139

platforms, to submit orders to the transfer agent or Fund/SERV. In addition, someintermediaries’ systems do not initiate batch processing until a fund’s final NAV is received or
until final NAVs are received for all funds offered on their platforms.
In response to the proposed hard close requirement, funds and intermediaries would needto make significant changes to their business practices, including updating their computer
systems, altering their batch processes, or integrating new technologies that facilitate faster ordersubmission. Intermediaries would need to reengineer their systems to ensure disseminated orderinformation reaches the transfer agent or Fund/SERV before 4 p.m., unless they determine toprocess fund orders at the next day’s price as a matter of practice.239 For intermediaries withreliance on “downstream” intermediaries, coordination in the timing of order communication
will be essential to ensure orders reach the fund, transfer agent, or registered clearing agency
prior to the deadline. In addition, Fund/SERV may need to run more batch cycles in the periodleading up to 4 p.m. than it does today, as currently batch cycles run into the evening andovernight to receive and process orders from intermediaries.
We understand that retirement plan recordkeepers may face particular challenges withadhering to the proposed hard close requirement.240 Retirement plan recordkeepers may employ amethod of order processing that relies on receiving the current day’s NAV before submittingorders. Funds do not typically receive the order flow information for transactions from retirement
239

While the proposed hard close requirement would require intermediaries to transmit eligible
orders before 4 p.m. ET, intermediaries would still be able to process orders after 4 p.m. forpurposes of execution and settlement, as they currently do today. For example, after receiving theNAV the intermediary would then be able to determine the net money to be paid to the investor
or to be collected.

240

See Comment Letter of The Principal Financial Group on 2003 Hard Close Proposing Release,
File No. S7-27-03 and Comment Letter of ASPA on 2003 Hard Close Proposing Release, FileNo. S7-27-03. The comment file for the 2003 Hard Close Proposing Release, where thesecomment letters can be accessed, is available athttps://www.sec.gov/rules/proposed/s72703.shtml.

140

plan recordkeepers until well after the day’s NAV has been calculated. These order flows aredelayed, we understand, due to the calculations that the retirement plan recordkeepers complete
under plan rules as well as to legacy systems that require the final NAV before finalizing theorder. For retirement plan recordkeepers, we understand that current recordkeeping systems
require that day’s NAV before the participant’s plan instructions may be applied to theparticipant’s order. Once the order has been processed through the investment instructions
specific to the participant’s plan, it can be placed for execution. In addition, retirement plan
recordkeepers may perform compliance and other checks on orders before finalizing the orders
for submission post-NAV strike.
We understand that the time it currently takes between when some retirement plan
recordkeepers begin to process their orders and when the order is finally submitted to the fundcan take upward of six hours due to the limitations of their current processing systems andhardware. We believe that retirement plan recordkeepers would need to substantially update oralter their processes and systems to accommodate the proposed hard close requirement to submit
orders more quickly. In the event compliance and other checks are required, plans may need toutilize the prior day’s NAV to estimate the share or dollar size of an order for those orders toreceive same day pricing.
c.

Intermediary Cut-Off Times

To help ensure that order flow information is provided to a designated party before theestablished pricing time, the proposed rule would likely cause some intermediaries to set theirown internal cut-off time for receiving orders to purchase or redeem fund shares that is earlier
than the pricing time established by the fund. Intermediaries may use earlier cut-off times toprovide time to transmit order flow information to a designated party so those orders receive that141

day’s price. Investors, therefore, depending on the entity through which an investor is transacting(e.g., a broker-dealer, retirement plan recordkeeper, or the fund’s transfer agent), may havedifferent deadlines for the same fund for submission of orders to receive that day’s price. For
example, an investor submitting an order to a fund’s transfer agent might have until 3:59 p.m. ET
to submit its order, while an investor submitting an order to an introducing broker would likely
have to submit its order earlier to provide enough time for the introducing broker to send theorder to the clearing broker and for the clearing broker to send it to the transfer agent or to
Fund/SERV.
Investors transacting through intermediaries may lose some flexibility in when they may
submit orders through an intermediary to receive that day’s price as intermediaries may instituteearlier cut-off times. Because technology has advanced since the Commission last considered ahard close in 2003, we generally do not believe, however, that intermediaries would need toestablish cut-off times significantly earlier than the pricing time set by the fund. We recognize,
however, that layered cut-off times may occur when an intermediary uses one or more tiers ofother intermediaries to submit orders, and that cut-off times generally would be earlier forinvestors submitting orders to lower-tier intermediaries. We also recognize that intermediaries
that net order activity or rely on batch processing may require additional time to support suchnetting or batch activities, while those intermediaries that submit orders individually throughmessage-based communications may have a higher volume of orders submitted, but a shortertime between order submission by an investor and order receipt by a fund, transfer agent, or
registered clearing agency. While the proposed hard close requirement generally would causeintermediaries to establish earlier cut-off times, the proposed rule would not prevent anintermediary from transmitting orders it received after its internal deadline but before 4 p.m. ET

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on an individual basis to the fund’s transfer agent or to Fund/SERV in order to receive that day’s
price.
d.

Effects on Certain Transaction Types

We recognize that the proposed hard close requirement could extend completion times
for certain types of transactions, where the specific number or value of fund shares to bepurchased or redeemed is unknown until that day’s price is available. For example, under certain
retirement plan rules, certain transactions, such as plan loans or withdrawals, currently remain
incomplete until all fund positions in the investor’s accounts are valued using that day’s prices.
Specifically, some plan provisions specify a hierarchy for drawing from different investments toaccommodate participant loan or withdrawal requests. As an example, the plan may require thesale of shares in Fund A to pay the loan or withdrawal before the sale of shares in Fund B. In thiscase, until that day’s final price for Fund A shares is available, the retirement plan recordkeeper
may not know if the value of the participant’s investment in Fund A is sufficient to pay the loan
or withdrawal amount on its own, or if satisfying the loan or withdrawal request in full will also
require redemptions from Fund B.
Under the hard close proposal, although plans would not be required to change their rules
governing these kinds of transactions, transaction requests that are subject to hierarchy rules may
take one or more additional days to complete than they would currently. This is because theretirement plan recordkeeper would no longer be able to wait until final prices are available
before calculating and submitting one or more redemption orders to satisfy the requested plantransaction. In the above example, this would mean that the recordkeeper would likely submit anorder to redeem shares of Fund A on the first day and may submit an order to redeem shares ofFund B on a subsequent day if the loan or withdrawal is not fully funded. We understand that143

these transactions typically are a small percentage of overall retirement plan flows and that plan
participants generally do not receive immediate execution of loan or withdrawal requests
today.241 Thus, we believe the aggregate effect of the proposed hard close requirement on suchtransactions would not be significant.
As another example, the proposed hard close requirement could extend the period of timefor executing an investor’s request to rebalance its holdings to a target asset allocation or model
portfolio. We understand that currently these requests may be facilitated by first valuing theinvestor’s existing positions, based on final prices for that day, and then submitting orders thatwould result in the desired allocation. The proposed rule would not permit these orders to receivesame-day pricing if they are submitted after the pricing time, and therefore may require theintermediary to achieve the desired rebalancing through a series of orders over more than one
day or to rebalance using prices from the prior day. In addition, the proposed hard close might
affect current order processing for funds of funds. We understand that a lower-tier fund in a fundof funds structure may not receive purchase or redemption orders from upper-tier funds until
well after 4 p.m. Under the proposed rule, the lower-tier fund (or another designated party)
would have to receive an upper-tier fund’s orders to purchase or redeem the lower-tier fund’s
shares before the lower-tier fund’s pricing time to receive that day’s price for the orders.
e.

Effects on Investors

The extent to which the hard close proposal would affect investors largely depends on thevalue investors place on their ability to obtain same-day pricing for orders initiated in the period

241

For example, according to one source, in 2021, 4.1% of defined contribution plan participants
took withdrawals, and at the end of Dec. 2021, 12.5% of participants of plan participants hadloans outstanding. See ICI Research Report, Defined Contribution Plan Participants’ Activities,
2021 (Apr. 2022), available at https://www.ici.org/system/files/2022-04/21_rpt_recsurveyq4.pdf.

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immediately before 4 p.m. ET or on the complex transaction types discussed above.242 Most fundshareholders are long-term investors, and thus we believe that most fund orders are not time
sensitive. In addition, because of advances in technology, it seems likely that intermediaries
would set cut-off times that are only incrementally earlier than current cut-off times. As a result,it seems likely that many investors would experience a significant change in when they must
submit their orders to intermediaries. For those investors who place a premium on being able toplace orders up until 3:59 p.m. ET, they generally could place orders with the fund’s transfer
agent to retain this option.243 While we understand that investors may experience a change in
how late they may transact through intermediaries that set earlier cut-off times as a result of our
proposed rule, overall the proposal is intended to better protect shareholders’ interests by
operationalizing swing pricing to combat shareholder dilution and enhancing fund resiliency. We
request comment on the effects of the proposed hard close on order processing, intermediaries
and investors, and on different transaction types:
109.

Should we require funds to implement the proposed hard close requirement? Are

there alternatives to the proposed hard close requirement that we should implement?
Would the proposed hard close requirement help funds operationalize swing pricing?
Would the proposed hard close requirement help prevent late trading? Are theCommission’s efforts to modernize fund order processing supported by the proposed
hard close requirement?
242

Rule 22c-1 already affects investors differently based on the time zone in which the investor
lives. Investors located in time zones other than the eastern time zone are subject to different cutoff times today. For example, 4 p.m. ET is 10 a.m. Hawaii time, meaning that an investor in
Hawaii has to submit its order before 10 a.m. to receive that day’s NAV if the fund’s pricing timeis 4 p.m. ET.

243

See infra section III.C.3 discussing that some investors may be affected by the proposed hardclose requirement if they desire to transact later in the day in response to market events and arelimited in their ability to change intermediaries or place orders with the fund’s transfer agent.

145

110.

What steps would intermediaries be required to take to operationalize theproposed hard close requirement? Are there operational impediments to funds
implementing the proposed hard close requirement? Are there operational
impediments for intermediaries, transfer agents, and/or registered clearing agencies in
implementing the proposed hard close requirement? Are there other operationalchanges that would be helpful to operationalize swing pricing?
111.

Would retirement plan providers need to make changes to plan rules in order toaccommodate compliance with a hard close? Are plan rules able to be altered forplans that are currently owned, or would alterations only be feasible on a going
forward basis? If a change in plan rules would be necessary, how would plan rules
need to be altered? How would plan participants be affected by changes to plan rules?
112.

Would the proposed rule affect intermediaries’ ability to net order flow? Wouldintermediaries move to message-based communications, where orders are transmitted
to the transfer agent or registered clearing agency as they are received, in response to
the proposed hard close requirement?
113.

Would elimination of cancellations and corrections that designated parties

currently may receive after the pricing time streamline processing and reduce costs
for funds and/or designated parties and, if so, by how much? Would costs forinvestors be affected by the elimination of these cancellations and corrections?
114.

Should there be any exceptions from the proposed hard close requirement forexigencies or types of parties? For example, should there be exceptions for certain
scenarios (e.g., emergencies), fund types (e.g., funds of funds), or intermediaries (e.g.,
retirement plan recordkeepers)? If so, what should be the parameters of such146

exceptions? For example, should we permit investor orders to receive same-day
pricing treatment as the result of an emergency, if the intermediary is unable to sendorders or a designated transfer agent or clearing agency is unable to receive orders?
Should an emergency exception be conditioned on the board or the chief executive
officer of the intermediary, transfer agent, or clearing agency certifying to the natureand duration of the emergency and, in the case of an intermediary, that theintermediary received the orders before the applicable pricing time? Should wepermit conduit funds, which invest all their assets in another fund and must calculate
their NAV on the basis of the other fund’s NAV, and which include master-feeder
funds and insurance company separate accounts, to receive same-day pricing? Should
we provide an exception to permit certain intermediaries, such as retirement plan
recordkeepers, to receive same-day pricing for the orders they submit, even if notreceived by a designated party before the pricing time, as long as the relevantintermediary received the orders before the pricing time? Should there be otherconditions associated with such an exception, such as a requirement to provide
advance notice of certain flow information to the fund or another designated party?
115.

Should we provide an exception from the proposed hard close requirement for

certain transaction types (e.g., retirement plan loans or withdrawals or certain
rebalancing transactions)? Should we amend the definition of eligible order to include
these or other transaction types? If so, what information should we require theintermediary to supply to a designated party before the pricing time to qualify forsame-day pricing? Should retirement plan recordkeepers or other intermediaries bepermitted to estimate order flow information for specific transaction types, like loans147or withdrawals? Would the estimates be prepared using the prior day’s price, or
through some other method?
116.

If exceptions to the hard close were permitted, how would that affect the proposedswing pricing requirement?
117.

Would the proposed hard close requirement help retirement plan recordkeepers to

reduce their batch processing cycles and, if so, how?
118.

Should the rule permit a fund or other designated party to impose a cut-off fororders received before that day’s NAV computation? For example, if the time for an
order to receive that day’s NAV is 4 p.m. ET, should the fund be permitted to impose
an earlier time of day, say 2 p.m. ET, as an earlier cut-off time to receive orders?
Would the ability to disconnect the cut-off time for receiving orders from the pricing
time help facilitate swing pricing by providing additional time to calculate the swing
factor?
119.

If different funds adopted different cut-off times for receipt of orders pursuant torule 22c-1, would intermediaries and transaction processing systems be able toaccommodate such differences on a fund specific basis? How would different cut-off
times affect investors? Would it be confusing or challenging for investors if there
were variation among funds’ cut-off times?
120.

If most funds continue to calculate their NAVs as of 4 p.m. ET and, as proposed,

funds are required to implement swing pricing and are subject to a hard close, would
funds have sufficient time between 4 p.m. ET and when they publish their prices toassess their flow information and apply the proposed swing pricing requirement,
including determination of a swing factor, as applicable? If not, how might funds148

adjust their practices to provide more time to make swing pricing determinations? For
example, would funds publish their prices later than they typically do, which iscurrently several hours after the pricing time?244 Are there any changes we could
make to facilitate later publication of prices, if needed? As another example, would
funds begin to calculate their NAVs as of an earlier time than 4 p.m. ET? What affect,
if any, would such a change have on transaction processing and the valuation of thefund’s investments?
121.

How would the proposed hard close requirement affect investors? For example,

what percentage of investors place orders shortly before 4 p.m., and how important is
it for those investors to receive that day’s price as opposed to the next day’s price?
When intermediaries establish their own cut-off times by which customers must placeorders to receive that day’s price, would these cut-off times be close to 4 p.m. ET as aresult of competition among intermediaries and customer demand? Are intermediaries
able to accelerate the time between receiving an order and relaying that order to a
designated party compared to current practice? Would it be confusing or challenging
for investors if there were variation among intermediaries’ cut-off times? Are there
circumstances in which intermediaries would transmit orders received after theirinternal cut-off times and before 4 p.m. ET to a fund’s transfer agent or to
Fund/SERV individually to receive same-day pricing? Would this increase the risk oferrors or otherwise be burdensome on funds or intermediaries?
122.

Should the rule initially require that funds receive order flow information by atime that is after the pricing time in order to “phase in” the proposed hard close244

See infra section III.C.2.a (discussing the potential effects on intermediaries and other market
participants if funds were to publish their prices later than they currently do).

149

requirement? For example, instead of requiring a designated party to receive all of afund’s order flow information by 4 p.m. ET each day, should we initially require
receipt of order flow information by the designated party one to two hours after thepricing time with the goal of eventually moving the time of receipt to before thepricing time? Would a delayed phase in of the proposed hard close requirement becompatible with the proposed swing pricing requirement? If so, how would a funddetermine whether to swing its NAV if it does not have all of its order flow
information until after the pricing time?
123.

We understand that intermediaries currently may adjust trade amounts to accountfor commissions or other fees. Would the proposed hard close requirement affect how
these adjustments are made? If so, should we make any changes to the proposed
approach to better accommodate such adjustments?
124.

Would earlier confirmations from a fund to an intermediary reduce anintermediary’s vulnerability to disruptions? Would intermediaries process orders
more frequently under a hard close? If so, would more frequent order processing
increase the resiliency of funds and transfer agents? If not, why not?
125.

Would intermediaries need to set earlier cut-off times than is the current practicefor investors in order to get orders to a designated party before the pricing time? If so,
how early? How much time do intermediaries need to process order flow
information?
126.

Should the rule require that funds set a uniform cut-off time for orders to bereceived by intermediaries? If the rule requires a uniform cut-off time, should we also
require that a fund disclose the cut-off time, such as in the fund’s prospectus? Would150funds, collectively, establish consistent cut-off times for these purposes, or wouldintermediaries need to manage different fund-specific cut-off times?
127.

Some intermediaries may establish earlier cut-off times in order to accommodatea hard close. Would investors that want to make an order up until 3:59 p.m. placeorders with a fund’s transfer agent instead of with an intermediary to preserve thisflexibility? Are there limitations on certain investors’ abilities to place orders with thetransfer agent instead of through an intermediary?
128.

Would some intermediaries choose to no longer distribute open-end funds thatwould be subject to the hard close requirement in order to avoid compliance costs? In
addition, would retirement plan providers be more likely to replace mutual funds asplan investment options with ETFs or CITs? If so, how would this affect investors?
4.

Other Proposed Amendments to Rule 22c-1

The proposed amendments would retain the requirements of the current rule concerning
the frequency and time of determining the NAV, but would reorganize and reword those
provisions.245 The proposed amendment would use the phrase “based on the current net asset
value of such security established for the next pricing time,” as opposed to “based on the current
net asset value of such security which is next computed” in the current rule. While its substanceis already required, this amendment would codify in the rule text that orders received after thepricing time, but before calculation of the NAV is complete, do not receive same-day pricing.246
We also propose to reorganize certain other provisions of rule 22c-1, including the existing245

See rule 22c-1(a), (b)(1), and (d); proposed rule 22c-1(a).

246

See 2003 Hard Close Proposing Release, supra note 224, at n.26.

151exceptions to the rule’s forward pricing requirement.247 In addition, we propose to revise certain
terminology in the rule.248
We are also proposing to remove the provision from rule 22c-1 that would allow funds
not to calculate their current NAV on days in which changes in the value of the fund’s securities
will not materially affect the current NAV. We believe this provision is no longer necessary
because a fund generally would need to determine its current NAV in the first instance before it
could conclude with certainty that changes in the value of the fund’s securities would notmaterially affect the fund’s current NAV.
We request comment on the other proposed amendments to rule 22c-1, including:129.

Are our proposed amendments to provide that orders received after the pricing

time, but before calculation of the NAV is complete, do not receive same-day pricing
sufficiently clear?
130.

Should we retain the current provision in rule 22c-1 that allows a fund not to

calculate its NAV on days when the changes in the value of the fund’s portfolio
securities do not materially affect the current NAV? If so, how would this affect theability of a fund to implement swing pricing? Do any funds rely on this provision
today? If so, what are the scenarios in which a fund relies on this provision? How arechanges in the value of the fund’s securities determined if the fund is not valuing theunderlying securities and computing the NAV on a daily basis?
247

See rule 22c-1(a)(1), (a)(2), and (c); proposed rule 22c-1.

248

For example, we propose to replace references to “orders” in the current rule with references to“directions” to purchase or redeem, which is intended to distinguish between the concept ofeligible orders that we propose to add for purposes of the proposed hard close requirement anddirections to purchase or redeem shares of other registered open-end investment companies thatare not subject to the proposed hard close requirement. As another example, we propose toincorporate the term “pricing time” into provisions of the rule that are not specific to the hardclose requirement for cohesion of the rule.

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5.

Amendments to Form N-1A

Open-end funds use Form N-1A to register under the Investment Company Act and toregister offerings of their securities under the Securities Act. Item 11 of Form N-1A requires afund to describe how it prices its shares. Item 11(a) specifically requires that funds state when
they calculate the NAV and that the price at which a purchase or redemption is effected is basedon the next NAV calculation after the order is placed. We are proposing to amend this disclosure
to also require, if applicable, that funds disclose that if an investor places an order with afinancial intermediary, the financial intermediary may require the investor to submit its orderearlier than the fund’s pricing time to receive the next calculated NAV. As discussed above,
intermediaries may set different times by which investors must have their purchase orredemption orders in place to receive that day’s price. We believe that this proposed disclosure isimportant so that investors may understand the potential variability in the time by whichintermediaries may require an order to be placed to receive a particular day’s price.
We request comment on the proposed amendments to Form N-1A, including:131.

Would the proposed requirement for funds to disclose in their prospectuses thatorders placed with intermediaries may need to be submitted earlier to receive thatday’s price be helpful to investors?
132.

In addition to the proposed disclosure requirements, are there additional

disclosures relating to the proposed hard close requirement that we should require?
Should funds be required to disclose the cut-off times of their intermediaries in theirdistribution network? If so, where should this disclosure be located (e.g., in the fund’s
registration statement or on its website)? What potential challenges, if any, would afund encounter in providing an up-to-date list of intermediary cut-off times?

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D.

Alternatives to Swing Pricing and a Hard Close Requirement
1.

Alternatives to Swing Pricing

In lieu of the proposed swing pricing requirement, we have also considered whether there
are alternative methods by which we could require funds to pass on costs stemming fromshareholder purchase or redemption activity to the shareholders engaged in that activity. These
alternatives could be used independently or in combination with each other. Some of thesealternatives would be dependent on investor flow information, similar to the proposed swing
pricing requirement. In those cases, an alternative could be paired with either a hard closerequirement or one of the alternatives to the hard close that we discuss below.
a.

Liquidity Fees

One alternative we considered is a framework that would apply a charge in the form of aliquidity fee rather than an adjustment to the fund’s price.249 A liquidity fee would apply as aseparate charge to a transacting investor and would not change the fund’s price. A liquidity fee
could be used to impose liquidity costs on purchasing or redeeming investors and address
dilution, much like a swing pricing-related price adjustment. We recognize that a liquidity fee
framework could have certain advantages over a swing pricing requirement. For example,
liquidity fees provide greater transparency for redeeming or purchasing investors of the liquidity
costs they are incurring. Liquidity fees also provide a mechanism for imposing liquidity costs
directly on purchasing or redeeming investors, without adjusting the transaction price for249

Although certain U.S. funds may use liquidity fees for redemptions, they are rarely used toaddress dilution, other than in the case of short-term trading of fund shares. See rule 22c-2 underthe Act. The use of redemption fees and anti-dilution levies in Europe varies to some extent by
jurisdiction. For example, Irish-domiciled funds are more likely to have adopted anti-dilution
levies than Luxembourg-domiciled funds. Overall, however, we understand that swing pricing
was more widely used by European fund complexes in Mar. 2020 than redemption fees or antidilution levies. See ICI, Experiences of European Markets, UCITS, and European ETFs During
the COVID-19 Crisis (Dec. 2020), available at https://www.ici.org/doc-server/pdf%3A20_rpt_covid4.pdf.

154

investors who are trading in the other direction.250 In addition, some funds and theirintermediaries are currently equipped to apply certain purchase and/or redemption fees.251
However, the proposed swing pricing requirement may have several advantages overliquidity fees for relevant open-end funds. With swing pricing, a fund can pass liquidity costs on
to redeeming or purchasing investors in a fair and equal manner, without any reliance onintermediaries to achieve fair and equal application of costs. Liquidity fees may require morecoordination with a fund’s intermediaries than swing pricing because fees need to be imposed ona transaction-by-transaction basis by each intermediary involved—which may be difficult withrespect to omnibus accounts that intermediaries may create to aggregate all customer activity andholdings in a fund.252 Funds and their transfer agents may contract with intermediaries to havethem impose liquidity fees under these circumstances, which may include a review of contractual
arrangements with fund intermediaries and service providers to determine whether any
contractual modifications are necessary or advisable to ensure that liquidity fees areappropriately applied to beneficial owners of fund shares. While we could require intermediaries
to submit purchase and redemption orders separately to transact in a fund’s shares, which could

250

For instance, on a day the fund has net redemptions, swing pricing adjusts a fund’s NAV
downward, and investors who purchase the fund’s shares that day buy at a discount. On a day
when a fund has net purchases, swing pricing adjusts a fund’s NAV upward, and investors who
sell the fund’s shares that day sell at a premium. Swing pricing must account for these discounts
or premiums that other investors are receiving to fully address dilution.

251

For example, some funds impose redemption fees under rule 22c-2 under the Investment
Company Act. See supra note 67 for a discussion of how many funds we estimate apply
redemption fees.

252

See infra section III.E.2 (noting certain omnibus accounting practices that may make a liquidity
fee operationally difficult). Swing pricing, on the other hand, would require some funds andintermediaries to create new systems and operational procedures, but once those are in place,swing pricing would be incorporated in the process by which a fund strikes its NAV and sets thetransaction price (including any swing of the NAV). Intermediaries would then effect customertransactions at the transaction price, as they do today, without further operational changes orcoordination with the fund.

155

allow funds and their transfer agents to apply fees directly, this type of requirement would also
involve some operational costs. Requiring intermediaries to submit purchase and redemption
orders separately would require operational changes for some intermediaries because they would
no longer be able to net otherwise offsetting customer purchases and redemptions.253 In addition,
the volume of transactions that transfer agents and Fund/SERV process would increase if netting
were not permitted. Further, unlike swing pricing, the amount collected from a liquidity fee is notavailable to the fund for a period of time until the intermediary remits to the fund the amountcharged.254 If the fund is under stress, the unavailability of the amount collected from fees mightcause the fund to incur other costs it might not have otherwise incurred, such as costs associatedwith selling investments to pay redemptions when the fee amount, if remitted, would have helped
the fund pay those redemptions.
There are many potential variations of a liquidity fee framework. The trigger for applying
fees could be based on net flows, similar to swing pricing, or other indicators that a fund’s
trading costs are increasing (e.g., widening spreads or reduced liquidity of the fund’s portfolio
investments). Alternatively, a fee could apply to all trades of a given type (for example, allredemption orders). When a fee applies, the determination of the size of the liquidity fee could beeither dynamic to reflect changing costs or simplified to remain relatively static. As for how thefee is processed, it could be applied to the purchase or sale or could be processed separately fromthe trade.
253

See supra section II.C.3.a (discussing that some intermediaries currently net orders, while others
separately submit purchase and redemption orders).

254

While money collected from the fee would not be available to the fund until the intermediary
remits payment, we understand that a fund would reflect the fee amount it is owed as an accrual
until the fund receives the fee payment. The accrual would help prevent declines in the fund’s
NAV that would otherwise result from any delay in remittal. Proper booking of the accrual
would, however, require the intermediary to inform the fund of the fee amount on an accurate andtimely basis.

156

As an example, similar to the proposed swing pricing requirement, a dynamic liquidity
fee could be calculated to reflect certain costs (e.g., spread, other transaction costs, and market
impact) a fund is likely to incur to meet redemptions or invest the proceeds from subscriptions
based on the direction and magnitude of that day’s flows. Dynamic liquidity fees that may
change in size from one day to the next may involve greater operational complexity and cost thanswing pricing, as intermediaries would have to identify and apply different fee amounts for eachfund in which their clients transact each day. This approach also generally would necessitate
timely flow information if the fee were processed as part of a transaction, similar to the proposedswing pricing requirement. If the fee were processed separately from the transaction and applied
to an investor’s account on a delayed basis, a fund would likely have more time to receive flow
information than under the proposed swing pricing requirement, which could avoid the need fora hard close or related alternatives. Delayed application of the fee, however, may raisecomplications related to collecting fee amounts from investors, particularly when an investor hasotherwise redeemed the full amount of its holdings. Follow-on fees also significantly increase thenumber of transactions to process, and may complicate reporting for custodians and advisers insituations where a transaction may occur in one reporting period but the fee related to thetransaction is not applied until the next reporting period. In addition, an intermediary may facedifficulties projecting upcoming cash balances in its client accounts if there are upcoming fees tobe charged, but the amounts of those fees are unknown. The fund itself may also have challenges
with projecting its own cash balance if it cannot predict when accrued fees will be received fromeach intermediary.
Instead of a dynamic liquidity fee, we could require a simplified liquidity fee. A
simplified liquidity fee, for example, could be a set percentage of the transaction amount, such as157

1%. Or it could be a default fee, such as 1%, that a fund could adjust up (possibly up to a cap) or
down as it determines is in the best interest of the fund. A simplified liquidity fee could apply toboth purchases and redemptions, given that both purchases and redemptions can contribute to
dilution. Under this type of approach, fees could be equivalent for both transactions, or fees
could be higher on one side and lower on the other (for example, a purchase fee of 0.25% and aredemption fee of 1%). Alternatively, we could require a one-sided simplified fee that applies toredemptions only or to purchases only, with the premise that a fee charged on redemptions could
also help to offset dilution that may result from purchases (or vice versa). Because all
shareholders purchase and redeem the fund’s shares during the life of an investment, a one-sided
fee would apply to all shareholders at some point and could help mitigate dilution that fundinvestors collectively contribute to through their purchase and redemption activity. A simplified
liquidity fee would not necessarily require flow information. For instance, if a simplified fee
applied only to redemptions, a set fee could apply to all redemptions or only to redemptions
when the fund’s trading costs are significantly increasing, such as in times of stress.255 If thedependency on flow information is removed, a simplified liquidity fee likely could be processedas part of a transaction, avoiding the need to process a fee as a separate follow-on transaction.
The size of a simplified liquidity fee likely would be more predictable for investors andintermediaries than a dynamic fee or swing pricing. This would enhance transparency and would
likely be easier to implement. While the size of the fee generally would be known in advance, it
may or may not be easy to predict when a fee would apply. For example, if a fee applied to all
redemptions, then investors and intermediaries would have certainty on when fees would apply.
However, if fees applied only in certain circumstances, such as when trading costs are materially255

We discuss an alternative in which a liquidity fee would apply when a fund’s trading costs are
significantly increasing in more detail in section II.D.3.b.

158

increasing or the fund has experienced net redemptions over multiple consecutive days, thenapplication of a fee may be more difficult to predict, particularly if a fund’s threshold for
applying a fee is non-public or based on factors that are difficult for other market participants toobserve or predict. An approach where it is difficult to predict when a fee would apply could
help avoid preemptive redemptions in anticipation of fees applying in the near future, but itwould also be less transparent. In addition, if liquidity fees are applied rarely, then application ofa fee might be viewed as a sign that a fund is under stress, which could incentivize further
redemptions, particularly if the fee amount is viewed as minimal.
Between dynamic and simplified fees, a dynamic fee would better reflect the costs
associated with fund purchases or redemptions on a given day. A simplified fee, however, would
be less costly to implement because, among other things, it would not necessarily require a hardclose or any alternatives to the hard close to provide actual or estimated flow information. Whilea simplified fee would be less sensitive to the fluctuating costs associated with fund purchases orredemptions, this fee would aid in the offset of costs stemming from purchase and redemption
activity and could assist with the mitigation of investor dilution.
On balance, we are proposing a swing pricing requirement because it may haveoperational advantages or be better tailored to mitigate dilution relative to liquidity fee options,but we request comment on using a liquidity fee framework to impose liquidity costs andwhether a liquidity fee alternative may have fewer operational or other burdens than the
proposed swing pricing requirement while still achieving the same overall goals of reducing
shareholder dilution.
133.

How do the operational implications of swing pricing, as proposed, differ fromthe operational implications of a dynamic liquidity fee framework (e.g., one where159

liquidity fees vary in size and increase during periods of stress)? What are theoperational implications of a requirement for mutual funds to impose a liquidity feethat can change in size and that may need to be applied with some frequency (up to
daily)? Are fund intermediaries equipped to apply dynamic fees on a regular basis?
Would funds have insight into whether and how intermediaries apply these fees toredeeming investors?
134.

If we adopt a liquidity fee framework instead of a swing pricing framework,

should a fund be required to apply a liquidity fee under the same circumstances inwhich a fund would be required to adjust its net asset value under the proposed swing
pricing requirement? Should a fund be required to use the same approach to
calculating a liquidity fee as the proposed approach to calculating a swing factor?
Should the same board oversight framework apply under this approach as the
proposed swing pricing requirement (e.g., with the board approving the fund’sliquidity fee policies and procedures and designating a liquidity fee administrator, andsuch administrator would report periodically to the board)?
135.

Should funds be required to apply liquidity fees to all redemption or purchaseorders, or should liquidity fees apply only upon a trigger event? If so, under whatcircumstances should a fee apply? For example, should liquidity fees apply when
trading costs are materially increasing?256 Should liquidity fees apply when a fund has
had net outflows over multiple consecutive days? If so, should net outflows be of acertain size (e.g., 2%, 5%, or 10%) and over what period of time should net outflows
trigger a fee (e.g., 2, 3, or 4 consecutive days)? Would this approach help mitigate
256

See infra section II.D.3.b. for additional discussion and requests for comment about such an
approach.

160

dilution, or would it contribute to first-mover advantages and potentially result in
unfair application of fees?
136.

Should a liquidity fee apply to both purchasing and redeeming investors?

Alternatively, should a liquidity fee apply to redeeming investors only or topurchasing investors only?
137.

Should funds be required to maintain records related to the application of liquidity

fees? For example, should funds be required to maintain records of the dates on
which the fund applied liquidity fees and in what amount? If application of liquidity
fees is subject to fund or board discretion, should a fund be required to maintainrecords documenting why the fund did or did not apply liquidity fees under certain
circumstances?
138.

Should liquidity fees apply to purchase or redemption orders of a specific size

only? If so, what size? How operationally feasible would such an approach be?
Would it create incentives for investors to modify their order amounts in an effort toavoid a fee, such as by holding smaller amounts of a fund’s shares at multiple
intermediaries or splitting up a purchase or sale order over multiple days? Howshould such an approach treat separate accounts managed by the same adviser, suchas separate accounts managed through a wrap program?
139.

Should a liquidity fee framework have an exclusion for purchase or redemption

orders of a de minimis amount? How should we identify an order for a de minimis
amount? Should it be a set dollar figure (e.g., $2,500 or less), a set percentage of thefund’s net assets, or a set amount that would be collected from application of a fee161

(e.g., $50 or less)? Should the amount of a de minimis exclusion be adjusted for
inflation over time?
140.

How should the amount of the liquidity fee be determined? Should the liquidity

fee be dynamic but based only on that day’s spreads? Should it include othertransaction costs, including market impact? Instead of a dynamic fee amount that
could change daily, should the fee amount be based on a fund’s historical trading
costs and evaluated periodically, such as annually, quarterly, or monthly? Should thefee be a flat percentage established by rule (such as 0.5%, 1%, or 2%), or should thefee increase as net redemptions or net purchases, illiquidity, or other variables
increase? Should the fee amount be based on reasonably expected transaction costs
but, if a fund cannot reasonably estimate those costs, it can use a default fee amountset by rule? If so, what should that default fee amount be (e.g., 0.5%, 1%, 2%, or3%)? Should the rule include a default fee amount that funds can always choose touse, with the option to use a higher or lower amount if such amount is determined to
be in the best interest of the fund? Should there be a minimum or maximum fee
amount, such as a 0.25% minimum or a 2% maximum?
141.

If we adopt a liquidity fee framework instead of a swing pricing framework, arethere any ways to simplify the application of fees to investors that invest through anintermediary, such as investors in an omnibus account, to facilitate funds or fundtransfer agents applying fees directly to investor purchases or redemptions occurring
through an omnibus account? For example, should fund intermediaries be required toseparately submit purchase and redemption orders, rather than net them, in order totransact in a fund’s shares? What would the operational consequences of such a162requirement be for fund intermediaries and for investors? To what extent dointermediaries already submit purchase and redemption orders separately, and does
this practice vary by type of intermediary (for example, are broker-dealers more
likely to submit separate purchase and redemption orders than retirement plan
recordkeepers)? Would there be consequences for fund transfer agents, Fund/SERV,
or others associated with increased order volume or other changes that would result
from a requirement to submit purchase and redemption orders separately? Whatchanges, if any, would funds or fund transfer agents need to make to be equipped toapply liquidity fees directly? If submission of purchase and redemption orders
separately is necessary to implement a liquidity fee framework, is it necessary for theCommission to mandate receipt of orders in this way to ensure compliance by all
market participants? If purchase and redemption orders may be submitted on a net
basis, as some intermediaries do currently, how would a fund accrue for liquidity feesin a timely manner? Should the Commission require fund transfer agents to apply
liquidity fees directly and, if so, why or why not?
142.

If we adopt a dynamic liquidity fee framework, would it be as reliant on timely

flow information as the proposed swing pricing requirement? For example, could
funds and intermediaries apply a dynamic fee to a transacting investor after an order
begins to be processed at that day’s NAV but before the trade settles? Could dynamic
fees be applied after settlement, or would that create challenges in collecting a fee
from investors who redeemed the full amount of their holdings? If a fee applies on adelayed basis, how should investors be notified of the application of a fee? Would it
be preferable to apply a simplified fee that may less accurately reflect the costs of163

investor transactions and may mitigate dilution with less precision, but that could beapplied at the same time an order is processed? Are there any other factors to consider
when deciding between dynamic and simplified liquidity fees?
143.

If we adopt a liquidity fee framework, should we require that the same liquidity

fee amount apply to all share classes (for example, if a liquidity fee is 1% on a given
day, the 1% fee must apply to all share classes)? Alternatively, should we permit the
fee amount to differ among classes (for example, a 1% fee for one class and a 0.5%
fee for another class) and, if so, why?
144.

Should a liquidity fee apply differently based on the type of fund or the type ofintermediary through which an investor trades? If so, what would be the basis for thedifferences in how a liquidity fee applies?
145.

What investor flow information, if any, would be required to implement aliquidity fee alternative? To the extent that a liquidity fee alternative requires timely
investor flow information, should the alternative be paired with the proposed hardclose requirement? Are there different considerations or effects related to the
proposed hard close requirement if we were to require funds to use a liquidity fee?
Would it be effective to implement the liquidity fee alternative with an alternative tothe hard close requirement discussed below, such as indicative flows, estimatedflows, or delayed cut-off times for intermediaries?
146.

Should a liquidity fee requirement be implemented through amendments to rule22c-2 or through a new rule? To what extent would information that financial
intermediaries agree to provide under a shareholder information agreement be164

important for funds to receive under a liquidity fee framework?257 Is there otherinformation funds would need to receive from financial intermediaries to determinethat liquidity fees are appropriately applied? Should we amend the definition ofshareholder information agreement to require that information, or are there othermechanisms for funds to receive that information (e.g., distribution agreements)? Are
there other rules we should amend if we adopt a liquidity fee requirement, such as
rule 11a-3 under the Act, which permits application of certain fees in connection withan exchange offer notwithstanding section 11(a) of the Investment Company Act? If
we amend rule 11a-3, should the rule treat a liquidity fee in the same way as aredemption fee, as defined in that rule?258
147.

How should funds be required to disclose liquidity fees to investors? Should

liquidity fees be reflected in the prospectus fee table, as mutual fund (other thanmoney market fund) redemption fees currently are?259 Or, similar to money market
fund liquidity fees, should liquidity fees be excluded from the prospectus fee table?260
Should funds be required to disclose the circumstances in which they would impose
liquidity fees in the prospectus? If a liquidity fee only applies on some days, should
the fund be required to disclose on its website that it is applying a liquidity fee that257

See rule 22c-2(c)(5) (defining a shareholder information agreement as a written agreement underwhich a financial intermediary agrees, among other things, to provide certain information to afund promptly upon request, including taxpayer identification number of all shareholders who
have purchased, redeemed, transferred, or exchanged fund shares held through an account withthe financial intermediary, and the amount and dates of such activity).

258

Under rule 11a-3, an offering company may cause a security holder to be charged a redemption
fee in connection with an exchange offer, subject to certain conditions. See rule 11a-3(b)(2); rule11a-3(a)(7) (defining a redemption fee as a fee that a fund imposes pursuant to rule 22c-2).

259

See Item 3 of Form N-1A.

260

See Instruction 2(b) to Item 3 of Form N-1A (excluding money market fund liquidity fees
imposed in accordance with rule 2a-7 from the definition of “redemption fee”).

165day and the size of the fee? Should funds be required to report information aboutliquidity fees that are imposed? For example, should a fund be required to report on
Form N-PORT the dates the fund imposed liquidity fees (or the number of days on
which fees were applied) and the amount of the fee applied on each occurrence? If afund or its board has discretion on when to apply liquidity fees, should a fund berequired to disclose why a liquidity fee was or was not imposed under certain
circumstances? Should funds be required to report other information about liquidity
fees or report information in other locations, such as in shareholder reports, on fundwebsites, or in Forms N-CEN or N-RN? Would any existing items on Form N-PORT,
Form N-CEN, Form N-1A, Form N-RN, or other forms need to be modified if wewere to adopt a liquidity fee framework instead of swing pricing?
148.

How quickly do intermediaries currently remit to funds the amounts collectedfrom purchase or redemption fees applied to customer accounts? If remittal currently
is delayed, what are the causes of delay? If we adopted a liquidity fee, would funds
reflect any delayed liquidity fee payment as an accrual? Under a liquidity fee
approach, should intermediaries be required to remit payments to funds within acertain amount of time after a purchase or redemption? If so, what is an appropriate
amount of time for remittal (e.g., on the day of settlement or within one or two days
after settlement)? For example, should we adopt a rule that would provide that a fundmust prohibit an intermediary from purchasing the fund’s shares in nominee name on
behalf of others if the intermediary does not remit payment on a timely basis? Are
there other appropriate consequences for an intermediary that has a pattern or practiceof late payments, such as a requirement that orders from such an intermediary may

166not receive today’s price and will be executed on a subsequent day at that day’s pricein order to otherwise limit the dilutive effects of purchase and sale orders received
through that intermediary since fees are not paid in a timely manner? Should werequire a fund to charge an additional surcharge to an intermediary that does not remit
payment on a timely basis? Should funds be required to report the names ofintermediaries who are delayed in remitting payment and the amount due? If so,where should funds provide this information (for example, Form N-PORT, Form NCEN, fund websites, or registration statements)?
149.

Would a liquidity fee requirement have different effects on investor behavior thana swing pricing requirement? For example, because application of liquidity fees ismore observable than application of swing pricing, would liquidity fees be more
likely to affect investors’ decisions of whether to purchase or redeem fund shares?
b.

Dual Pricing

We also considered the use of dual pricing as an anti-dilution measure. A fund that uses
dual pricing would quote two prices—one for incoming shareholders (reflecting the cost of
buying portfolio securities in the market), and one for outgoing shareholders (reflecting theproceeds the fund would receive from selling portfolio securities in the market).261 Dual pricing
is permitted and used by some funds in certain foreign jurisdictions.262 In comparison to swing
pricing and liquidity fees, we believe that dual pricing may impose additional operationalburdens and complexity on fund intermediaries, service providers, and other third parties as they261

See Swing Pricing Adopting Release, supra note 11, at n.40. Swing pricing would permit a fundto continue to transact using one price, as they do today (instead of transacting using separate
prices for purchasing and redeeming shareholders).

262

For example, jurisdictions that permit dual pricing include the UK, Ireland, Australia, and HongKong. See Jin, et al, supra note 163, at n.6 and accompanying text.

167

would need to handle two share prices on each trade date. We understand that mutual fund orderprocessing systems currently are designed to accommodate only one price, which is applied bothto trades and valuation, and a fund’s share price feeds into many analyses that intermediaries,
funds, or others would need to update if there were two share prices, such as rebalancing activity.
In addition, as recognized above, there would be operational costs associated with intermediaries
needing to submit purchase and redemption orders separately, rather than netting purchase andredemption orders.
In addition, with a dual pricing framework, we would also address effects on a fund’s
financial statements and performance reporting, as the Commission has already done for swing
pricing.263 If we were to adopt a dual pricing framework, we could use the same generalframework as in swing pricing. Under this approach, a fund would use its “GAAP” NAV (i.e.,
the amount of net assets attributable to each share of capital stock outstanding at the close of theperiod) in its statement of assets and liabilities and in performance reporting, while it would use
its two transaction prices in reporting the dollar amounts received for shares sold and paid forshares redeemed in its statement of changes in net assets and reflect the impact of dual pricing in
the fund’s financial highlights.
Similar to liquidity fees, dual pricing could be either dynamic (e.g., calculated to reflectspread, other transaction costs, and market impact a fund is likely to incur to meet redemptions
or invest the proceeds from subscriptions and based on the magnitude of those flows) or
simplified (e.g., a constant spread around a fund’s NAV). Dynamic dual pricing generally would
necessitate timely flow information, similar to the proposed swing pricing requirement.
However, simplified dual pricing may not necessitate timely flow information. Between these263

See Swing Pricing Adopting Release, supra note 11, at section II.A.3.g.

168

two types of dual pricing, a dynamic approach would better reflect the costs associated with themagnitude of fund purchases or redemptions on a given day. Under a simplified dual pricing
framework, there also is the potential for either redeeming or subscribing investors to be overcharged for transaction costs that their investing activity does not trigger, because the fund would
adjust its NAV for both subscribing and redeeming investors daily without regard to whether thefund has net inflows or net outflows on a given day. A simplified approach, however, would beless costly to implement because, among other things, it would not require a hard close or any
alternatives to the hard close to provide actual or estimated flow information.
On balance, we are proposing a swing pricing requirement because it may haveoperational advantages over dual pricing. We request comment on using a dual pricing
framework to impose liquidity costs on transacting shareholders and whether a dual pricing
alternative may have fewer operational or other burdens than the proposed swing pricing
requirement or a liquidity fee alternative while still achieving the same overall goals of reducing
shareholder dilution.
150.

How do the operational implications of swing pricing, as proposed, differ fromthe operational implications of dual pricing? As dual pricing involves calculating andapplying two prices on each trade date, would that approach involve operationalburdens and complexity for fund intermediaries, service providers, and other third
parties that would not exist with a single price under our proposed swing pricing
framework?
151.

If we adopt a dual pricing framework instead of a swing pricing framework, howshould the spread around the NAV be determined? For example, should the spreadaround the NAV be constant or calculated daily or at some other frequency to reflect

169transaction costs? If the latter, which transaction costs (e.g., spread, other transaction
costs, and market impact)? Under a dual pricing framework, would funds need thesame investor flow information that is needed for swing pricing, or would
implementation of dual pricing be less dependent on investor flow information?
152.

Should a dual pricing requirement apply differently based on the type of fund or

the type of intermediary through which an investor trades? If so, what would be thebasis for the differences in how dual pricing applies?
153.

If we adopt a dual pricing framework, should we address the effects of two

transaction prices on a fund’s financial statements and performance reporting in amanner similar to how the Commission has addressed the effects of swing pricing(i.e., by clarifying that the GAAP NAV must be used in some cases, while transaction
prices are used in others)? Are there additional implications of two transaction pricesthat we would need to address and that would lead to a different result than ourcurrent swing pricing approach?
154.

Under a dual pricing framework, which value of the fund’s shares would market

participants use for analyses that currently are based on a fund’s NAV, such asrebalancing a client’s holdings of different funds to achieve a desired asset allocation
or reflecting the value of an investor’s holdings on an account statement? If we adopt
dual pricing, should we provide guidance on which value to use for these or otherpurposes?
155.

Are there differences between liquidity fees and dual pricing that make one abetter framework than the other to address dilution? If so, what are the differences
and why is one better than the other (e.g., differences in tax treatment, if any)?

170

156.

What investor flow information, if any, would be required to implement a dual

pricing alternative? To the extent that a dual pricing alternative requires timely
investor flow information, should the alternative be paired with the proposed hardclose requirement? Are there different considerations or effects related to the
proposed hard close requirement if we were to require funds to use dual pricing?
Would it be effective to implement the dual pricing alternative with an alternative tothe hard close requirement discussed below, such as indicative flows, estimatedflows, or delayed cut-off times for intermediaries?
157.

If we adopt a dual pricing framework, what other changes should be made to the

proposal as a result? For example, what reporting should be required on Form NPORT, Form N-CEN, Form N-1A, Form N-RN, or other forms used by funds thatwould be subject to the framework? Would any existing reporting items on these orother forms need to be modified if we were to adopt a dual pricing framework insteadof swing pricing? Are there other rules (e.g., rule 11a-3 under the Act) that would
require changes if we adopt an alternative framework?
158.

Would a dual pricing framework affect investor behavior differently than a swing

pricing framework or a liquidity fee framework?
2.

Alternatives to a Hard Close

We are proposing to require a hard close for open-end funds that are subject to the
proposed swing pricing requirement. Under this proposal an eligible order to purchase or redeem
any redeemable security of such a fund would be executed at the current day’s price only if thefund, its designated transfer agent, or a registered clearing agency receives the order before the171fund calculates its NAV. This proposal is designed to facilitate the operation of swing pricing aswell as to help prevent late trading and to modernize order processing.
In connection with the swing pricing proposal, we have also considered whether there arealternative methods by which a fund would be able to generate sufficient investor flow
information to determine whether to apply swing pricing on a given day. As discussed above,swing pricing requires that funds have significant information about their order flows todetermine with accuracy if the fund should impose a swing factor and to determine what thatswing factor should be. Instead of requiring that funds operationalize swing pricing based on
actual order flow information received before the pricing time, we have also considered whether
reasonable estimates, calculated by either the fund or the intermediary, would provide
sufficiently accurate information for a swing pricing determination. We have also considered
whether later cut-off times for flow information and the publication of the day’s NAV would
facilitate swing pricing. We discuss each alternative below. We also considered how thesealternatives would work if, rather than require swing pricing, we were to require funds to adopt
liquidity fees or dual pricing.264 Although the below discussion focuses on swing pricing, we
believe similar considerations would apply in the case of liquidity fees or dual pricing (to theextent a liquidity fee or dual pricing regime, like swing pricing, was based on the amount of net
flows), and these alternatives therefore also could be used in combination with a liquidity fee ordual pricing approach.265

264

See supra section II.D.1.

265

We provide additional illustrative examples of potential alternatives and pairings in section
II.D.3.

172

a.

Indicative Flows

We considered whether, instead of requiring a hard close, we should require that funds
receive indicative flow information from intermediaries by an established time. This approach
would require that intermediaries (e.g., broker-dealers, banks, and retirement plan recordkeepers)
calculate an estimate for what they anticipate the given flows for a particular day to be either
before the fund’s pricing time or a set time thereafter (e.g., by 4:30 p.m. ET or 5 p.m. ET).
Consistent with current practices, intermediaries could submit final order flow information after
the pricing time once the intermediary has received and calculated the final flows for the day.
For example, we could consider orders to be eligible to receive that day’s price if, in the case oforders submitted through an intermediary: (1) the intermediary receives the orders from investors
before 4 p.m. ET; (2) the intermediary provides estimated order flow to the fund by the identified
time; and (3) the intermediary provides final order information by the next morning. Under thisapproach, a fund would be permitted to use the indicative flow information provided byintermediaries to determine whether a swing factor should be applied to that day’s NAV.
In order to calculate the indicative flow information, intermediaries would need togenerate an estimated flow based on, among other things, the actual flows that they havereceived before the pricing time and the prior day’s price, as well as any indicative historicalinformation that is available if the indicative flow information is provided to the fund before thepricing time. Alternatively, the intermediary could provide summary net flow information (forexample, estimated net purchases of $3 million, estimated net redemptions of 250,000 shares,
and the purchase of an unknown quantity of fund shares with proceeds from redeeming 100
shares from a different identified fund), and the fund could apply the prior day’s NAV to arriveat an estimated net flow. Intermediaries would need to update their systems and processes to173

calculate indicative flow information by or shortly after the pricing time while continuing toprovide actual final flow information as it is available. We understand that different
intermediaries may, based on their different characteristics, use different methods to calculate orprovide their indicative flows. A broker-dealer and a retirement plan recordkeeper would notnecessarily use the same method due to the differences in how they are able to generate andcommunicate flow information to funds. Retirement plan recordkeepers, for example, would
need to generate indicative flow information that accounts for not only purchase and redemption
activity that is a known number of shares or dollars as of the pricing time, but also estimated loan
and withdrawal activity that is subject to hierarchy provisions under their specific plans. If anintermediary is unable to provide indicative flow information by the identified time, the orders
would receive the next day’s price.
Unlike the proposed hard close requirement, the alternative of permitting funds to rely on
indicative flows provided by intermediaries would provide intermediaries with more flexibility
in providing final flow information. Thus, the broader changes that may be needed forintermediaries to comply with the proposed hard close requirement that are discussed above may
not be needed under this alternative. This approach would not ultimately provide funds with themost accurate information about anticipated flows. If intermediaries are required to provide
indicative flows before a fund’s pricing time, the flow information may be less reliable,
particularly during times of stress since intermediaries may not be able to account for or
anticipate the effects of a stress event on order flow information. This limitation of indicative
flow information may create down-stream effects on the accuracy and efficacy of swing pricing,particularly in times of stress. For swing pricing to serve the goal of mitigating dilution ofshareholders’ interests, funds need accurate order flow information, particularly in times of174

stress. In addition, an approach based on indicative flows would be less effective at preventing
late trading and at reducing operational risk through improvements to order processing.
We request comment on the indicative flow alternative, including:
159.

Should we allow funds to use indicative flow information to determine whether or

not to apply swing pricing?
160.

If intermediaries are required to provide indicative flows to funds, should the ruleestablish this requirement by considering an order as eligible to receive a given day’s
price only if the intermediary provides indicative or final order flow information by
an identified time and provides final order information by a later identified time?
Should we instead provide that a fund must prohibit an intermediary from purchasing
the fund’s shares in nominee name on behalf of others if the intermediary does notprovide timely indicative flow information? Should the rule require that funds enter
into a contractual agreement with intermediaries to require the indicative flow
information? If so, should this contract be required to specify how indicative flows
are calculated by the intermediary? In either case, should we prohibit or restrict anintermediary from charging fees to funds for the costs associated with providing
indicative flow information?
161.

Would intermediaries have sufficient incentives to provide timely and accurate

indicative flow information? Are there other consequences we should impose for lateor materially inaccurate indicative flow information? For example, if an intermediary
has a pattern of providing late or inaccurate information, should we require a fund toprohibit the intermediary from purchasing the fund’s shares in nominee name on
behalf of others? As another alternative, should we prohibit orders received from that175

intermediary from receiving that day’s price and instead require that the orders be
executed and settled on a delayed basis at a future day’s price, in order to limit thedilutive effects of orders that intermediary submits?
162.

When should intermediaries be required to provide indicative flows under thisalternative? Are indicative flows needed before the pricing time, or could funds still
make timely swing pricing decisions if intermediaries provided indicative flows after
the pricing time? How long after the pricing time could funds receive the indicative
flow information and still make timely swing pricing decisions? In connection withthis approach, would funds publish their prices later than they do today to provide
additional time to make swing pricing decisions?
163.

Should the intermediary or the fund apply the prior day’s price to arrive at anindicative flow estimate? Is there value in the fund performing this calculation
because it would have better information about potential changes to the prior day’s
price that it could take into account (e.g., the size of any swing factor adjustment
made on the prior day, as well as potential changes to the value of its portfolio
holdings)?
164.

Should intermediaries that have minimal holdings with the fund be permitted not

to provide indicative flows under this approach? If so, how should we defineintermediaries that have minimal holdings of fund shares? How would this approachwork if an intermediary’s customers began to transact in higher volumes of the fund’s
shares?
165.

Should we provide fund managers a safe harbor from liability under certain

circumstances (e.g., absent knowing or reckless behavior) if the fund relies on176

indicative flows to determine whether to swing the fund’s NAV and the size of theswing factor and those indicative flows do not align with the actual flows the fundultimately receives? From what statutory provisions or rules should any safe harborprovide relief (for example, section 34(b) under the Investment Company Act, rule22c-1, or other provisions and rules)?
166.

If we adopt an indicative flows approach, are there any changes we should maketo the proposed swing pricing requirement? For example, instead of requiring use of“reasonable, high confidence” estimates of investor flow information, should we use
a different standard (e.g., reasonable estimates based on available information)?
167.

Do commenters agree with the discussion of the potential benefits, costs, ordrawbacks of this alternative? During times of stress, would intermediaries be able togenerate accurate indicative flow information?
168.

Does this alternative raise different considerations if we were to require funds touse a liquidity fee framework or dual pricing, rather than swing pricing? Should an
indicative flows approach operate or be structured differently if paired with a liquidity
fee or dual pricing requirement and, if so, how?
169.

Is there information about the indicative flows alternative, if adopted, that would

be important for investors to understand and that funds should be required to disclosein their registration statements or elsewhere?
b.

Estimated FlowsWe also considered an approach that would allow funds to estimate their flows for the
day for the purposes of determining whether to apply a swing factor to the day’s NAV and theamount of the swing factor (e.g., whether the amount of net redemptions exceeds the market

177impact threshold). In order to estimate flows for a given day, funds could generate models thatincorporate the information available to them. For example, funds could use the flow informationthat they have already received by a pre-established time as well as historical order flow
information in order to estimate expected flows for the day.
The ability of a fund to estimate flow information may differ based on the types andnumber of intermediaries from which the fund is ultimately receiving flow information. In orderto estimate flows, funds may rely on factors that include the historical pattern of flows for aparticular intermediary while accounting for any observed changes in the flows for a given fund.
This estimate could be based on all of the information received by the fund by a set time, withadditional adjustments to account for flows from intermediaries that do not submit orders by thattime. For example the fund could base its estimate on all information that it has received by 5
p.m. ET. For some intermediaries, however, like retirement plan recordkeepers, funds would
likely need to create models that are able to project estimated flow information based on
historical order flow information as retirement plan recordkeepers may not have sufficient
information available by the time established by the fund. In addition, to the extent funds do notalready receive large trade notifications, funds may determine to negotiate arrangements withintermediaries for receipt of advance notice of certain large transactions that are known inadvance by intermediaries, such as replacing a fund as an investment option in a retirement plan.
The considerations for whether estimates generated by the fund provide sufficiently
reliable information to implement swing pricing are similar to those discussed above for thealternative for indicative flows from intermediaries. Funds have a narrower view of anticipatedflow activity than intermediaries, however, as intermediaries are closer to investor activity andlikely have a more accurate estimate of their customers’ flows for a particular fund. This benefit178

of indicative flows over estimated flows may be mitigated to the extent that intermediaries lack
incentives or are otherwise unable to provide reasonably accurate indicative flows. During timesof stress, funds may have a limited view of anticipated order flow information, which may
impact their ability to effectively implement swing pricing. In addition, an approach based on
estimated flows would be less effective at preventing late trading and at reducing operational risk
through improvements to order processing than the proposed hard close requirement. On theother hand, estimated flows would be less costly than either a hard close or indicative flows.
We request comment on the estimated flow alternative, including:170.

How accurately can funds estimate flows from different intermediaries? For

example, are retirement plan flows relatively stable and predictable, or do they varyover different periods? To what extent do retirement plans inform funds in advance ofmaterial flows that deviate from historical patterns, such as changes in funds the planoffers? Would funds receiving flows from specific intermediaries be better able toestimate their flows? For example, would it be easier for funds to estimate flows frombroker-dealers because broker-dealers tend to be able to provide order flow earlier
than some other intermediaries? Would it be easier for funds to estimate flows fromretirement plan recordkeepers because those flows are more predictable? To theextent that certain events make flows less predictable, such as changes in the funds aretirement plan offers to its participants, could funds better estimate their flows if
intermediaries were required to provide advance notice or other information about
these events?
171.

Should we provide fund managers a safe harbor from liability under certain

circumstances (e.g., absent knowing or reckless behavior) if the fund relies on

179estimated flows to determine whether to swing the fund’s NAV and the size of theswing factor and those estimated flows do not align with the actual flows the fundultimately receives? From what statutory provisions or rules should any safe harborprovide relief (for example, section 34(b) under the Investment Company Act, rule22c-1, or other provisions and rules)?
172.

Should we require funds to conduct back-testing of estimated flows using final

data to refine their estimation process over time and help ensure that estimates used
for swing pricing are reasonable?
173.

Would funds be able to implement swing pricing based on estimated flow

information? If we adopt an estimated flows approach, are there any changes weshould make to the proposed swing pricing requirement? For example, instead ofrequiring use of “reasonable, high confidence” estimates of investor flow information,
should we use a different standard (e.g., reasonable estimates based on available
information)?
174.

Does this alternative raise different considerations if we were to require funds touse a liquidity fee framework or dual pricing, rather than swing pricing? Should an
estimated flows approach operate or be structured differently if paired with a liquidity
fee or dual pricing requirement and, if so, how?
175.

Is there information about the estimated flows alternative, if adopted, that would

be important for investors to understand and that funds should be required to disclosein their registration statements or elsewhere?
176.

To what extent would the estimated flows alternative reduce costs on funds andintermediaries relative to the proposed hard close?

180

c.

Later Cut-Off Times for Intermediaries

We have considered whether establishing later cut-off times for intermediaries to submit
order flow information would lessen the burden on intermediaries to comply with the proposed
hard close requirement while continuing to give funds the necessary order flow information to
implement swing pricing. Under this alternative, investors would continue to need to submit
orders before the fund’s pricing time to be eligible to receive that day’s price, but intermediaries
would have additional time to provide those orders to a designated party after the pricing time,such as by 6 or 7 p.m. ET for a fund with a 4 p.m. ET pricing time. To provide time to assess theflows and determine whether to apply swing pricing, a fund might push the time of publicationof its price to a later time, such as 8 to 10 p.m. ET. Much like the proposed hard close, thisalternative may have additional benefits beyond facilitating swing pricing. Ensuring that all order
flow information is provided to a designated party earlier than it is currently may improve orderprocessing. This alternative would be less effective, however, at preventing late trading.
Allowing intermediaries more time to provide order flow information and delaying
publication of the NAV would involve many of the systems costs discussed in connection withthe hard close. For example, intermediaries would still need to transmit orders before the NAV isavailable. However, providing intermediaries and funds more time to compile order flow
information and to calculate the price may lessen the overall burden of the proposed changes,
and may reduce the need for intermediaries to establish cut-off times prior to the fund’s pricing
time for receipt of investor orders.
We request comment on the alternative of later cut-off times for intermediaries,
including:

181

177.

What would an appropriate delayed cut-off time be (e.g., two or three hours after

the fund’s pricing time)? Would a delayed cut-off time, in combination with adelayed price publication, provide funds with sufficient time to make swing pricing
decisions?
178.

If funds were to delay the publication of their price, what steps would funds needto take? Would they need to amend agreements with intermediaries? What effects
would a delayed publication time have on intermediaries or other parties?
179.

Would a delayed cut-off time for intermediaries to submit orders to a designatedparty be less burdensome than the proposed hard close? Would a delayed pricepublication time be less burdensome than the proposed hard close?
180.

Would funds be able to implement swing pricing if we require later cut-off times

for intermediaries instead of the proposed hard close? If we adopt a later cut-off time
approach, are there any changes we should make to the proposed swing pricing
requirement? For example, instead of requiring use of “reasonable, high confidence”
estimates of investor flow information, should we use a different standard (e.g.,reasonable estimates based on available information)?
181.

Does this alternative raise different considerations if we were to require funds touse a liquidity fee framework or dual pricing, rather than swing pricing? Should alater cut-off time approach operate or be structured differently if paired with aliquidity fee or dual pricing requirement and, if so, how?
182.

Is there information about the later cut-off times alternative, if adopted, thatwould be important for investors to understand and that funds should be required todisclose in their registration statements or elsewhere?

182

3.

Additional Illustrative Examples

While there are many potential combinations of swing pricing and hard close alternatives,
several of which we have already discussed in this release, this section provides additional
illustrative examples of alternatives to the proposed swing pricing and hard close requirementsthat are designed to reduce shareholder dilution. The alternatives discussed in this section areintended to have lower operational costs than the proposed requirements, although the reduction
in costs involves other trade-offs, as discussed below.
a.

Spread Cost Adjustment on Days with Estimated Net Outflows

Spread costs can be a major component of a fund’s swing factor. Instead of the proposedswing pricing and hard close requirements, we could require a simplified version of swing
pricing in which funds adjust their current NAVs to reflect good faith estimates of spread costs
on days the fund reasonably expects to have net redemptions based on estimated flows. Under
this approach, if a fund determined its NAV based on the midpoint of each investment’s bid-ask
spread, on days of estimated net redemptions the fund would swing its transaction price down by
an amount designed to reflect spread costs in the portfolio. The adjustment would be based ongood faith estimates of spread costs, consistent with the proposed swing pricing requirement. As
with the swing factor under the proposal, the estimated spread costs could be determined
periodically, as long as significant market developments or other developments that affect thegood faith estimate of spread costs prompt a quicker reevaluation.266 If the fund already uses bid

266This approach would not require a fund to use bid prices to value each of its investments when
determining its NAV. Instead, as appropriate, a fund could continue to value its investments using
the midpoint to determine its NAV and, on days of estimated net outflows, the fund would be
required to reduce the fund’s transaction price based on good faith estimates of spread costs.

183

prices for valuation purposes, it would not be required to adjust its current NAV to reflect spread
costs.267
This approach would be designed to mitigate dilution from spread costs associated withselling investments to meet redemptions. The reflection of costs would be dynamic when a fundexpects net outflows, with the adjustment to reduce a fund’s transaction price increasing in size
as spreads widen during times of stress. A fund would need to estimate the direction of flows(i.e., net redemptions or net purchases) based on available information before the fund publishes
its price, but the fund would not need to estimate the size of net flows. A fund’s reasonable
expectation of the direction of fund flows may be based on different types of information,
depending on the fund. For example, a fund could consider indicative flow information fromintermediaries, trends in orders submitted that day, general market intelligence, or historical
trends in flows.
This approach would impose lower operational burdens and costs relative to the proposal,
including by not necessitating a hard close and by simplifying the analysis of a swing factor. At
the same time, the approach would address dilution less fully than the proposal. Unlike theproposed swing pricing requirement, this approach would not capture market impact or othercosts of selling investments to meet redemptions. For one, a fund could not assess market impact
without an estimate of the size of net flows and, without a hard close, estimating the size of net
flows with accuracy would be subject to a greater risk of error than estimating only the directionof flows. In addition, as previously discussed, there may be operational challenges andcomplexities to estimating market impact costs more generally. Another difference from the267

See supra note 202 (discussing accounting standards that state that the price within the bid-ask
spread that is most representative of fair value in the circumstances shall be used to measure fairvalue and that provide that use of bid prices is permitted for these purposes, as well as use of midmarket pricing as a practical expedient).

184

proposed swing pricing requirement is that this approach would not address dilution fromsizeable net purchases. Because smaller levels of net purchases are less likely to result in dilution
than net redemptions (as funds have more time to invest the proceeds from net purchases than tosell investments to meet redemptions), it may not be appropriate to require a fund to adjust its
current NAV to reflect spread costs on any day it estimates net purchases. For this reason, we
have a net inflow swing threshold of 2% in the proposal and, as with the potential inclusion ofmarket impact in this framework, estimating the size of net flows involves a greater risk of error
than estimating only the direction of net flows.
In addition to other requests for comment related to variations of swing pricing andestimation of flows, we request comment on requiring a fund to adjust its current NAV to reflect
good faith estimates of spread costs on days the fund reasonably expects to have net
redemptions, instead of requiring the proposed version of swing pricing and a hard close.
183.

Would this approach reduce operational burdens and costs relative to the

proposed swing pricing and hard close requirements? Would this approach reduce
operational burdens and costs relative to the liquidity fee alternative? Would thisapproach reduce operational burdens and costs relative to the dual pricing alternative?
How effective would this approach be in addressing dilution? To what extent would
this approach protect non-transacting investors from dilution due to the bid-ask
spread costs and ameliorate any first-mover advantage? Would the effectiveness ofthe tool vary between normal and stressed market conditions? Should this approachalso reflect transaction costs in addition to spreads, for example, commissions,markups, and/or markdowns?

185

184.

How accurately can funds estimate the direction of daily net flows? Should therequirement apply on days the fund reasonably expects to have net redemptions (suchthat the fund uses this approach only if it affirmatively expects net redemptions) or ondays the fund does not reasonably expect to have net purchases (such that the funddefaults to this approach unless it affirmatively expects net purchases)?
185.

To what extent do funds already value their portfolio investments using bid

prices? What consequences, if any, would a requirement to reflect good faithestimates of spread costs when a fund reasonably expects to have net redemptions
have on these funds?
186.

Would this approach incentivize funds to value their portfolio investments using

bid prices without properly evaluating whether the bid price is most representative offair value in the circumstances, in order to avoid the need to determine whether thefund reasonably expects net redemptions each day?
187.

If we adopt this approach, how should we amend disclosure and reporting

requirements? For example, if we required funds to use this simplified version ofswing pricing, should current prospectus and financial statement reporting
requirements for swing pricing apply? Should we require funds to report thefrequency and amount of adjustments made to their current NAVs under thisapproach? Should a fund be required to report both its current NAV and its adjusted
price? Should a fund be required to report information about the accuracy of its
estimates of flow information? Where should any such information be located (e.g.,
Form N-PORT, fund websites, annual and semi-annual reports)?

186

b.

Liquidity Fee When Trading Costs Are Significant

Another alternative we considered is a liquidity fee that would apply only on days when afund anticipates significant trading costs. A rule could either define the trigger or require funds toestablish policies and procedures that identify their own fund-specific triggers. In terms ofestablishing the trigger, one alternative would be a trading cost trigger that the fund sets inadvance or that the Commission establishes by rule (for example, with a set size, a set increase,or a set standard deviation in trading costs based on criteria such as spreads or transaction
volumes for the fund’s portfolio, either in terms of dollars or as a percentage of the fund’s
portfolio). As another alternative, the trigger for applying a liquidity fee could include otherfactors that indicate an increase in trading costs, such as increasing net flows (e.g., based on thefund’s flow history or estimated flows) or decreasing liquidity (e.g., based on declines in thepercentage of the fund’s investments classified as highly liquid, or increases in the percentage ofinvestments classified as illiquid). A fund’s trigger for applying liquidity fees could be required
to be made public or kept non-public.
As one example of a policies and procedures based approach, a fund could be required toestablish written policies and procedures that would define the trigger event(s) that would cause
a fund to apply a fee. The fund’s policies and procedures would be required to be designed tomitigate dilution and recoup the costs the fund reasonably expects to incur as a result of
shareholder redemptions on days when trading costs are higher. Funds would have discretion todefine their own trigger events, but all funds would be required to consider certain identified
factors, such as trading costs, liquidity of the fund’s portfolio, market conditions, and reasonably
estimated investor flows, in determining their trigger events.268
268

Consideration of expected investor flows would not require a fund to estimate the size of
expected flows with accuracy. Rather, this consideration would be intended to recognize the187

There are several alternatives for setting a fee amount. For instance, the fund could eitherbase the fee amount on reasonable estimates of expected transaction costs, including market
impact, or if the fund determined this estimation is not feasible, the fund could establish a set fee
amount, or graduated fee levels, it would apply when a trigger event occurs. The rule could
either allow a fund to determine that estimating transaction cost amounts is not feasible inadvance, or the rule could require a fund to consider its ability to estimate transaction costs eachtime a liquidity fee applies. Under another possible approach, the rule could establish a default
fee amount, such as 1%, that a fund could opt out of or adjust if determined to be in the bestinterest of the fund.
With respect to board oversight, if fee triggers or amounts were determined based on
written policies and procedures, we could require board approval of the policies and procedures
defining a fund’s trigger event or identifying how to determine a fee amount, as well as any
material changes to those policies and procedures. As for determining when a trigger event
occurs and the amount of the fee, similar to the proposed swing pricing requirement, we could
allow a liquidity fee administrator approved by the board to make some or all of these
determinations.
If designed incorrectly, a fee that only applies when trading costs are significant could
incentivize investors to redeem if investors can observe in advance that a fee is likely to apply inthe near future. There are various mechanisms we could use to reduce these incentives. For one,
if the rule identified specific trigger events that all funds would use, in that case, the potential forpreemptive redemptions would be reduced if investors or other market participants could not
potential relevance of flows, to the extent a fund has sufficient information to reasonably estimate
them. Moreover, if a fund anticipates a significant increase in costs of selling its investments but
does not expect to need to sell investments due to an anticipation of net inflows, this approach
would not require a fund to impose a fee.

188

observe with certainty if a fund is nearing a trigger event. Another approach would be to identify
specific thresholds for triggering a fee in the rule and allow a fund to choose to use one or moreof those thresholds to determine when to apply a fee. If funds determined their own fee triggers,
the rule could provide that a fund’s trigger event would be either public or nonpublic. Public
disclosure of a fund’s trigger for applying liquidity fees would increase transparency. The rule
could require, however, that the fund’s trigger event be kept nonpublic in order to reduce thepotential for preemptive redemptions. Under this approach, a fund would not disclose its defined
trigger event, and instead would be required to disclose in its prospectus that it applies a liquidity
fee on days its trading costs increase, as well as how it determines the amount of the fee. A fundcould be required to report information about how frequently it applied a liquidity fee and theamount of each fee on Form N-PORT.
Unlike the proposed swing pricing requirement, this approach would not address smaller
levels of dilution that may occur in the normal course. Instead, it would be designed to focus onperiods where funds have heightened dilution risk, such as in stress events. In addition, thisapproach would not address dilution that may occur from net purchases.
In addition to other requests for comment related to liquidity fee alternatives, we request
comment on whether we should require a fund to apply liquidity fees only on days when a fundanticipates significant trading costs, instead of requiring swing pricing and a hard close.
188.

Should a fund be required to apply a liquidity fee only when trading costs are

significantly increasing, such as a period of stress? If so, should the rule identify atrigger when fees apply, or should funds establish their own trigger events?
189.

If the rule establishes a trigger, what should that trigger be based on? For

example, should the rule require a fund to apply a liquidity fee when spreads are

189widening or transaction volumes for the portfolio increase? For instance, should fees
be required when spreads widen beyond a 95% confidence level for key componentsof the fund’s portfolio, where the mean and standard deviation of these key markets
are measured for the trailing 252 business days (the average number of trading daysin a year), and the trigger occurs if the current spread is greater than 1.65 standard
deviations (i.e., the equivalent of a 95% confidence in a normal distribution) above
the mean for that period? Should different confidence levels, standard deviations, ormeasurement periods be used? Should a liquidity fee trigger be based on an increasein the transaction volume of the fund’s portfolio, such as a trigger when the dollar- or
percentage-based transaction volume for that day exceeds the 95% confidence levelcompared to the average daily transaction volume for the trailing 252 business days?
Should different confidence levels or measurement periods be used? Do funds alreadytrack information that would allow them to identify readily when a trigger based onwidening spreads or increased dollar transaction volume is crossed, or would theyneed to collect or monitor additional information about spreads or transaction
volumes? Should the rule use other or additional triggers? For example, should atrigger be based on or consider large net outflows or a reasonable expectation of large
net outflows above a certain percentage, such as net redemptions above 1% or 2% of
net assets or net redemptions that are higher than typical for the individual fund basedon historical flows? If the rule included a numerical threshold for net redemptions,would funds have concerns about their ability to accurately estimate net flow amounts
and therefore be less likely to apply fees? If so, would a safe harbor address theseconcerns? Should a trigger be based on or consider an identified change in the fund’s

190

liquidity classifications, such as an identified decrease in the percentage of highly
liquid investments the fund holds or an identified increase in the percentage of
illiquid investments the fund holds? Should identification of a trigger event accountfor indicators of market stress in the financial markets overall or in the specificmarkets in which the fund invests? If so, what indicators of market stress should therule include? Should the rule identify multiple potential triggers and allow funds tochoose whether to use one or more of those triggers to determine when to apply a fee?
190.

Instead of identifying specific trigger points by rule, should we require funds toestablish and implement policies and procedures that describe when the fund will
impose a fee? Would a policies and procedures approach allow funds to tailor theapplication of a fee to scenarios in which transacting investors are likely to cause
dilution? Under a policies and procedures approach, should we identify the factors afund must consider in defining its trigger events? If so, what factors should werequire a fund to consider (e.g., trading costs, liquidity of the fund’s portfolio, market
conditions, and reasonably estimated investor flows)? Rather than require funds toconsider these factors, should we require funds to define their trigger events withrespect to these or other specific factors?
191.

Should we permit a fund not to apply a fee upon the occurrence of a defined

trigger event? For example, should a fund be required to apply a fee when a trigger
event occurs, unless the board determines that it is not in the interest of the fund to
apply a fee in the specific circumstance?
192.

What risks are associated with requiring a fund to define its own trigger event,and how could we reduce these risks? Would funds define a trigger event such that a191fund would be delayed in determining that a fee should apply relative to potentially
fast-moving changes in market conditions? If so, would this delay increase thepotential for preemptive redemptions and contribute to a first-mover advantage?
Would funds define a trigger event in a way that makes it unlikely that a fund would
ever apply a fee? Are there ways to ensure that funds’ policies and procedures are
sufficiently robust, such as requirements to report the policies and procedures to theCommission or to report when a fund applied a fee? For example, should funds berequired to confidentially report their trigger events to the Commission and to report
how frequently fees applied and in what amounts on Form N-PORT?
193.

Should liquidity fees apply only to redemptions if a trigger event occurs? Orshould liquidity fees apply to both redemptions and purchases under this approach?
Should a single trigger event result in fees applying to both redemptions andpurchases, or should funds establish trigger events that differ between redemptions
and purchases?
194.

How should the amount of a liquidity fee be determined under this approach?

Should the rule set a specified fee amount that would occur upon any fund’s trigger
event, such as 0.5%, 1%, or 2%? Should any fee amount set by rule be a default
amount, such that a fund could use a higher or lower fee amount if determined to bein the best interest of the fund? Should funds be required to calculate the amount of
the fee based on reasonable estimates of expected transaction costs, including market
impact? Should fund policies and procedures, or a rule, establish a set fee amount thatwould apply if a fund is unable to reasonably estimate expected transaction costs?
Should funds be required to consider their ability to reasonably estimate transaction

192costs each time a trigger event applies, or should funds be able to determine inadvance that estimation is not feasible and opt to use a set or graduated fee for all
trigger events? Should fund policies and procedures, or a rule, establish graduated fee
levels that would apply for different trigger events? Should we establish a limit on thesize of a liquidity fee under this approach (e.g., 2%, 3%, or 5%)?
195.

After a fee is triggered, how should the rule permit or require a fund to determine

when it should no longer apply a fee? For instance, should a fund reassess daily
whether trading costs have decreased, or should a liquidity fee remain in place for a
set number of days (e.g., 2 to 5 days) and then no longer apply unless the funddetermines a fee continues to be in the best interest of the fund?
196.

What information should funds be required to disclose in their prospectuses under

this approach? How much detail should funds be required to provide about when they
will impose a liquidity fee? Should the prospectus state only that a fund will impose a
fee when trading costs increase, or should the prospectus also discuss the factors afund considers to make this determination? Should a fund be required to disclose its
trigger events in its prospectus? Would that disclosure contribute to potential
preemptive redemptions, or would trigger events be difficult to observe publicly inadvance? Should funds be required to disclose fee amounts in their prospectuses, ortheir methods for calculating fee amounts?
197.

Should the fund’s board be required to approve the fund’s written policies andprocedures defining the trigger event(s) and how the fund will determine the amountof the fee? Should the board be required to approve any material changes to thepolicies and procedures? Should other board oversight be required? Should the board

193

have to determine that a fee is appropriate every time a trigger event occurs before thefund can impose a fee? Or should the board be required to designate a liquidity fee
administrator that would be responsible for determining when liquidity fees apply andthe size of the fee? Should the definition of a liquidity fee administrator mirror the
proposed definition of a swing pricing administrator? If not, what changes should be
made? Similar to the proposed swing pricing requirement, should a liquidity fee
administrator be required to provide periodic reports to the board (at least annually)that describe: (1) the administrator’s review of the adequacy of the policies andprocedures identifying the fund’s trigger event and the effectiveness of theirimplementation, including the effectiveness in mitigating dilution; (2) any materialchanges to the liquidity fee policies and procedures since the date of the last report (ifsuch material changes are not subject to board approval); and (3) the administrator’s
review and assessment of the fund’s method for determining the size of the liquidity
fee?
198.

What are the operational implications of this approach for funds andintermediaries? Would intermediaries be able to apply a liquidity fee on the same day
the fund announces its imposition? What effects would this approach have on
investors?
199.

If liquidity fees are only applied rarely under this approach, how would that affectfund and intermediary preparedness for imposing fees? Would it increase investor
sensitivity to fees and increase the likelihood of preemptive redemptions?
200.

Should we pair a requirement to adjust a fund’s current NAV to reflect spread

costs on days the fund estimates it will have net redemptions with a requirement to194

apply a liquidity fee when trading costs increase? Would this combined frameworkaddress dilution from net redemptions in a manner similar to the proposed swing
pricing requirement without the costs of a hard close?
E.

Reporting Requirements
1.

Amendments to Form N-PORT

Registered management investment companies and ETFs organized as unit investment
trusts are required to file periodic reports on Form N-PORT about their portfolios and each of
their portfolio holdings as of month-end.269 While the reports provide monthly information to theCommission, funds file these reports on a quarterly basis with a 60-day delay, and the public
only has access to information for the third month of each quarter. We are proposing to require
reports on Form N-PORT to be filed within 30 days of month-end, which would be followed bypublic availability of much of the reported information 60 days after month-end. We are also
proposing to require an open-end fund that is subject to classification requirements in theliquidity rule to provide information regarding the aggregate percentage of its portfolio
represented in each of the three proposed liquidity categories, which would be publicly available.
The reported aggregate percentages would include adjustments to give effect to other aspects ofthe proposal. Finally, we are proposing amendments relating to funds’ use of swing pricing,
conforming amendments to reflect the proposed amendments to rule 22e-4, and amendments tocertain entity identifiers.

269

For purposes of this section, the term “fund” refers to registrants that currently are required toreport on Form N-PORT, including open-end funds, registered closed-end funds, and ETFs
registered as unit investment trusts, and excluding money market funds and small business
investment companies.

195

a.

Filing Frequency

We are proposing to amend rule 30b1-9 and Form N-PORT to require funds to filereports on Form N-PORT on a more timely basis, with changes to both the frequency with whicha fund would file reports on Form N-PORT and when the reports are due.270 Specifically, rather
than filing monthly reports with the Commission 60 days after the end of each fiscal quarter, weare proposing to require that funds file reports on a monthly basis.271 These monthly filings
would be due within 30 days after the end of the month to which they relate and would be madepublic 60 days after the end of the month to which they relate.272 As an example, currently a fundfiles Form N-PORT reports for the first, second, and third months of each fiscal quarter with theCommission 60 days after the end of the third month of the quarter. Under the proposal, funds
would separately file reports for the first, second, and third months of the quarter, with eachmonth’s report due within 30 days of month-end.
These changes are intended to provide more timely information regarding the fund’s
portfolio, including its liquidity profile. Both the current quarterly reporting cadence and the 60day delay after the end of the quarter before reports are due make it difficult to use reported datato assess events that are developing quickly, or to identify early warning signs of potential
distress. By the time the information is filed, it is at least two, and could be as many as four,months out of date.273
270

The proposal would also make a conforming edit to the filing instructions for Form N-PORT.
See proposed 17 CFR 274.150(a).

271

We would also make conforming changes to General Instruction A of Form N-PORT and rule30b1-9 to remove references to the requirement for a fund to maintain in its records theinformation that is required to be included on Form N-PORT no later than 30 days after the endof each month; this would no longer be necessary because the information would be filed with theCommission. See Proposed General Instruction A of Form N-PORT; proposed rule 30b1-9.

272

Id; proposed General Instruction F of Form N-PORT. As is the case currently, if the due datefalls on a weekend or holiday, the filing deadline would be the next business day.

273

Because reports are due 60 days after the end of a fund’s fiscal quarter, deadlines vary based on196

As proposed in 2015 and adopted in 2016, Form N-PORT would have provided formonthly filings with the Commission, within 30 days after the end of each month.274 Only reports
for every third month would have been available to the public.275 The Commission originallyrequired monthly portfolio reporting because it would be useful for fund monitoring, particularly
in times of market stress.276 The Commission originally required funds to file each monthly
report within 30 days of month end because more delayed data would reduce the utility of theinformation to the Commission and lag times of more than 30 days would make monthly
reporting impractical, as reports would overlap with preparation time.277
Before the date funds would have been required to comply with this requirement, theCommission experienced a cybersecurity incident that resulted in unauthorized access to certain
nonpublic information on the EDGAR system.278 As part of the Commission’s ongoingassessment of its internal cybersecurity risk profile, the Commission re-evaluated and modified
the filing frequency for reports on Form N-PORT. The Commission required funds to file athe fund’s fiscal year. As an example, depending on a given fund’s fiscal year, reports on Form
N-PORT that included information for Mar. 2020 were due between June 1, 2020, and July 30,
2020. For instance, for funds with fiscal years ending Dec. 31, Sept. 30, June 30, or Mar. 30—
which is just under half of all funds—the due date of the filing was May 30, 2020. Because thiswas a Saturday, the filing deadline was extended until the next business day on Monday, June 1.
See General Instruction A to Form N-PORT.
274

See Investment Company Reporting Modernization, Investment Company Act Release No.
32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (“Reporting Modernization Adopting
Release”), at section II.A; Investment Company Reporting Modernization, Investment Company
Act Release No. 31610 (May 20, 2015) [80 FR 33589 (June 12, 2015)] (“Reporting
Modernization Proposing Release”).

275

See Reporting Modernization Adopting Release, supra note 274, at section II.A.

276

See id., at paragraph following n.453.

277

See id., at nn.461-462 and accompanying text.

278

See Statement on Cybersecurity (Sept. 20, 2017), available at https://www.sec.gov/news/publicstatement/statement-clayton-2017-09-20; see also Testimony before the Financial Services andGeneral Government Subcommittee of the Senate Committee on Appropriations (June 5, 2018),
available at https://www.sec.gov/news/testimony/testimony-financial-services-and-generalgovernment-subcommittee-senate-committee.

197

report with the Commission for each month in the fund’s fiscal quarter no later than 60 days after
the end of each fiscal quarter and to maintain in their records the information that is required to
be included on Form N-PORT not later than 30 days after the end of each month. In making thischange, the Commission stated that it significantly reduced the sensitivity of the non-public data,
but that the staff would continue to monitor and solicit feedback on the data received and the use
made (or expected to be made) of such data in furtherance of the Commission's statutory
mission, as well as cybersecurity considerations and other matters deemed relevant by thestaff.279
The Commission applies controls and systems for the use and handling of filing systems
for confidential information and associated confidential data in a manner that reflects thesensitivity of the data and is consistent with the maintenance of its confidentiality. The
Commission also has gained additional experience in receiving and maintaining sensitive
portfolio data on the EDGAR system. This experience includes, for example, the existing nonpublic portions of Form N-PORT, which are subject to controls and systems designed to protect
their confidentiality, as well as confidential treatment requests for reports on Form 13F.280
Market events have reinforced the need for timely data regarding funds’ portfolios andthe liquidity of those portfolios. For example, disruptions in the markets for Treasury securities
and corporate bonds began near the end of the first quarter of 2020, but many funds’ reports on
Form N-PORT reflecting these events were not due until June 1, 2020, or as late as the end of279

See Amendments to the Timing Requirements for Filing Reports on Form N-PORT, Investment
Company Act Release No. 33384 (Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)] at nn.36-39 andaccompanying text.

280

See Electronic Submission of Applications for Orders under the Advisers Act and the Investment
Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV-NR;
Amendments to Form 13F, Investment Company Act Release No. 34635 (June 23, 2022) [87 FR
38943 (June 30, 2022)], at section II.C.

198

July 2020. This meant that Commission staff were not able to review monthly filings, forexample, to assess and analyze how the events were affecting funds or identify issues for further
inquiry. Similarly, the Russian invasion of Ukraine began in late February 2022, when many
funds were just filing their reports for the final quarter of 2021. This meant that when
Commission staff were reviewing data to assess funds’ exposures to securities that could be
affected by the invasion, the data was several months out of date.281 As a result, during major
market events, the staleness of Form N-PORT data limits the Commission staff’s ability todevelop a comprehensive understanding of the market. The stale data also can impede our ability
to contribute fully to interagency discussions of and responses to market events.
Although funds are required to maintain the monthly data and produce it to Commission
staff upon request, any such production would be done on an individual basis. In addition,
making individual requests requires Commission staff to determine the appropriate funds fromwhich to collect data, which can be particularly challenging when Commission staff is
responding to market events but may not have the market data necessary to determine quickly
which funds to prioritize in responding to the event.
Requiring funds to file monthly reports on Form N-PORT within 30 days of the end ofeach month, consistent with the filing frequency the Commission initially adopted for Form NPORT, would enhance our ability to effectively oversee and monitor the activities of investmentcompanies in order to better carry out our regulatory functions, consistent with the goals of Form
N-PORT reporting.282
281

As evidence mounted that an invasion was likely to occur, funds may have adjusted their
exposure to securities that could be affected, but Commission staff were unable to review this ona market-wide basis until months after the invasion due to the delay in receiving information.

282

See, e.g., Reporting Modernization Proposing Release, supra note 274, at section IV.A. See also2015 Proposing Release, supra note 31, at text accompanying n.562.

199

We request comment on the proposed changes to the timing and frequency with whichfund would be required to file reports on Form N-PORT, including:201.

As proposed, should we require that funds file reports on Form N-PORT on amonthly, rather than quarterly, frequency? Because funds are currently required tomaintain the information required to prepare their reports on Form N-PORT on amonthly basis, within 30 days after the end of the reporting period, would they have
any increased burden due to filing such information monthly, within 30 days after theend of the reporting period, as proposed?
202.

As proposed, should we shorten the deadline for filing reports on Form N-PORT

to 30 days after the end of the reporting period? Should we instead use a different
deadline, such as 15, 45, or 60 days after the end of the reporting period?
203.

Should we, as proposed, revise General Instruction A of Form N-PORT and rule30b1-9 to remove the requirement for a fund to maintain in its records the informationthat is required to be included on Form N-PORT no later than 30 days after the end ofeach month because this information would be filed with the Commission under the
proposal?
b.

Publication Frequency

We are proposing to make funds’ monthly reports on Form N-PORT public 60 days after
the end of each monthly reporting period.283 Currently, only the report for the third month of
every quarter is made public, meaning the proposal would triple the amount of data madeavailable to investors on Form N-PORT in a given year. Thus, the proposal would enhance theability of investors to review and monitor information about their funds’ portfolios.284
283

See proposed General Instruction F of Form N-PORT.

284

We also propose to include additional information about the aggregate liquidity profiles of fund200

We continue to believe that publication of information collected on Form N-PORT canbenefit investors by assisting them in making more informed investment decisions.285 The publicavailability of monthly information, rather than information only for the third month of eachquarter, may enhance these benefits. For example, institutional investors could directly use themonthly information reported on Form N-PORT to evaluate fund portfolios and assess thepotential for returns and risks of a particular fund, and other investors may benefit from thirdparty analysis of the monthly data.
When the Commission first adopted Form N-PORT, it recognized potential negative
effects from frequent publication of Form N-PORT data. For example, the Commission
acknowledged the risk that frequent public disclosure could allow market participants to use
funds’ reports on Form N-PORT to engage in predatory trading such as front-running.286 The
Commission also recognized that more frequent public disclosure could permit free riding on afund’s research or trading expenditures by allowing other market participants to copy the fund’s
trades.287 In determining to maintain the status quo of quarterly public reporting based on thefund’s fiscal quarters, the Commission stated that it was important to assess the impact of thedata reported on Form N-PORT on the mix of information available to the public, and the extent
to which these changes might affect the potential for predatory trading, before determining

portfolios. See infra section II.E.1.c.
285

See Reporting Modernization Adopting Release, supra note 274, at section II.A.4.

286

See Reporting Modernization Adopting Release, supra note 274, at text accompanying n.488.
See also Investment Company Reporting Modernization, Investment Company Act Release No.
32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)] (noting same concerns).

287

Id. But see Morningstar Comment Letter on Reporting Modernization Proposing Release, FileNo. S7-08-15, available at https://www.sec.gov/comments/s7-08-15/s70815-355.pdf (discussing
data that funds providing more frequent disclosure do not appear to exhibit lower returns as aresult of predatory behavior).

201

whether more frequent or more timely public disclosure would be beneficial to investors infunds.288
Since the adoption of Form N-PORT, funds’ practices with respect to disclosure of
information about their portfolios have continued to evolve. For example, many funds, including
actively managed funds, voluntarily provide their complete portfolio holdings on their websites
on a monthly basis, typically lagged 30 days. Further, ETFs, including actively managed ETFs,
generally are required to provide transparency into their portfolio holdings on a daily basis.289
Many funds also provide monthly information about their portfolio holdings to third party data
aggregators, generally with a lag of 30 to 90 days, which in turn make them available toinvestors for a fee. We believe this demonstrates that investor demand for monthly portfolio
holdings already exists and that funds providing the information have determined the potential
for predatory trading is justified by the benefit to investors. The proposal would simply allow all
investors to receive similar data without paying a fee.290 Thus, we believe that many funds
already provide public transparency of their portfolio holdings more frequently than the proposal
would require, and that our proposal would level the playing field by standardizing the reporting
288

Reporting Modernization Adopting Release, supra note 274, at text accompanying nn.494-499
and accompanying text.

289

See 17 CFR 270.6c-11(c)(1)(i); Exchange-Traded Funds, Investment Company Act Release No.
33646 (Sep. 25, 2019) [84 FR 57162 (Oct. 24, 2019)] (“ETF Release”), at section II.C.4 (stating
that, although a few commenters raised concerns about front running or free riding if certain
ETFs were required to provide full daily portfolio transparency, the Commission believed it was
likely that all current ETFs that may rely on the rule already provide full portfolio transparency asa matter of market practice). In addition, a small number of “nontransparent” ETFs have received
an exemptive order from the Commission permitting them not to disclose their portfolio holdings
on a daily basis. As of Mar. 31, 2022, there were 45 nontransparent ETFs. Several of these
nontransparent ETFs voluntarily disclose their complete portfolios on a monthly basis with a onemonth lag.

290

For example, we understand that a majority of funds provide monthly information regarding theirportfolios to a third-party data aggregator. Individual investors are able to review the holdings
reported by funds providing data to the aggregator using an analysis tool for which the aggregatorcharges a fee.

202

timelines for all funds, putting the data in a single location that all investors can access withoutcharge, and using a standardized format that enables investor analysis of reported data.291 In
addition, under the proposal, the public information for each fund’s monthly report on Form NPORT would not be publicly available until 60 days after the end of the month, which is thesame delay that currently exists for funds’ reports for the third month of every quarter. This isdesigned to balance the benefits to investors of more frequent portfolio disclosure, while also
retaining the existing 60-day delay, which we believe is appropriate in order to make thedisclosed positions less timely and thus less likely to facilitate predatory trading practices.292 As aresult, and given that the proposal would provide data for additional monthly periods but would
not change the current 60-day delay in making funds’ reports on Form N-PORT public, theproposal is intended to mitigate opportunities for predatory trading or free riding of funds’
trading strategies.293
Furthermore, the proposal is intended to benefit investors through increased transparencyof Form N-PORT information, especially because it is provided in structured format and made in291

In addition, because we propose to make funds’ reports on Form N-PORT available for every
month, investors could use Form N-PORT to monitor how their funds respond to events
regardless of when they occur. For example, investors in some funds have access to Form NPORT filings for Mar. 2020, while investors in other funds do not. This is because Form N-PORT
data is publicly available for the third month of each fund’s fiscal quarter, but fiscal quarters vary
among funds.

292

Section 45(a) of the Investment Company Act requires information in reports filed with theCommission pursuant to the Act be made public unless we find that public disclosure is neither
necessary nor appropriate in the public interest or for the protection of investors. For the reasons
discussed above, we preliminarily believe that keeping the data for the first and second months ofa fund’s calendar quarter confidential until the expiration of the 60-day period provided by the
proposal is necessary or appropriate in the public interest for the protection of investors.

293

Form 13F is due 45 days after the end of each calendar quarter, meaning that every third month,a fund’s disclosure on Form N-PORT would not be the first mandatory disclosure of its portfolio.
Funds currently have the ability to designate certain holdings for the third month in every quarteras “miscellaneous securities,” which are not disclosed publicly on Form N-PORT. Because we
propose that all filings would eventually become public, we are extending this to filings for eachmonth. See text accompanying infra note 319.

203

a single, centralized database. Giving investors access to this information in monthly reports on
Form N-PORT may result in investors being better able to monitor the portfolios of their funds ina systematic fashion, and assist investors in choosing the investment products that most closelyalign with their desired levels of risk, asset exposures, and liquidity profiles.
The proposed reporting requirement also takes into account the cybersecurity risk profileof the information we are collecting. Under the proposal, we would receive the monthly
information 30 days after the end of each month. Because the monthly information reported on
Form N-PORT would be made public 30 days after it is filed with the Commission, theCommission would retain less confidential information than under the final rules theCommission adopted in 2016. This is because, under the proposal, information for each monthwould become public shortly after filing instead of information in only the third month of eachquarter being publicly disclosed.
Currently, certain information reported on Form N-PORT is nonpublic, even in the reportfor the third month of the quarter that is otherwise publicly available. This aspect of the form isunchanged in this proposal, and that information—which includes liquidity classifications forindividual portfolio investments—would remain nonpublic in individual reports. However,Commission staff may publish aggregate or other anonymized information about the nonpublic
elements of reports on Form N-PORT.294
We request comment on the proposed changes to the frequency with which funds’ reports
on Form N-PORT would be made public, including:204.

Should we, as proposed, make funds’ reports on Form N-PORT public on amonthly basis, 60 days after the end of the month to which they relate? How would294

See General Instruction F of Form N-PORT.

204

investors use the additional information? Are there other potential users of public
portfolio disclosures, including third-party users that provide services to investors,
who find the additional information useful, and through whom investors could benefit
indirectly?
205.

Many funds already provide monthly information about their portfolio holdingson their websites. Would investors benefit from having centralized information on
Form N-PORT that includes all funds, rather than having to look at each fund’s
website? Would investors benefit from having the information in a structured format
rather than the format the fund uses on its website? Would the proposed requirement
reduce costs for investors who currently use data aggregators to obtain holdings
information regarding the funds in which they invest?
206.

Should the lag between filing and publication be extended, for example to 45 days

after filing, or shortened, for example to 15 days after filing? Should reports be madepublic immediately upon filing?
207.

Previously, some have suggested that more frequent public disclosure could raisecosts for investors due to predatory trading or copy-catting of fund strategies. Given
that the proposal would provide data for additional monthly periods but would notchange the current 60-day delay in making funds’ reports on Form N-PORT public,
would the proposal raise costs for investors due to predatory trading or copy-catting?
What empirical data exists that supports these assertions?
208.

Would actively managed nontransparent ETFs, which generally do not disclose

their complete portfolios on a daily basis, be affected by the proposed requirement todisclose their portfolio on a 60-day delay differently than other actively managed

205

funds, and should we permit these funds to disclose their portfolios less frequently asa result?
209.

Do funds voluntarily publish data about their portfolios to compete for investors,

notwithstanding potential effects on their performance?
210.

Are there certain items on Form N-PORT that we propose to make public on amonthly basis that should only be public on a quarterly basis? If so, why is monthly
disclosure of the relevant item neither necessary nor appropriate in the public interest
or for the protection of investors?
c.

Public Reporting of Aggregate Liquidity Classifications

We are proposing to require that funds’ monthly reports on Form N-PORT would include
the percentage of a fund’s assets that fall into each of the three liquidity categories.295 To giveeffect to the proposed adjustments to a fund’s calculations of its level of highly liquid
investments and illiquid investments in the liquidity rule, a fund would be required to make thesame adjustments to its reported amount of highly liquid investments and illiquid investments,
rather than simply report the percent of assets the fund has classified in each category.
Specifically, a fund would reduce its reported amount of highly liquid assets by the amount ofhighly liquid assets that it posts as margin or collateral for derivatives transactions that are nothighly liquid and by the amount of the fund’s liabilities. A fund also would increase its reported
amount of illiquid assets by the amount of collateral available upon exit of illiquid derivatives
transactions.296 The fund’s adjustments are intended to more accurately reflect the availability of295

See proposed Item B.12.a of Form N-PORT.

296

See proposed Items B.8 and B.12.b of Form N-PORT. In certain situations, the adjustments
could result in the amounts of a fund’s investments in all three categories not summing to 100%of assets. For example, the reduction in the reportable amount of highly liquid assets may begreater than the increase in the reportable amount of illiquid assets, resulting in the percentages ofthe fund’s assets in each category summing to an amount below 100%. Funds would be required

206

assets to meet redemptions. We propose to require that a fund’s reported aggregate liquidity
classifications include these adjustments, rather than report the adjustments separately, to make iteasier for investors to understand the information a fund reports about its liquidity.
The public disclosure framework we are proposing is similar to the framework theCommission adopted in 2016.297 At that time, the Commission determined to require a fund to
publicly disclose the aggregate percentage of its portfolio assets representing each of theclassification categories to balance some commenters’ concerns about potential adverse effects
that could arise from public reporting of detailed portfolio liquidity information with investors’
need for improved information about funds’ liquidity risk profiles.298
As funds began to implement the liquidity rule’s classification requirements, and before
funds were required to provide public disclosure of aggregate liquidity classifications, theCommission received additional information about the potential challenges and concerns ofpublicly disclosing a fund’s aggregate liquidity profile at that time, namely the risk that the data
would be subjective, that it was presented in isolation, and that it lacked the context of otherdisclosures about the fund.299 In response, the Commission replaced this disclosure with narrativeliquidity disclosure in 2018.300 In removing the requirement to report aggregate liquidity
classifications, the Commission stated that the subjectivity involved in the classification process
to increase their reported amounts of moderately liquid investments if necessary to make theamounts the fund reports sum to 100%. See proposed Item B.12.b of Form N-PORT.
297

See Liquidity Rule Adopting Release, supra note 8, at section III.C.6.c.

298

See id., at text accompanying n.621.

299

See Investment Company Liquidity Disclosure, Investment Company Act Release No. 33046(Mar. 14, 2018) [83 FR 11905 (Mar. 19, 2018)] (“2018 Liquidity Disclosure Proposing Release”)
at nn.9-13 and accompanying text.

300

See 2018 Liquidity Disclosure Adopting Release, supra note 22. For discussion generally of theCommission’s stated rationale for making this change, see generally id. and 2018 Liquidity
Disclosure Proposing Release, supra note 299.

207

raises concerns when applied to public disclosure. Specifically, the Commission expressed
concern that the quantitative presentation of the aggregate liquidity information may imply
precision and uniformity in a way that obscures its subjectivity, and that funds may face
incentives to classify their investments as more liquid in order to make their funds appear more
attractive to investors, while also potentially increasing the risk of herding if funds adjusted theirportfolios in response to the disclosure requirement. In addition, the Commission believed that it
would not be appropriate to adapt Form N-PORT to provide narrative context to help investors
appreciate the fund’s liquidity risk profile and the subjective nature of classification.
The Commission judged at that time that effective disclosure of liquidity risks and their
management would be better achieved through prospectus and shareholder report disclosure
rather than Form N-PORT, and adopted a requirement to disclose in a narrative format a brief
discussion of the operation and effectiveness of its liquidity risk management program in thefund’s shareholder reports. The intent of the narrative framework was to provide investors with aholistic view of the liquidity risks of the fund and how effectively the fund’s liquidity risk
management program managed those risks on an ongoing basis over the reporting period.301
In practice, though, the narrative disclosure did not meaningfully augment otherdisclosure requirements.302 Instead, based on staff experience with several years of shareholder
reports covering a range of market conditions, including a market crisis in March 2020 that
included substantial liquidity concerns for certain securities, we found that the narrative
disclosure often appeared as a lengthy, boilerplate recitation of the requirements of rule 22e-4
that was not tailored to a particular fund and did not change as conditions in the market changed.
301

See, e.g., supra section II.A.1. To the extent a fund would be incentivized to manage its portfolio
so as to report higher amounts of highly liquid investments, we believe this would be consistent
with the focus in section 22 of the Act on preserving the redeemability of open-end funds.

302

Tailored Shareholder Reports Adopting Release, supra note 26, at text accompanying n.463.

208

For example, many funds’ liquidity disclosures did not change after the events of March 2020,
even for funds that invested in assets that had experienced severe liquidity issues. This meantthat investors had limited information about the liquidity of fund investments or how the fundmanaged that liquidity risk through these stressful events. We believe that this prevented
investors from fully evaluating the liquidity risks associated with a particular fund for purposesof making more informed investment decisions.
Investors and funds have made similar observations. In 2020, when the Commission
proposed amendments designed to streamline fund shareholder reports, some commenters
requested that we require funds to disclose their aggregate liquidity buckets.303 Other commentersstated that the narrative disclosure is not particularly relevant to investment decision making.304
Several other commenters also stated that they believed the narrative disclosure should be moved
from shareholder reports.305 We recently adopted amendments that remove the requirement todisclose the narrative disclosure in the shareholder reports.306

303

See, e.g., Comment Letter of Consumer Federation of America on 2020 Tailored Shareholder
Reports Proposing Release, File No. S7-09-20 (“[S]trongly encourag[ing] the Commission toreconsider its decision” to remove aggregate liquidity disclosure and characterizing narrative
disclosure as “boilerplate.”); see also Comment Letter of Tom and Mary on 2020 Tailored
Shareholder Reports Proposing Release, File No. S7-09-20 (“We think funds should be required
to disclose their aggregate liquidity bucketing in their annual report. We believe this information
is important to investors and will help them appreciate any liquidity risk.”). The comment file forthe 2020 Tailored Shareholder Reports Proposing Release, where these comment letters areavailable, is at https://www.sec.gov/comments/s7-09-20/s70920.htm.

304

See, e.g., Comment Letter of Ubiquity on 2020 Tailored Shareholder Reports Proposing Release,
File No. S7-09-20 (“Disclosure [of liquidity information in narrative format] is currently
worthless and even with” the proposed changes which were designed to retain the narrative
format, it “will continue to be worthless.”); see also Comment Letter of Tom Williams on 2020
Tailored Shareholder Reports Proposing Release; Feedback Flier of Olivia Brightly on 2020
Tailored Shareholder Reports Proposing Release.

305

See, e.g., Comment Letters of Morningstar Trustees, ICI, SIFMA. Fidelity, Dechert, JamesAngel, Lisa Barker, and T. Rowe Price on 2020 Tailored Shareholder Reports Proposing Release.

306

See Tailored Shareholder Reports Adopting Release, supra note 26.

209

Our proposed amendments to the liquidity rule, along with the years of experience thatfunds have gained in complying with the current rule, also have made the concerns theCommission identified in 2018 less relevant. Since 2018, the staff has conducted outreach withnumerous market participants, including fund complexes, liquidity classification vendors, andothers, and we are proposing several changes to rule 22e-4 that would prescribe additionalparameters for many aspects of the classification process. These changes include introducing theconcept of a 10% stressed trade size, establishing a minimum value impact standard, andremoving asset class classifications, which would reduce subjectivity in classifications andreduce variation in funds’ classification practices, even if incentives for a fund to mis-classify its
investments remain.307 These changes are intended to reduce the risk of subjectivity impeding an
investor’s understanding.
To the extent that subjectivity remains, investors reviewing this information on Form NPORT also will have access to additional information in fund prospectuses and shareholder
reports, which are delivered directly to investors. Prospectuses and shareholder reports would
provide additional information about the fund and context for the liquidity disclosure in Form NPORT, such as information about the factors affecting a fund’s risks, returns, and performance.308
In addition, the fact that the aggregate liquidity information would be required to change as
liquidity conditions in the market change, and that investors would be able to review thesechanges on a monthly basis and compare them against the fund’s prior reports would provide
additional context for investors who desire this information. Investors could also compare thefund’s reports to reports of similar funds, which could aid their understanding by allowing them
307

See, e.g., supra section II.A.1 and note 301.

308

See Reporting Modernization Adopting Release, supra note 274, at text following n.486 (“Form
N–PORT is not primarily designed for disclosing information to individual investors . . .”).

210

to focus on the differences. Finally, the proposed aggregate liquidity disclosure could improvethe mix of information available to investors. Though reports on Form N-PORT do not provide
information regarding a fund’s investment strategy and risk factors, the information reported on
Form N-PORT may complement the other information already available to investors in order toallow them to develop a fuller understanding of the fund and its risks.
We request comment on the proposed public availability of the aggregate liquidity
classifications funds would report on Form N-PORT, including:211.

Should we, as proposed, require funds to report publicly information regarding

the aggregate percentage of their portfolio in each of the three proposed liquidity
classification categories? Should we, as proposed, require that this information bereported publicly on a monthly basis and, if not, what factors are unique to liquidity
information that should result in it being publicized on a different frequency thanother information on Form N-PORT? Instead of, or in addition to, the percentages ofa fund’s investments in each of the three proposed liquidity categories, should werequire additional information to be reported? Is there any additional context, such as
narrative disclosure, that would also be useful to investors? Should that narrative
disclosure be located in Form N-PORT or somewhere else (e.g., a fund prospectus,
shareholder report, or website)?
212.

Instead of, or in addition to, aggregate liquidity information, should we require

position-level liquidity classifications to be reported publicly on Form N-PORT?
Should we instead require position-level liquidity classifications to be reported
publicly on a different form, such in a fund’s annual and semi-annual reports? How
frequently should this information be reported? Would position-level liquidity

211reporting improve funds’ liquidity classifications by allowing the public to review
and scrutinize liquidity classifications? Would position-level liquidity reporting
improve consistency in classification practices across funds by allowing funds to see
how other similarly situated funds had classified the same or similar investments?
Would position-level liquidity reporting improve investor access to or understandingof liquidity information, or would this information be difficult for investors tosynthesize or understand? Would position-level liquidity reporting simplify thereporting framework for funds if this disclosure were in lieu of separate aggregate
presentations? Would changes to the proposal, such as changes to how funds report
the effect of the collateral they hold against derivatives that are not highly liquid, orthe effect of liabilities, be necessary if we were to require position-level liquidity
reporting? Would there be potential negative effects of position-level liquidity
reporting? For example, would position-level liquidity reporting result in investors
being able to infer information about a fund or company, such as being able todetermine that a fund has material nonpublic information about an issuer because thefund categorizes the issuer’s securities as illiquid? Would position-level liquidity
reporting result in funds’ counterparties engaging in predatory trading practices withfunds, for example by adjusting the prices they bid for certain assets of a fund due togranular knowledge of how the fund categorizes the liquidity of its portfolio?
213.

Should we, as proposed, require adjustments to the percentages of funds’ assets inthe proposed liquidity categories to account for certain derivatives transactions?
Should we instead require information about derivatives transactions to be reported
separately? Should certain derivatives transactions be treated differently for these212purposes, for example by making differing adjustments based on whether a derivative
is exchange-traded, centrally cleared, made with certain categories of counterparty, orotherwise? Should we require differing adjustments for derivatives transactions
depending on the purpose, for example whether they are intended to hedge currency
or interest rate risks associated with one or more specific equity or fixed-income
investments held by the fund as described in rule 18f-4(c)(4)(i)(B)? Are there anychanges we should make to aid investor understanding of how funds’ use ofderivatives affects their liquidity?
214.

We propose to require that if the reported sum of a fund’s investments in each of

the three categories does not equal 100%, the fund must adjust the percentage ofassets attributed to the moderately liquid investment category so that the sum of thefund’s investments in each category equals 100%. Should we take a different
approach, such as making the adjustment optional, or permitting a fund to reportaggregate percentages that do not sum to 100%? Should we permit or require funds toprovide additional information, such as an explanatory note that the totals have beenadjusted and the amount of the adjustment? Are there other metrics for which weshould permit or require funds to modify the reported amounts?
215.

Would fund prospectuses and shareholder reports delivered directly to investors

provide sufficient context for the fund’s aggregate liquidity information that would be
disclosed on Form N-PORT under the proposal? Because Form N-PORT is notdelivered to investors, would investors who have sought out Form N-PORT
disclosure in the first instance be more likely to consider the information in thecontext of other publicly available information about the fund? If investors would not213have sufficient context when reviewing Form N-PORT, should we address this byrequiring that funds send their most recent report on Form N-PORT to investors when
they send other communications, such as their periodic reports or prospectus updates?
216.

Instead of, or in addition to, including information regarding funds’ aggregateliquidity profiles in Form N-PORT, as proposed, should we require that it be included
in other documents, such as funds’ annual and semi-annual shareholder reports? If so,should the disclosure included in funds’ annual and semi-annual shareholder reports,
or other documents, differ from what we propose to include in Form N-PORT? For
example, should any disclosure in funds’ annual and semi-annual shareholder reports,
or other documents be in a different format, such as a pie chart, or also include
narrative disclosure to allow funds to provide additional context?
d.

Other Proposed Amendments to Form N-PORT

In addition to our proposed amendments to require more timely reporting of informationand to enhance public transparency of funds’ portfolio holdings and liquidity classifications, weare proposing a few additional amendments to Form N-PORT. These additional amendments
include a new reporting item related to swing pricing, amendments to certain existing items toaccount for the proposal to make monthly Form N-PORT information available to the public,
other conforming amendments to reflect the proposed amendments to rule 22e-4, andamendments to certain entity identifiers.
In connection with our proposed amendments to swing pricing, we are proposing torequire enhanced transparency into the frequency and amount of a fund’s swing pricing
adjustments. Currently, if a fund were to engage in swing pricing, it would only be required toreport on Form N-CEN if the fund engaged in swing pricing during a given year and, if so, the214swing factor upper limit established by the fund.309 We are proposing to remove that reporting
requirement on Form N-CEN and replace it with a new reporting requirement on Form N-PORT
that would require information about the number of times the fund applied a swing factor during
the month and the amount of each swing factor applied.310 To recognize that a swing factor
adjustment could be positive (when the fund has net purchases) or negative (when the fund has
net redemptions), we propose to specify that a fund must use a plus sign before a positive swing
factor and a minus sign before a negative swing factor.311 More frequent and detailed information
about a fund’s use of swing pricing is intended to help the Commission assess the size of theprice adjustments funds are making during normal and stressed market conditions, as well as
how often funds apply swing factor adjustments. The public may also benefit from thisinformation to help facilitate an understanding of the frequency and size of swing factor
adjustments.
In addition, we are proposing to amend items that currently require funds to report certain
return and flow information for each of the preceding three months.312 Rather than require
information for the preceding three months, we are proposing to instead require a fund to reportthat information only for the month that the Form N-PORT report covers.313 The Commission
currently requires return and flow information for the preceding three months in a single reportto provide investors access to monthly data for a given quarter, given that investors currently
309

See Item C.21 of current Form N-CEN.

310

See proposed Item B.11 of Form N-PORT. Funds would be instructed to respond with “N/A”
when appropriate.

311

We also propose to add a definition of “swing factor” to Form N-PORT, which would crossreference the definition of this term in proposed rule 22c-1(d). See General Instruction E of
proposed Form N-PORT.

312

See Item B.5 and Item B.6 of current Form N-PORT.

313

See Item B.5 and Item B.6 of proposed Form N-PORT.

215

only have access to Form N-PORT reports for the third month of each quarter.314 Monthly data
for the preceding three months was also intended to avoid a potential investor misperception that
one month’s returns or flows represented returns or flows for the full quarter.315 Because, under
our proposal, investors would have access to monthly Form N-PORT reports, we propose toamend the period for which a fund must report return and flow information to align with monthly
public reporting.
For similar reasons, we are proposing to amend Part F of Form N-PORT, which currently
requires a fund to attach its complete portfolio holdings for the end of the first and third quartersof the fund’s fiscal year, presented in accordance with Regulation S-X, within 60 days after theend of the reporting period. We are proposing to require funds to file this disclosure within 60
days of the end of the reporting period for each month, with the exception of the last month of
the fund’s second and fourth fiscal quarters, because the latter portfolio holdings information isalready available in funds’ annual and semi-annual reports.316 That is, we propose that funds
would be required to file the portfolio disclosure on Part F of Form N-PORT ten times per year,
instead of the current requirement to file twice per year. When the Commission adopted Part F ofForm N-PORT, it recognized that not all investors may prefer to receive portfolio holdings
information in a structured XML format, and instead might prefer portfolio holdings schedules
presented using the form and content specified by Regulation S-X.317 The Commission stated that314

See Reporting Modernization Adopting Release, supra note 274, at paragraphs accompanying
nn.225, 232, and 250.

315

See id., at paragraphs accompanying nn.225 and 250.

316

See Part F of proposed Form N-PORT. Currently, Part F of Form N-PORT does not require
information for the second and fourth quarters of the fund’s fiscal year for the same reason. See
Item 6 of Form N-CSR and Reporting Modernization Adopting Release, supra note 274, atsection II.J.

317

Id. at section II.A.2.j.

216

requiring funds to attach these portfolio holdings schedules to reports on Form N-PORT would
provide the Commission, investors, and other potential users with access to funds’ current andhistorical portfolio holdings for those funds’ first and third fiscal quarters, as well as consolidate
these disclosures in a central location, together with other fund portfolio holdings disclosures inreports on Form N-CSR for funds’ second and fourth fiscal quarters.318 In conformance with theproposed requirement for funds to file their structured portfolio schedules on a monthly basis,and to make the monthly disclosure more useable for investors, we propose to amend Part F ofForm N-PORT so that investors would be able to access unstructured portfolio schedules
presented in accordance with Regulation S-X on the same frequency.
Similarly, we are proposing to amend Part D of Form N-PORT regarding miscellaneoussecurities to align with the proposal to make monthly Form N-PORT reports publicly available.
Form N-PORT currently contemplates that detailed information about miscellaneous securities,
which would remain nonpublic, would only be included in reports filed for the last month ofeach fiscal quarter.319 This is because today all information reported on Form N-PORT for the
first and second months of each quarter is nonpublic, which means there is no need for funds todesignate any of their investments for those reporting periods as miscellaneous securities.320
Although our proposed shift from quarterly to monthly public reporting is intended to improve
public transparency of funds’ portfolio holdings, we continue to believe that treating information
318

Id.

319

See Part D of current Form N-PORT. The form permits funds to report as “miscellaneoussecurities” an aggregate amount of portfolio investments that does not exceed 5% of the total
value of the fund’s portfolio investments, provided that the securities included in this category are
not restricted, have been held for not more than one year prior to the date of the related balance
sheet, and have not previously been reported by name to the shareholders, or set forth in any
registration statement, application, or report to shareholders or otherwise made available to the
public.

320

See Reporting Modernization Adopting Release, supra note 274, at text following n.424.

217

related to miscellaneous securities as nonpublic may serve to guard against the premature releaseof those securities positions and thus deter front-running and other predatory trading practices,and that for this reason public disclosure of miscellaneous securities continues to be neither
necessary nor appropriate in the public interest or for the protection of investors.321 At the sametime, it is important for the Commission to receive more detailed information about
miscellaneous securities holdings so the Commission has a complete record of the portfolio formonitoring, analysis, and checking for compliance with Regulation S-X.322 As a result, we areproposing to amend Part D of Form N-PORT to remove the language that limits reporting of
nonpublic information about individual miscellaneous securities holdings to reports filed for thelast month of each fiscal quarter. The proposed amendment would allow funds in their monthly
Form N-PORT reports to report publicly the aggregate amount of miscellaneous securities heldin Part C, while requiring funds to provide more detailed information in Part D about theindividual holdings in the miscellaneous securities category to the Commission on a nonpublic
basis.
We are also proposing amendments to Form N-PORT to reflect the proposed
amendments to rule 22e-4. For example, because we are proposing to remove the concept of areasonably anticipated trade size from rule 22e-4, we are proposing to replace references to thisconcept in an instruction related to classifying portions of a single holding in multiple liquidity
categories with references to the stressed trade size concept.323 We are also proposing to revise
the liquidity classifications a fund will report to reflect the revisions to the liquidity categories in321

See id. at n.421 and accompanying text.

322

See Reporting Modernization Adopting Release, supra note 274, at section II.A.2.h (requiringthat information about miscellaneous securities be reported to the Commission on a nonpublic
basis).

323

See Instructions to Item C.7 in proposed Form N-PORT.

218

rule 22e-4.324 Because we are proposing improvements to the way that a fund treats collateral for
certain derivatives transactions when calculating whether it holds sufficient assets to meet its
highly liquid investment minimum or holds an amount of illiquid assets that exceeds the 15%
limit, we also are proposing to revise the information open-end funds must report about thecollateral posted as margin or collateral in connection with certain derivatives transactions.325 We
are similarly proposing to revise the information a fund would report about the fund’s highly
liquid investments to reflect that not all highly liquid investments will count toward the fund’s
highly liquid investment minimum.326 In addition to reflecting changes to rule 22e-4, thesechanges are also designed to provide additional information to Commission staff regarding afund’s level of highly liquid assets and illiquid assets and the effect of derivatives transactions onthat amount.
In addition, we propose to amend certain items and definitions related to entity identifiersin the form. Specifically, we propose to amend the definition of LEI in the form to remove
language providing that, in the case of a financial institution that does not have an assigned LEI,
a fund should instead disclose the RSSD ID assigned by the National Information Center of theBoard of Governors of the Federal Reserve System, if any.327 Instead of classifying an RSSD ID
as an LEI for these purposes, we propose to provide separate line items where a fund would324

See Item B.8 in proposed Form N-PORT; General Instruction E (Definitions) in proposed Form
N-PORT.

325

See Item B.8 in proposed Form N-PORT. The proposed revisions would require a fund to reportthe value of its highly liquid investments that are assets that are posted as margin or collateral inconnection with moderately liquid or illiquid investments, and would require a fund to report thevalue of any margin or collateral posted in connection with an illiquid derivatives transaction,
where the fund would receive the value of the margin or collateral if it exited the derivatives
transaction.

326

See Item B.7.b in proposed Form N-PORT.

327

See General Instruction E of proposed Form N-PORT.

219

report an RSSD ID, if available, in the event that an LEI is not available for an entity.328 Thischange is designed to improve consistency and comparability of information funds report about
the instruments they hold, including issuers of those instruments and counterparties to certaintransactions.
217.

Should we require funds to report the number of times the fund applied a swing

factor and each swing factor applied, as proposed? Should we require the median,highest, and lowest (non-zero) swing factor applied for each reporting period on Form
N-PORT, rather than require disclosure of each swing factor applied?
218.

Should we require funds to provide additional information about swing pricing in

Form N-PORT reports, such as the swing pricing administrator’s determination to use
a lower market impact threshold or lower inflow swing threshold, if applicable?
Should we separately require funds to disclose information about market impact
factors, such as how many times a market impact factor was included in the swing
factor each month and the size of those market impact factors (e.g., either the size ofany market impact factor applied, or the median, highest, and lowest (non-zero)amount)? Should we require funds to provide information about their imposition ofredemption fees under rule 22c-2, which funds can use to recoup some of the direct
and indirect costs incurred as a result of short-term trading strategies, such as market
timing? If so, should we require funds to disclose in reports on Form N-PORT thenumber of times they imposed redemption fees during the period and the amount of
the fees? Should funds be required to itemize each fee charged, disclose the total

328

See Items B.4, C.1, C.10, and C.11 of proposed Form N-PORT.

220

amount charged during the period and the average fee charged, or some otherpresentation?
219.

Instead of, or in addition to, requiring information about swing pricing on Form

N-PORT, should we require funds to provide information about their use of swing
pricing in other locations? For example, would investors find this information moreaccessible if it were on fund websites, in registration statements, or in shareholder
reports?
220.

Should we require funds to provide return and flow information only for a single

month, as proposed, or should we continue to require funds to provide return and flow
information for the preceding three months? Even though investors would haveaccess to monthly reports on Form N-PORT, is it helpful to have return or flow
information for previous months in a single report to have a readily available point ofcomparison?
221.

Should we amend Form N-PORT to continue to maintain the confidentiality of

information about a fund’s miscellaneous securities for each reporting period, as
proposed? Are there other conforming amendments we should make to align Form NPORT reporting requirements with the proposed changes to the frequency funds mustfile these reports and the timeline for filing and public availability?
222.

Should we amend Form N-PORT to require a fund to attach its complete portfolio

holdings presented in accordance with Regulation S-X within 60 days after the end ofeach month except for the last month of the fund’s second and fourth fiscal quarters,
as proposed? Should we instead require a fund to file this information on a different
frequency, such as every month, without exception? Should we maintain the current

221filing schedule? Should we require funds to attach this information within a different
timeframe, such as no later than 45 days or 75 days after the end of the reporting
period? If we make changes to other aspects of the proposal, such as changes to thefrequency funds file reports on Form N-PORT, the delay between the end of thereporting period and filing, or the time at which filings are made public, should we
also make conforming changes to Part F?
223.

Are our proposed amendments to remove references to the concept of areasonably anticipated trade size in Form N-PORT and replace them with references
to the stressed trade size effective? Are there other conforming amendments weshould make to align Form N-PORT with the liquidity rule amendments?
224.

Should we, as proposed, amend Form N-PORT to require funds to identify thevalue of margin or collateral the fund has posted as margin or collateral in connection
with an illiquid derivatives transaction in order to provide a complete picture of theamount of illiquid investments for purposes of the liquidity rule’s 15% limit?
225.

As proposed, should we amend the definition of LEI in the form and provide aseparate item for providing an RSSD ID as an identifier, as applicable?
2.

Amendments to Form N-CEN

We are proposing amendments to Form N-CEN to identify and provide certain
information about service providers a fund uses to fulfill the requirements of rule 22e-4. The
amendments would require a fund to: (1) name each liquidity service provider; (2) provide
identifying information, including the legal entity identifier and location, for each liquidity
service provider; (3) identify if the liquidity service provider is affiliated with the fund or its
investment adviser; (4) identify the asset classes for which that liquidity service provider

222

provided classifications; and (5) indicate whether the service provider was hired or terminatedduring the reporting period. This information would allow the Commission and other participants
to track certain liquidity risk management practices.329 As liquidity classification services havebecome more widely used, the proposal would require information about whether and which
liquidity service providers are used, for what purpose, and for what period. Among other things,
this information would help us better understand potential trends or outliers in funds’ liquidity
classifications reported on Form N-PORT; for example, by analyzing classifications trends ofspecific vendors, we might distinguish patterns in how classifications might differ due to vendor
models or data.
As described above, we also propose to remove the current disclosure in Item C.21 ofForm N-CEN and replace it with a new reporting requirement on Form N-PORT to provide
enhanced transparency into the frequency and amount of a fund’s swing pricing adjustments.330
In addition, consistent with our proposed amendments to the definition of LEI in Form N-PORT,
we are proposing to make the same changes in Form N-CEN to separate the concepts of LEIs
and RSSD IDs.331
We request comment on the proposed amendments to Form N-CEN:
226.

Would the proposed reporting on liquidity classification service providers assist

investors and funds in better understanding how liquidity risk is managed at a fund?
Should any other information be provided about the liquidity classification service
provider?
329

See Liquidity Rule Adopting Release, supra note 8, at n.973.

330

Item C.21 of Form N-CEN is proposed to be revised to require disclosure on liquidity
classification services, as described above.

331

See Items B.16, B.17, C.5, C.6, C.9, C.10, C.11, C.12, C.13, C.14, C.15, C.16, C.17, D.12, D.13,
D.14, E.2, F.1, F.2, F.4, and Instructions to Item G.1 of proposed Form N-CEN.

223

227.

Should we require any information about a fund’s use of swing pricing on Form

N-CEN? How would this information relate to the information we propose to requireon Form N-PORT?
228.

As proposed, should we amend Form N-CEN to separate the concepts of LEI and

RSSD ID? As proposed, should funds be required to provide an RSSD ID, if
available, when an LEI is not available?
F.

Technical and Conforming Amendments

In September 2019, the Commission adopted new rule 6c-11 to allow ETFs that satisfy
certain conditions to operate without obtaining an exemptive order from the Commission.332 We
are proposing to make a technical amendment to the definition of ETF in rules 22e-4 and 22c-1,
as well as in Forms N-CEN and N-PORT, as a result of this rulemaking. Specifically, theproposed amendments would replace language in each definition that refers to “an exemptive
rule adopted by the Commission” with a direct reference to rule 6c-11.333
We are also proposing to make a conforming amendment to rule 31a-2. Specifically, this
proposed amendment to the recordkeeping rule would replace the reference to the current swing
pricing provisions in rule 22c-1(a)(3) with a reference to the proposed swing pricing provisions
in rule 22c-1(b).334
G.
Exemptive Order Rescission and Withdrawal of Commission Staff
Statements
In light of the scope of our proposed amendments to the liquidity rule, and pursuant toour authority under the Act to amend or rescind our orders when necessary or appropriate to the332

See ETF Release, supra note 289.

333

See proposed rule 22e-4(a) and proposed rule 22c-1(d); General Instruction E of proposed Form
N-CEN and General Instruction E of proposed Form N-PORT.

334

See proposed rule 31a-2(a)(2).

224

exercise of the powers conferred elsewhere in the Investment Company Act, we are proposing torescind an exemptive order that relates to rule 22e-4.335 As this order’s representations andconditions, and the relief provided, are predicated on rule 22e-4 in its current form, the proposed
amendments, if adopted, would render the order moot, superseded, and inconsistent with thefinal rule amendments. In addition, staff in the Division of Investment Management is reviewing
its no-action letters and other statements addressing compliance with rules 22e-4 and 22c-1 todetermine which letters and other staff statements, or portions thereof, should be withdrawn inconnection with any adoption of this proposal. Upon the adoption of any final rule amendments,
some of these letters and other staff statements, or portions thereof, would be moot, superseded,or otherwise inconsistent with the final rule amendments and, therefore, would be withdrawn.
The staff review would include, but would not necessarily be limited to, the staff no-action
letters and other staff statements listed below:


Investment Company Liquidity Risk Management Programs Frequently Asked
Questions (April 10, 2019);



Reflow, SEC Staff No-Action Letter (July 15, 2002);

Charles Schwab & Co., Inc., SEC Staff No-Action Letter (July 7, 1997);

Investment Company Institute, SEC Staff No-Action Letter (Feb. 9, 1973);



United Benefit, SEC Staff No-Action Letter (July 13, 1971);Investment Company Institute, SEC Staff No-Action Letter (Mar. 24, 1970); and

Investment Companies: Share Pricing: SEC Staff Views, Investment Company Act
Release No. 5569 [34 FR 383 (Dec. 27, 1968)].

335

See J.P. Morgan Investment Management Inc., et al., Investment Company Act Release No.
34180 (Jan. 21, 2021). See also section 38(a) of the Act, 15 U.S.C. 80a-37(a)225

Additionally, the staff statements, or portions thereof, may be withdrawn following therelevant underlying transition period discussed in section II.H below, if adopted, as determined
appropriate in connection with the staff’s review of those staff statements.
We request comment on the proposed rescission or withdraw of past Commission or staff
statements, and specifically on the following items:
229.

Are there additional letters or other statements, or portions thereof, that should be

withdrawn or rescinded? If so, commenters should identify the letter or statements,
state why it is relevant to the proposed rule, how it or any specific portion thereof
should be treated, and the reason.
230.

If the amendments to the liquidity rule are adopted, are there any questions andresponses in the staff FAQs that would still be relevant and helpful to retain?336
H.

Transition Periods

We propose to provide a transition period after the effective date of the proposed
amendments to give affected funds sufficient time to comply with any of the proposed changes
and associated disclosure and reporting requirements, if adopted, as described below. Based on
our experience, we believe the proposed compliance dates would provide an appropriate amountof time for funds to comply with the proposed rules, if adopted.
Twenty-Four-Month Compliance Date. We propose that 24 months after the effective
date of the amendments, all registered open-end management investment companies,
except for money market funds and exchange-traded funds, must comply with theproposed swing pricing requirement in rule 22c-1, as well as the swing pricing
disclosures applicable to these funds in the proposed amendments to Forms N-PORT and

336

See Liquidity FAQs, supra note 79.

226

N-1A.337 We also propose that 24 months after the effective date of the amendments,
funds, transfer agents, registered clearing agencies, and intermediaries must comply withthe proposed “hard close” requirement in rule 22c-1, and funds must comply with related
disclosure requirements we propose to require in Form N-1A.338


Twelve-Month Compliance Date. The proposed compliance period for all other aspects ofthe proposal is 12 months after the effective date of the amendments, if adopted, andincludes the following:o The proposed amendments to rule 22e-4, which include: (1) amending the rule’s
liquidity categories, including reducing the number of liquidity categories fromfour to three; (2) providing specific and consistent standards that funds would use
to classify investments, including by setting a stressed trade size and defining
when a sale or disposition would significantly change the market value of aninvestment; and (3) requiring daily classifications;339 ando The proposed amendments to Forms N-PORT and N-CEN, except the swing
pricing-related disclosure on Form N-PORT.
We request comment on the proposed transition dates, and specifically on the following

items:
231.

Are the proposed compliance dates appropriate? If not, why not? Is a longer or

shorter period necessary to allow affected funds to comply with one or more of theseparticular amendments, if adopted? If so, what would be a recommended compliance337

See proposed rule 22c-1(b); Item B.11 of proposed Form N-PORT; and Item 6(d) of proposed
Form N-1A.

338

See proposed rule 22c-1(a); Item 11(a) of proposed Form N-1A.

339

See proposed rule 22e-4.

227date? Should we provide a longer compliance date for smaller funds, and if so whatshould this be (for example, 36 months for compliance with the swing pricing
requirements, and 18 months for the other aspects of the proposal)? How should we
define a “smaller fund” for this purpose? For example, should a smaller fund be afund that, together with other investment companies in the same group of related
investment companies, has net assets of less than $1 billion as of the end of its mostrecent fiscal year?
232.

In particular, is a longer period necessary for funds to comply with the proposed

removal of the less liquid investment category and the amendment to the scope of
illiquid investments? How long might it take for funds and other parties to reduce thesettlement times for bank loans and other investments that funds currently classify asless liquid investments? Is a longer period necessary for retirement plan
recordkeepers or other intermediaries to make necessary changes to their systems?
233.

Should the compliance dates be staggered for certain provisions? For example,

should the compliance date for the hard close occur prior to the compliance date forswing pricing?
III.

ECONOMIC ANALYSISA.

Introduction

The Commission is mindful of the economic effects, including the benefits and costs, ofthe proposed amendments. Section 2(c) of the Act, Section 202(c) of the Advisers Act, andSection 3(f) of the Exchange Act direct the Commission, when engaging in rulemaking where it
is required to consider or determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors, whether the action will promote228efficiency, competition, and capital formation. In addition, Section 23(a)(2) of the Exchange Act,requires the Commission, when making rules under the Exchange Act, to consider among othermatters the impact that the rules would have on competition, and prohibits the Commission fromadopting any rule that would impose a burden on competition not necessary or appropriate infurtherance of the purposes of the Exchange Act. The analysis below addresses the likely
economic effects of the proposed amendments, including the anticipated benefits and costs of theamendments and their likely effects on efficiency, competition, and capital formation. The
Commission also discusses the potential economic effects of certain alternatives to theapproaches taken in this proposal.
Open-end funds serve as intermediaries between investors seeking to allocate capital andissuers seeking to raise capital by pooling a portfolio of investments and selling the shares of thisportfolio to investors. A prominent feature of open-end funds is the mismatch between theimmediate liquidity funds provide to their shareholders340 and the potential illiquidity of fund
portfolio investments (“liquidity mismatch”). In order to pay net redemptions or invest proceedsfrom net subscriptions, a fund generally incurs trading costs, which can, among other things, takethe form of bid-ask spreads, commissions, markups, markdowns, or market impact (the tendencyof large trades to shift prices in the market). Therefore, the liquidity mismatch can lead to nonnegligible trading costs associated with selling the fund’s less liquid portfolio investments inorder to meet investor redemptions or buying portfolio investments in order to accommodate
investor subscriptions.341
340

Section 22(e) of the Act establishes a shareholder right of prompt redemption in open-end funds
by requiring such funds to make payments on shareholder redemption requests within seven daysof receiving the request.

341

Unless otherwise specified, we use the term “less liquid” in this section to refer to investmentsthat are on the lower end of the liquidity spectrum, and not solely investments that are classified
as “less liquid investments” under the current rule 22e-4.

229

As such, the liquidity mismatch and associated trading costs in the open-end fund sector
present several potential problems, including: (1) funds may not be able to meet the statutory
obligation to satisfy investor redemptions within seven days without incurring significant trading
costs; (2) fund investors are subject to the risk of dilution; (3) fund investors’ anticipation thatthey may be diluted may create a first-mover advantage that incentivizes them to redeem theirshares before other investors do; and (4) fire sales that can be provoked by an increased pressure
to meet redemptions could further disrupt already stressed markets.342
Market stress events, such as the one that occurred during March 2020, may exacerbate
these issues.343 For example, during stress events investors may rebalance away from someinvestments into others for many reasons, including but not limited to, their general risk
tolerance, legal or investment policy restrictions, or short-term cash needs. To the extent thatsuch rebalancing activity is correlated across investors of the same fund or is correlated withdeterioration in the liquidity of the fund’s underlying assets, trading costs for the funds’
underlying investments may increase and non-transacting fund shareholders may become
exposed to increased dilution risk, which may lower future fund returns. In addition, the risk ofinvestor dilution associated with the illiquidity of funds’ underlying investments may create afirst-mover advantage that could lead to increased mutual fund redemptions.344
Fund managers may not fully incorporate potential future fund shareholder dilution into
their investment decisions for several reasons. First, potentially misaligned incentives between
fund shareholders and fund managers may cause some fund managers to hold portfolios withliquidity levels that could be insufficient to meet redemptions without imposing significant
342

See infra section III.B.3 for additional discussion of these issues.

343

See supra section I.B for a detailed discussion of the Mar. 2020 market events.

344

See infra section III.B.3 for additional discussion.

230dilution costs on non-transacting fund investors, especially during periods of market stress.
Second, fund investors may not have granular and timely enough information to adequately
assess the extent of the liquidity risk they are taking on and, therefore, cannot discipline theextent to which a fund manager exposes the fund’s shareholders to dilution risk. Finally, to theextent that first-mover advantage can lead to anticipatory mutual fund redemptions that could
impose costs on other market participants,345 fund managers do not necessarily have an incentive
to factor such costs into their investment decisions.
In light of these issues and our associated regulatory experience,346 the proposal seeks tofurther address liquidity externalities in the open-end fund sector. In particular, we expect the
proposal to: (1) enhance open-end funds’ liquidity; (2) improve funds’ anti-dilution andresilience mechanisms for any given level of liquidity; and (3) increase the transparency of openend funds’ liquidity management practices. Together, the proposed amendments may mitigate
liquidity externalities in the open-end fund sector by improving the ability of funds to meet
redemptions without imposing significant trading costs on investors. This, in turn, may reduce
the first-mover advantage associated with the dilution from trading costs and curtail run risk in
open-end funds,347 which is consistent with recent analyses discussing how more robust liquidity345

See e.g., Bing Zhu & René-Ojas Woltering, Is Fund Performance Driven by Flows into
Connected Funds? Spillover Effects in the Mutual Fund Industry, 45 J. ECON. & FIN. 544, no. 9(2021). See infra section III.B.3 for additional discussion.

346

See supra sections I and II for the discussion of regulatory experience.

347

We recognize that factors other than dilution related to trading costs – such as dilution fromfalling asset prices (market risk) and from potential differences between prices of underlying
investments used for a fund’s net asset value calculation and execution prices for theseinvestments – may also contribute to the first-mover advantage in redemptions and potential runs
in open-end funds. These and other considerations are discussed in greater detail in section III.B.3
below.

231

management may mitigate this risk.348 The proposed amendments may also reduce the likelihoodor the extent of future government interventions.349
The proposed amendments to the liquidity risk management (“LRM”) program350 are
designed to support funds’ ability to meet redemptions without significant trading costs, such aslarger haircuts associated with less liquid investments that open-end funds may hold in theirportfolios. Although less liquid investments generally offer a higher return, the trading costs
associated with selling these assets during periods of increased redemptions may offset this risk
premium, potentially resulting in a lower overall return for fund investors.351 Therefore, a morerobust liquidity management program that requires funds to hold more highly liquid investments
may benefit fund investors in the longer term. In addition, requiring funds to hold a greater shareof highly liquid investments may help limit the price impact that funds impose on underlying
markets when they sell less liquid assets to meet investor redemptions, especially during periodsof market stress.352

348

See Nicolas Valderrama, Can the Liquidity Rule Keep Mutual Funds Afloat? Contextualizing theCollapse of Third Avenue Management Focused Credit Fund, 70 CATH. U. L. REV. 317 (2021).
See also Landon Thomas Jr., A New Focus on Liquidity After a Fund's Collapse, N.Y. TIMES, Jan.
11, 2016, available at https://www.nytimes.com/2016/01/12/business/dealbook/a-newfocus-on-liquidity-after-a-funds-collapse.html.

349

See e.g., Antonio Falato et. al., Financial Fragility in the COVID-19 Crisis: The Case of
Investment Funds in Corporate Bond Markets, 123 J. MONETARY ECON. 35 (2021). The authors
discuss how the Federal Reserve bond purchase program helped to reverse mutual funds’
outflows during the Mar. 2020 period.

350

See supra section II.A.

351

See e.g., Mikhail Simutin, Cash Holdings and Mutual Fund Performance, 18 REV. FIN. 1425, no.
4 (2014), See also Aleksandra Rźeznik, Skilled Active Liquidity Management: Evidence from
Shocks to Fund Flows, (Jul. 29, 2021), available at SSRN: https://ssrn.com/abstract=4106412(retrieved from SSRN Elsevier database).

352

See e.g., Sergey Chernenko & Adi Sunderam, Liquidity Transformation in Asset Management:
Evidence From the Cash Holdings of Mutual Funds (National Bureau of Economic Research(NBER) working paper no. w22391, Jul. 11, 2016), available athttps://ssrn.com/abstract=2807702.

232

The goal of the proposed swing pricing and hard close requirements is to reduce thedilution of non-transacting fund shareholders by charging redeeming and subscribing investors
the trading costs they impose on a fund,353 which may mitigate the first-mover advantage
associated with the dilution from trading costs. Although swing pricing has not yet been
implemented by any fund in the U.S., usage of swing pricing in other jurisdictions has beenshown in certain cases to mitigate redemption pressure during periods of elevated market
volatility.354 We recognize that swing pricing may not always fully reduce the potential firstmover advantage associated with increasing trading costs and discourage associated investor
redemptions.355 However, even in these cases, we believe that investors would neverthelessbenefit from the proposed requirement because it would reduce the dilution of non-transacting
fund shareholders, regardless of the amount of trading activity by redeeming or subscribing
investors.
Coupled with the proposed amendments to the LRM program and the proposed swing
pricing and hard close requirements, the proposed reporting and public disclosure requirements
are aimed at promoting transparency and facilitating investors’ understanding of liquidity risk in
the open-end fund sector, as well as promoting transparency regarding funds’ application of353

See supra sections II.B and II.C.

354

See e.g., CSSF Paper, supra note 61; Dunghong Jin et. al., Swing Pricing and Fragility in OpenEnd Mutual Funds 35 REV. FIN. STUD. (2022); Benjamin King & James Semark, Reducing
Liquidity Mismatch in Open-Ended Funds: A Cost-Benefit Analysis (Bank of England working
paper no. 975, Apr. 22, 2022), available at https://ssrn.com/abstract=4106646.

355

See CSSF Paper, supra note 61; Claessens & Lewrick, supra note 61; ESMA, Recommendationof the European Systemic Risk Board (ESRB) on Liquidity Risk in Investment Funds (Nov. 12,2020), available at https://www.esma.europa.eu/document/recommendation-european-systemicrisk-board-esrb-liquidity-risk-in-investment-funds.

233

liquidity management tools.356 As a result, the proposed public disclosure requirements may aid
investors in making more efficient portfolio allocation decisions.
Many of the benefits and costs discussed below are difficult to quantify. For example, welack data that would help us predict how funds may adjust the liquidity of their portfolios in
response to the proposed liquidity rule amendments; the extent to which investors may reduce
their holdings in open-end funds as a result of the proposed swing pricing requirement and otheramendments; the extent to which investors may move capital from mutual funds to otherinvestment vehicles, such as closed-end funds, ETFs, or CITs; and the reduction in dilution costs
to investors in open-end funds as a result of the proposed amendments (which would depend on
investor subscription and redemption activity and the liquidity risk of underlying fundinvestments). Form N-PORT data is not sufficiently granular to allow such quantification, andmany of these effects will depend on how affected funds and investors would react to the
proposed amendments. While we have attempted to quantify economic effects where possible,
much of the discussion of economic effects is qualitative in nature. We seek comment on all
aspects of the economic analysis, especially any data or information that would enable aquantification of the proposal’s economic effects.
B.

Baseline
1.

Regulatory Baselinea.

Liquidity Risk Management Program

Under the current rule,357 open-end funds classify each portfolio investment into one of
the four defined liquidity categories, based on the number of days within which a fundreasonably expects the investment to be convertible to cash or sold or disposed of, without
356

See supra section II.E.

357

See Liquidity Rule Adopting Release, supra note 8.

234

significantly changing the investment’s market value. The four categories are: (1) “highly liquid
investments,” which are cash and investments convertible into cash in current market conditionsin three business days or less; (2) “moderately liquid investments,” which are convertible into
cash in current market conditions in more than three calendar days but in seven calendar days or
less; (3) “less liquid investments,” which are those the fund reasonably expects to be able to sellor dispose of in current market conditions in seven calendar days or less, but where the sale ordisposition is reasonably expected to settle in more than seven calendar days; and (4) “illiquid
investments,” which cannot be sold or disposed of in current market conditions in seven calendar
days or less.
A fund may generally classify and review its investments by asset class unless the fund oradviser has information about any market, trading, and investment-specific considerations that it
reasonably expects to affect significantly the liquidity characteristics of an investment comparedto the fund’s other portfolio holdings within that asset class.358 Among other requirements, openend funds generally are required to determine a minimum amount of highly liquid investments
they should maintain. In addition, all open-end funds are prohibited from acquiring any illiquid
investment if, immediately after the acquisition, the funds would have invested more than 15%of their net assets in illiquid assets; however, an investment in a liability position, such as a
derivative, is not subject to this limitation. Under the current rule, a fund is required to identify
the percentage of the fund’s highly liquid investments that it has posted as margin or collateral inconnection with derivatives transactions that the fund has classified as less than highly liquid.359
358

See rule 22e-4(b)(1)(ii)(A).

359

See rule 22e-4(b)(1)(ii)(C). In addition, funds currently are also required to exclude highly liquid
assets that are posted as margin or collateral in connection with non-highly liquid derivatives
transactions when determining whether the fund primarily holds highly liquid assets. See rule22e-4(b)(1)(iii)(B).

235

In classifying its investments under the current rule, a fund analyzes how quickly it cansell an investment without the sale “significantly” changing the investment’s market value.
Funds are required to determine two key inputs for this analysis. The first is the fund’sreasonably anticipated trade size.360 Reasonably anticipated trade size interacts with a fund’s
assessment of future redemption/subscription activity: for example, if the fund would anticipate
selling a large position relative to trading volume, the sale may depress the price. The second is
the determination of what constitutes a “significant” change in value. In both cases, the rule
allows funds to make their own reasonable assumptions.
Rule 22e-4 currently requires that funds review their liquidity classifications at least
monthly in connection with reporting on Form N-PORT, and more frequently if changes in
relevant market, trading, and investment-specific considerations are reasonably expected tomaterially affect one or more of their investments’ classifications.361 The current rule also
requires a fund to monitor and take timely actions related to the liquidity of its investments,
including changes to its liquidity profile. Specifically, the rule prohibits a fund from acquiring
any illiquid investment, if immediately after the acquisition, the fund would have invested morethan 15% of its net assets in illiquid investments that are assets.362 In addition, the rule requires afund to provide timely notice to its board, and to the Commission on Form N-RN, if the fundexceeds the 15% limit on illiquid investments, or if there is a shortfall of the fund’s highly liquid
investments below its highly liquid investment minimum for seven consecutive calendar days.363

360

Funds’ current practices in classifying the liquidity of their investments and otherwise complying
with rule 22e-4 may take consideration of the staff’s Liquidity FAQs. See, e.g., supra note 79.

361

See rule 22e-4(b)(1)(ii).

362

See rule 22e-4(b)(1)(iv).

363

See rule 22e-4(b)(1)(iv)(A) and rule 22e-4(b)(1)(iii)(A)(3); Form N-RN Parts B through D.

236

Rule 22e-4 currently requires a fund to determine a highly liquid investment minimum if
it does not primarily hold investments that are highly liquid. Funds that are subject to the highly
liquid investment minimum requirement must determine a highly liquid investment minimum
considering several factors, review this minimum at least annually, and adopt policies andprocedures to respond to a shortfall of the fund’s highly liquid investments below theminimum.364 The current exclusion for funds that invest primarily in highly liquid investments
provides some discretion to determine the level of highly liquid investments that constitutes
primarily.
b.

Swing Pricing

Currently, the rule allows open-end funds that are not excluded funds to use swing
pricing. The required swing pricing policies and procedures provide that funds must adjust their
NAV per share by a single swing factor or multiple factors that may vary based on the swing
threshold(s) crossed once the level of net purchases into or net redemptions from such fund has
exceeded the applicable swing threshold for the fund. The current rule permits a fund to
determine its own swing threshold for net purchases and net redemptions, based on aconsideration of certain factors the rule identifies.365 The fund’s swing factor is permitted to take
into account only the near-term costs expected to be incurred by the fund as a result of net
purchases or net redemptions on that day and may not exceed an upper limit of 2% of the day’s
NAV per share.
The determination of whether the fund’s level of net purchases or net redemptions has
exceeded the applicable swing threshold is permitted to be made based on receipt of sufficient364

See rule 22e-4(b)(1)(iii).

365

See supra note 176.

237

information about the fund investors’ daily purchase and redemption activity to allow the fund toreasonably estimate whether it has crossed the swing threshold with high confidence. This
investor flow information may consist of individual, aggregated, or netted orders, and may
include reasonable estimates where necessary.
In addition, rule 2a-4 requires, when determining the NAV, that funds reflect changes inholdings of portfolio securities and changes in the number of outstanding shares resulting from
distributions, redemptions, and repurchases no later than the first business day following thetrade date. This calculation method provides funds with additional time and flexibility toincorporate last-minute portfolio transactions into their NAV calculations on the business day
following the trade date, rather than on the trade date.366c.

Reporting Requirements

Registered management investment companies and ETFs organized as unit investment
trusts are required to file periodic reports on Form N-PORT about their portfolios and each of
their portfolio holdings as of month-end.367 Funds file these reports on a quarterly basis, witheach report due 60 days after the end of a fund’s fiscal quarter. Only information about thefund’s holdings for the third month of each fiscal quarter is available to the public. In addition to
the publicly available information on Form N-PORT, investors also have access to information
about the holdings of ETFs, including actively managed ETFs, which generally are required to366

See Adoption of rule 2a-4 Defining the Term “Current Net Asset Value” in Reference toRedeemable Securities Issued by a Registered Investment Company, Investment Company Act
Release No. 4105 (Dec. 22, 1964) [29 FR 19100 (Dec. 30, 1964)].

367

For purposes of discussions of filing requirements on Form N-PORT, the term “fund” refers toregistrants that currently are required to report on Form N-PORT, including open-end funds,
registered closed-end funds, and ETFs registered as unit investment trusts, and excluding money
market funds and small business investment companies.

238

provide transparency into their portfolio holdings on a daily basis.368 Many funds also provide
monthly information about their portfolio holdings to third party data aggregators, generally witha lag of 30 to 90 days, which in turn make them available to the public for a fee.
Registered investment companies other than face amount certificate companies also
report census-type information to the Commission annually on Form N-CEN, including
information related to fund service providers and whether a fund engaged in swing pricing
during the fiscal year and if so, what was the upper limit for the swing factor. The current
definition of LEI in Forms N-PORT and N-CEN provides that, in the case where a financial
institution does not have an assigned LEI, a fund should instead disclose the RSSD ID assignedby the National Information Center of the Board of Governors of the Federal Reserve System, if
any.369
Item 6 of Form N-1A also requires disclosure of a fund’s use of swing pricing if the fundchooses to use swing pricing. Specifically, these provisions require that a fund that uses swing
pricing explains the fund’s use of swing pricing, including its meaning, the circumstances underwhich the fund will use it, and the effects of swing pricing on the fund and investors, as well as
the upper limit the fund has set on the swing factor. Open-end funds are also required to file
Form N-RN with the Commission if more than 15% of the registrant’s net assets are, or become,
illiquid investments as defined in rule 22e-4 and if a registrant’s holdings in assets that are highly
liquid investments fall below its highly liquid investment minimum for more than 7 consecutive
calendar days. The form is required to be filed within one business day of the occurrence of these
events.
368

See supra note 289.

369

See General Instruction E of proposed Form N-PORT and Instructions to Item G.1 of the Form
N-CEN.

239

2.

Overview of Certain Industry Order Management Practices

Mutual fund orders can be submitted to funds directly or via an intermediary. An order
will be executed at a given day’s NAV if an intermediary—rather than solely the fund, its
designated transfer agent, or a registered securities clearing agency—receives the order by thefund’s pricing time, typically 4 p.m. ET, unless an intermediary specifically established anearlier cut-off time for investor orders. In particular, a financial intermediary currently can
submit an order that it received before 4 p.m. ET to a designated party after 4 p.m. ET for
execution at that day’s NAV.370 A fund discloses in its prospectus its pricing time and that apurchase or redemption is effected at a price that is based on the next NAV calculation after theorder is placed.371 After a fund finalizes its NAV calculation for a day, it disseminates the NAV
to pricing vendors, media, and intermediaries, typically between 6 p.m. ET and 8 p.m. ET. We
understand that certain intermediaries use order-processing systems that require knowledge of afund’s NAV. In addition, certain investor orders may also require knowledge of a fund’s NAV
before the order is sent to the fund.372 As a result, a fund does not receive certain orders until
after the fund distributed its NAV. For example, most retirement plan recordkeepers currently do
not process orders from investors until they receive a fund’s NAV and funds typically receive
orders from these intermediaries the next morning.
We understand that for orders submitted to funds by an intermediary, an intermediary
may net orders to varying degrees before their submission to a fund, a practice known as
omnibus accounting. In addition, intermediaries may submit one or more netted orders at a single
time, or may submit netted orders in batches at different times. For example, if an intermediary370

We note that this practice differs from other jurisdictions. See supra note 225.

371

See Item 11(a) of Form N-1A.

372

See supra section II.C.3.d.

240

does not submit orders until after it has received the fund’s final price, it may submit a single
order to the fund that reflects the net dollar amount or the number of fund shares to be purchased
or redeemed across all investors that submitted orders through that intermediary. If anintermediary does not wait until the fund’s final price is received, it may submit two orders: oneorder expressed in the net number of shares purchased or sold and one order expressed in the net
amount of dollars purchased or sold. Other intermediaries may aggregate orders at finer levels,
providing aggregate purchase and sale figures separately. While netting practices vary, they may
generally save intermediaries money, to the extent that intermediaries incur per transaction costs
when submitting orders to a fund.
Intermediaries may track investor orders to various degrees before they send the finalizedorders to funds. As such, the processing time of investor order may vary depending on the
tracking and netting process of an intermediary. For example, retirement accounts track holdings
and trades at the level of individual participants. Each participant account typically has multiple
sub accounts that are organized by contribution type or source (pretax, after-tax, employer
match, profit sharing, and other). We understand that, at least according to some plan rules,
compliance restrictions require plans to track an account according to contribution type orsource. For example, we understand that in at least some 401(k) plans, the third party
administrator or retirement plan recordkeeper receives participant trades at the participant
account level, after which, trades must be pro-rated (usually done based on today’s market value)and posted to each contribution type or source. The administrator or recordkeeper thenaggregates all participant trades for a particular plan and sends them to the trustee/custodian. The
trustee then posts the aggregated plan trades on a trust/custody system (i.e., for mandatory plan241

reporting purposes). Most trust companies then aggregate all of their client trades at the asset
level, generally to minimize trading or NSCC costs.
A significant portion of mutual fund orders is processed through NSCC’s Fund/SERV
platform. Within this platform, there exists a separate system that processes orders from defined
contribution plans called Defined Contribution Clearance & Settlement (“DCC&S”).
Fund/SERV for non-retirement clients allows firms to submit orders in currency, shares, or
exchanges before knowing the NAV.373 DCC&S, on the other hand, as a matter of practice does
not initiate order processing until the recordkeeper/third party administrator receives NAVs, aswell as daily and periodic distribution (dividend and capital gain) rates.374
We recognize that the current industry practices related to intermediaries’ ordersubmissions prevent funds from knowing their final net flows until later hours, which may be
one reason why no funds in the U.S. have implemented the optional swing pricing. We also
recognize that swing pricing has been employed in Europe, including by U.S.-based fundmanagers that also operate funds in Europe.375 There can be various reasons why swing pricing
has been successfully implemented in certain jurisdictions. For example, we understand thatintermediary order submission practices in Europe differ from those in the U.S.,376 allowing
funds to have more complete flow information before funds’ pricing time. Another factor that
may contribute to successful implementation of swing pricing in Europe is that the European
mutual fund sector does not depend as much as the U.S. mutual fund sector on defined
contribution retirement plans. According to ECB’s investment fund statistics, as of Q2 2022,
373

See https://www.dtcc.com/wealth-management-services/mutual-fund-services/fund-serv.

374

Id.

375

See supra section I.B for a more detailed discussion about use of swing pricing in Europe.

376

See supra note 225.

242

pension funds held approximately EUR 1.4 trillion (10%) in investment fund shares377 out of
14.8 trillion in aggregate value of European investment fund shares issued.378 This is in contrast
to U.S. where 54% of all mutual fund assets were held in retirement accounts as of Q1 2022.379
Further, according to one estimate, defined contribution retirement plans which, at least in the
U.S., have certain transactions that require knowledge of NAV in order to be processed by anintermediary represent only 17% of Europe’s total pension assets.380
3.

Liquidity Externalities in the Mutual Fund Sector

As discussed above, the liquidity mismatch can lead to non-negligible trading costs (e.g.,
spread or market impact costs) associated with selling the fund’s less liquid portfolio investments
in order to meet investor redemptions or buying portfolio investments in order to accommodate
investor subscriptions. The magnitude of these costs can vary depending on market conditions,the liquidity of the underlying investments held in a fund’s portfolio, and the size of funds’
transactions in the market. Consequently, if investors transact at a NAV that does not account for
ex-post trading costs, investors remaining in the fund have to bear these trading costs because
they are ultimately reflected in the fund’s future NAV.381 Therefore, the value of shares held by377

See Aggregated Balance Sheet of the Euro Area Pension Fund Sector, Section 1.1.1, European
Central Bank Statistical Data Warehouse, available at https://sdw.ecb.europa.eu/reports.do?
node=1000006465.

378

See Aggregated Balance Sheet of Euro Area Investment Funds, Section 1.1.2, European Central
Bank, Statistical Data Warehouse, available at https://sdw.ecb.europa.eu/reports.do?
node=1000003516.

379

See infra section III.B.4.ii.

380

See Press Release, Cerulli Associates, Europe’s Defined Contribution Market Is Set to Keep
Growing, (Mar. 3, 2022), available at https://www.cerulli.com/press-releases/europes-definedcontribution-market-is-set-to-keep-growing.

381

For example, suppose a fund is fully invested in an underlying asset which can be bought at$1.01 and sold at $0.99. If the NAV is struck at the “mid,” the fund’s share price is $1, and that iswhat redeeming investors receive for each fund share redeemed. However, after paying the
spread costs, the fund receives only $0.99 for each unit of the underlying asset that is sold to meet
redemptions. The fund therefore needs to sell more of its underlying asset position relative to thesize of the redemptions it experiences, reducing the assets held by non-transacting shareholders

243non-transacting investors can be diluted due to the trading costs associated with the past trading
activity of transacting fund investors, lowering the future returns of non-transacting fundshareholders.
We recognize that factors other than trading costs may contribute to dilution. For
example, some funds may hold investments that do not have an active and robust secondary
market (e.g., high-yield bonds or municipal securities), making them opaque and difficult toaccurately price in a timely manner, especially during times of market stress when some of theseassets may stop trading. In such events, the last reported prices for these assets may be prices
realized during pre-stress market conditions. As a result, the risk that the fund’s NAV may bebased on “stale” information if contemporaneous information about an asset’s current value isunavailable or less reliable may increase. If a fund’s NAV on a given date is based on such stale
information, net redemptions at that NAV can dilute non-transacting fund shareholders whenassets are eventually sold at prices that reflect their true, lower value.382 Prior to the compliance
date with the recent rule 2a-5,383 which aims to improve fund valuation practices, the stale pricing
phenomenon has been documented in fixed income funds, and has been found to contribute toand the fund’s subsequent NAV. For example, if 10% of the fund’s investors redeem their sharesat the NAV of $1, the fund needs to sell 10% / $0.99 = 10.1% of its underlying asset position tomeet redemptions and pay the spread costs. This leaves the remaining 90% of fund shares held by
non-transacting fund investors with 100% – 10.1% = 89.9% of the fund’s prior asset position.
Valued at the mid-price of $1, this reduces the fund’s NAV to 89.9% / 90% = $0.999.
382

We recognize that fund investors can also be diluted due to factors other than trading costs orstale pricing, such as market risk. Market risk can also result in accretion for non-transacting fundinvestors. For example, if a fund redeems shareholders at an NAV of $100 based on market
prices at the time NAV is struck, but is then able to liquidate assets at a higher valuation on
subsequent days due to changes in market prices, the value of shares held by non-transacting
shareholders will increase beyond the increase due solely to the change in the value of theunderlying investments held by the fund. While the value of the fund’s holdings can go both up
and down, such market risk amplifies the risk fund shareholders would otherwise experience.
However, since market prices may be very difficult to forecast, the degree to which such dilution
contributes to the first-mover advantage is unclear.

383

The Commission adopted rule 2a-5 in Dec. 2020, and the compliance date for funds was Sept. 8,2022. See Valuation Adopting Release, supra note 110.

244

strategic redemptions.384 However, we recognize that while trading costs are strictly dilutive,
pricing based on stale information can also result in accretion for non-transacting fund investors
if realized sale prices are higher than prices that were based on stale information and used for theNAV calculation.
The stylized example illustrated in Figure 4 below shows how trading costs can dilute afund that experiences net redemptions under two scenarios.385 Under the first scenario (the dottedline), the fund is able to sell investments to accommodate redemptions prior to striking its NAV
for the day and to reflect these trades as well as trading costs in the calculated NAV for thatday.386 This scenario is a theoretical benchmark that shows the minimum amount of dilution thatmust occur in order to accommodate redemptions. Under the second scenario (the solid line), thefund trades to accommodate redemptions after striking its NAV for the day. This scenario isgenerally the way U.S. funds currently accommodate investor redemptions, possibly because
funds do not have complete order flow information before the end of the trading day.387
Figure 4: Dilution Effects of Different Trading Timelines over 1 Day.

384

See, e.g., Jaewon Choi et. al., Sitting Bucks: Stale Pricing in Fixed Income Funds, 145 J. FIN.
ECON. 296, no. 2, Part A, (Aug. 2022).

385

The examples in the figure assume that a fund holds a portfolio of assets whose value is constantand that liquidating any portion of the portfolio to meet redemptions incurs a haircut of 10%. By
assuming that the value of the asset does not change, the examples isolate the effect of trading
costs on dilution from the effects of other sources of dilution such as market risk or stale NAVs.
See supra note 384. The haircut assumption in these stylized examples is used purely forillustrative purposes; haircuts on most assets held by open-end funds generally tend to be smaller.

386

We recognize that under the current rule 2a-4 under the Investment Company Act, funds are
permitted to reflect changes in their portfolio holdings in the first NAV calculation following thetrade date and, thus, are not required to include today’s trades in the calculation of today’s NAV.

387

We recognize that there may be other operational considerations that result in this common
practice. Therefore, even if a fund has complete order flow information before the trading day isover, it may choose to trade at a later date to accommodate today’s redemptions.

245

1.0
0.8
0.6
0.4
0.2
0.0

Post-Flow Value of $1 Initial Fund Investment ($)

Trading after NAV
Trading before NAV
-100

-80

-60

-40

-20

0

Net Fund Flow (%)

While these two scenarios result in similar dilution for lower levels of redemptions, larger
levels of redemptions can contribute nonlinearly to higher fund dilution under the second
scenario.388 This occurs because increasing redemptions result in increasing trading costs for thefund. These trading costs are borne solely by shareholders remaining in the fund, the number ofwhich decreases as more investors redeem. Under this hypothetical scenario, the fund eventuallyruns out of assets to sell and is unable to meet further redemptions. In contrast, under thetheoretical benchmark, the trading costs are borne by both redeeming investors and investors
remaining in the fund; therefore, the shareholder base absorbing the trading costs remains
constant regardless of the extent of redemptions. Accordingly, dilution increases proportionallyto the amount of redemptions and the corresponding increase in trading costs.

388

To the degree that funds determine their NAV using holdings as of the prior trading day, suchpractices may also contribute to dilution.

246

Figure 5 removes the theoretical benchmark scenario illustrated in Figure 4 and focuseson how dilution affects both redemptions and subscriptions when trading to accommodate
investor transactions occurs after the fund’s NAV has been struck.389

1.0
0.8
0.6
0.4
0.2
0.0

Post-Flow Value of $1 Initial Fund Investment ($)

Figure 5: The Dilutive Effects of Redemptions and Subscriptions.

-100

-50

0

50

100

Net Fund Flow (%)

The theoretical example in Figure 5 illustrates that the dilutive effect of trading costs isasymmetric for redemptions and subscriptions: while redemptions and subscriptions are similarly
dilutive for small levels of net flows, their effects are different for more extreme levels of net
flows. This occurs because a fund is not able to redeem 100% of its shares due to the non-linear
impact of trading costs related to meeting redemptions being absorbed solely by investors
remaining in the fund, as described above. In contrast, the trading costs related to subscriptions

389

To model the effect of net subscriptions, the example assumes that any new cash received by thefund is invested in the same underlying portfolio of investments, and that doing so incurs thesame 10% spread cost. Redemptions are represented as negative net flows to the left of 0 on thex-axis and subscriptions are represented as positive net flows to the right of 0 on the x-axis. We
recognize that dilution due to subscriptions does not occur until a fund incurs costs investing thesubscription proceeds. Therefore, a fund that holds its subscription proceeds in cash indefinitely
will not experience dilution.

247

are shared by both new subscribers and existing fund shareholders, which limits the maximum
amount of dilution that can occur due to subscriptions.
The simplified examples above illustrate that non-transacting fund investors are exposedto the dilution risk that arises from accommodating redemptions and subscriptions of transacting
fund investors. Incentives of mutual fund managers may not be sufficient to alleviate this risk forvarious reasons. For example, it is possible that investors do not have enough information to
fully understand the nature of the risk they are exposed to by investing in funds that hold lessliquid investments. In addition, investors in a fund may have varying preferences for risk andreturn, with some investors preferring investments with higher expected returns. Although
investments that face increased liquidity risk may deliver such higher returns, the returns offunds that hold these investments may also be subject to greater amounts of volatility.390 A fundmanager may choose to hold investments that are less liquid because of their potentially higher
returns, or because they offer exposure to a different set of risks (e.g., some investments may beless correlated with the market) than other investments in the fund’s portfolio. Because higher
returns tend to be associated with future inflows, it is possible that a fund manager’s incentives
are tilted towards earning higher returns relative to the risk they are taking on (though the
opposite is also possible).391 In particular, to the extent that holding less liquid investments may
increase a fund’s return (e.g., during normal market conditions) and consequently its AUM,
390

See, e.g., Kuan-Hui Lee, The World Price of Liquidity Risk, 99 J. FIN. ECON. 136 (2011). See
also Viral V. Acharya & Lasse H. Pedersen, Asset Pricing with Liquidity Risk, 77 J. FIN. ECON.
375 (2005). See also Lubos Pastor & Robert Stambaugh, Liquidity Risk and Expected Stock
Returns, 111 J. POL. ECON. 642 (2003).

391

In an open-end fund context, fund inflows are sensitive to fund returns, which can incentivize
fund managers to take on more risk. See, e.g., Jaewon Choi & Mathias Kronlund, Reaching for
Yield in Corporate Bond Mutual Funds, 31 REV. FIN. STUD. 1930 (2018); Jon A. Fulkerson et.
al., Return Chasing in Bond Funds, 22 J. FIXED INCOME, 90 (2013); Ferreira, Miguel A., et al.,The Flow-Performance Relationship around the World, 36 J. BANKING & FIN. 1759, no. 6(2012).

248

which determine the amount of management fees a fund manager collects, the fund manager may
choose to over-invest in such assets,392 not accounting for potential future trading costs theseinvestments may impose on a fund if the market conditions change, which would result in ahigher dilution risk for the fund’s investors. Investors may currently lack sufficiently granular
information to monitor for this possibility and to discipline the extent to which a fund manager
exposes the fund’s shareholders to dilution risk.
Investor dilution associated with illiquidity of funds’ underlying investments may createa first-mover advantage that may lead to increased mutual fund redemptions similar to bankruns.393 Such redemptions have been observed prior to the adoption of the current liquidity
rule.394 More specifically, fund investors may have an incentive to redeem their shares quickly ifthey believe that other investors will also redeem their shares and, by doing so, these otherinvestors will dilute the fund’s non-transacting shareholders. This first-mover advantage effect inmutual funds has been documented395 and studied as a mechanism for runs on mutual funds in

392

See, e.g., Linlin Ma et. al., Portfolio Manager Compensation in the U.S. Mutual Fund Industry,74(2) J. Fin. 587 (2019). See also Abhishek Bhardwaj et. al., Incentives of Fund Managers andPrecautionary Fire Sales (Oct. 29, 2021), available at https://ssrn.com/abstract=3952358.

393

Liquidity mismatch between assets and liabilities is a mechanism that creates bank run dynamics
that is well-accepted in the academic literature. See, e.g., Douglas Diamond & Philip Dybvig,
Bank Runs, Deposit Insurance, and Liquidity, 91 J. POL. ECON., 401 (1983).

394

See Third Avenue Trust and Third Avenue Management LLC; Notice of Application andTemporary Order, Investment Company Act Release No. 31943 (Dec. 16, 2015). See also note
348.

395

See Qi Chen et. al., Payoff Complementarities and Financial Frailty: Evidence From Mutual
Fund Outflows, 97 J. FIN. ECON. 239 (2010). See also Itay Goldstein et. al., Investor Flows andFragility in Corporate Bond Funds, 126 J. FIN. ECON. 592 (2017); Yiming Ma et. al., Bank Debt
Versus Mutual Fund Equity in Liquidity Provision (working paper, May 29, 2020), available athttps://ssrn.com/abstract=3489673; Luis Molestina et. al., Burned by Leverage? Flows andFragility in Bond Mutual Funds (European Central Bank (ECB) working paper no. 20202413,
May 19, 2020) available at https://ssrn.com/abstract=3605159 (retrieved from SSRN Elsevier
database); Michael Feroli et. al., Market Tantrums and Monetary Policy (Chicago BoothResearch Paper no. 14-09, Mar. 15, 2014), available at https://ssrn.com/abstract=2409092(retrieved from SSRN Elsevier database).

249

the academic literature.396 In addition, it has been shown that the effect of the first-moveradvantage may be larger for funds that hold less liquid investments.397 While the academic
literature on mutual fund runs generally relies on an exogenous mechanism to generate initial
redemptions from a fund or relies on frictions such as an inability of a fund to raise capital andexogenous shocks such as negative fund returns, the results may extend to trading costs to thedegree that dilution due to trading costs may reduce subsequent fund returns, which would
trigger runs in these models. At the same time, we recognize that while dilution risk arising fromtrading costs can create incentives for early redemptions, redemptions may also occur for reasons
unconnected to the pooled vehicle nature of the fund. For example, a recent working paper398
concludes that the behavior of mutual fund investors is similar to that of direct investors withoverlapping holdings, and suggests that systemic implications of mutual fund investors’ activities
are not necessarily due to the liquidity transformation feature of the mutual fund structure, but

396

See e.g., Yao Zeng, A Dynamic Theory of Mutual Fund Runs and Liquidity (working paper no.
42, Apr. 2017), available at https://ssrn.com/abstract=2907718 (retrieved from SSRN Elsevier
database). See also Stephen Morris et. al., Redemption Risk and Cash Hoarding by AssetManagers, 89 J. MONETARY ECON. 71 (2017); Yiming Ma et. al., Mutual Fund Liquidity
Management, Transformation and Reverse Flight to Liquidity (working paper, Jul. 29, 2020),
available at https://ssrn.com/abstract=3640861(retrieved from SSRN Elsevier database);and Philipp König & David Pothier, Safe but Fragile: Information Acquisition, Liquidity Support
and Redemption Runs, J. FIN. INTERMEDIATION (in press, corrected proof Dec. 15, 2020).

397

For example, one paper argues that fund investors’ behavior is affected by the expected behaviorof other investors in the fund and finds that funds with less liquid assets (where this investor
effect is stronger) exhibit stronger sensitivity of outflows to bad past performance than funds withmore liquid assets. See Qi Chen et. al., Payoff Complementarities and Financial Frailty:
Evidence From Mutual Fund Outflows, 97 J. FIN. ECON. 239 (2010). Also see Meijun Qian andBaşak Tanyeri, Litigation and Mutual-Fund Runs, 31 J FIN. STABILITY 119, (2017); and Sirio
Aramonte et. al., Measuring the Liquidity Profile of Mutual Funds (FEDS working paper no.
2019-55, Oct. 22, 2019), available at https://ssrn.com/abstract=3473039 (retrieved from SSRN
Elsevier database).

398

See Christof W. Stahel, Strategic Complementarity Among Investors with Overlapping
Portfolios (working paper, May 1, 2022), available at https://ssrn.com/abstract=3952125(retrieved from SSRN Elsevier database).

250

rather to the fact that mutual funds’ investors compete for finite asset market liquidity when theydecide to sell assets.
Mutual fund shareholders’ transactions may also affect markets for funds’ underlying
portfolio holdings. Academic research suggests that redemption-induced sales of securities bymutual funds can create price pressure in underlying markets which may result in a fire-sale forthese securities.399 Two studies have constructed measures of mutual fund outflow-induced pricepressure on various securities that are widely-used in the academic literature.400 Subsequentstudies use these price impact measures and claim that fire sales induced by investor redemptions
hurt peer funds’ performance and flows, leading to further asset sales that have a negative priceimpact.401 Another paper suggests that redemptions from mutual fund that hold less liquid
investments may contribute further to already existing poor market conditions by putting further
downward pressure on prices of illiquid stocks.402 In addition, one paper suggests that the399

See e.g., Shiyang Huang et. al., Does Liquidity Management Induce Fragility in Treasury Prices:
Evidence From Bond Mutual Funds (Dec. 30, 2021), available athttps://ssrn.com/abstract=3689674 (retrieved from SSRN Elsevier database). See also Hao Jiang
et. al., Does Mutual Fund Illiquidity Introduce Fragility Into Asset Prices? Evidence From the
Corporate Bond Market, 143 J. FIN. ECON. 277 (2021); Joshua D. Coval & Erik Stafford, Asset
Fire Sales (and Purchases) in Equity Markets, 86 J. FIN. ECON. 479, no. 2 (2007); Donald J.
Berndt et. al., Using Agent-Based Modeling to Assess Liquidity Mismatch in Open-End Bond
Funds, SUMMER SIM ’17: PROCEEDINGS OF THE SUMMER SIMULATION MULTI-CONFERENCE(Society for Computer Simulation International, San Diego, CA) (Jul. 2017); Valentin Haddad et.
al., When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and theFed’s Response, 34 REV. FIN. STUD. 5309, no.11 (2021).

400

See Coval & Stafford, supra. Also see Alex Edmans et. al., The Real Effects of Financial
Markets: The Impact of Prices on Takeovers, 67 J. FIN. 933 (2012).The constructed measures
exploit the idea that large investor redemptions place pressure on mutual funds to sell portfolio
holdings, and if these sales are sufficiently large, the funds’ liquidity needs may put downward
pressure on prices that is unrelated to the fundamental value of the underlying stocks.

401

See e.g., Pekka Honkanen & Daniel Schmidt, Learning From Noise? Price and Liquidity
Spillovers Around Mutual Fund Fire Sales, 12(2) REV. ASSET PRICING STUD. 593 (Jun. 2022);
Antonio Falato et. al., Fire-Sale Spillovers in Debt Markets, 76 J FIN. 3055 no. 6 (2021).

402

See Azi Ben-Rephael, Flight-to-Liquidity, Market Uncertainty, and the Actions of Mutual Fund
Investors, 31 J. FIN. INTERMEDIATION 30 (2017).

251exposure of stocks to fire-sale risk is bigger when mutual funds represent a larger share of thestock’s owners.403 Moreover, academic research also documents the potential effect of mutualfund flows on market-wide return volatility,404 on a wide array of corporate decisions,405 on the
choices of ETF security baskets,406 and on sell-side analysts’ recommendations on stocks subject
to mutual-fund flow-driven stock mispricings.407 However, several recent studies argue that the
aforementioned price impact measures are biased and that with the removal of this bias many
established in the prior literature results above no longer hold.408 Notwithstanding, while we
recognize that there is an ongoing debate in the academic literature as to the size of these effects,
the literature does point to a potential link between mutual fund flows and prices in theunderlying markets.

403

See George O. Aragon & Min S. Kim, Fire Sale Risk and Expected Stock Returns (Mar. 11,2022), available at https://ssrn.com/abstract=3663567 (retrieved from SSRN Elsevier database).

404

See e.g., Charles Cao et. al., An Empirical Analysis of the Dynamic Relationship Between Mutual
Fund Flow and Market Return Volatility, 32 J. BANKING & FIN. 2111, no. 10 (2008).

405

See e.g., Alex Edmans, supra. The authors find that mutual fund investor flows lead to pressure
on the price of underlying securities, which may in turn affect the probability of takeover of thefirm issuing the security. Also see Derrien, François et. al., Investor Horizons and Corporate
Policies, 48 J. FIN. & QUANTITATIVE ANALYSIS 1755 no. 6 (2013). Also see Norli, Øyvind et. al.,Liquidity and Shareholder Activism, 28 REV. FIN. STUD. 486 (2015). Also see B. Espen Eckbo et.
al., Are Stock-Financed Takeovers Opportunistic? 128 J. FIN. ECON. 443 (2018).

406

See Han Xiao, The Economics of ETF Redemptions (Apr. 10, 2022), available athttps://ssrn.com/abstract=4096222 (retrieved from SSRN Elsevier database).

407

See Johan Sulaeman & Kelsey D. Wei, Sell-Side Analysts and Stock Mispricing: Evidence From
Mutual Fund Flow-Driven Trading Pressure, 65 MGMT. SCI. 5427 no. 11 (2019).

408

See Elizabeth Berger, Selection Bias in Mutual Fund Fire Sales (Apr. 18, 2021), available athttps://ssrn.com/abstract=3011027 (retrieved from SSRN Elsevier database). See also Malcolm
Wardlaw, Measuring Mutual Fund Flow Pressure as Shock to Stock Returns, 75(6) J. FIN. 3221
(2020). See also Aleksandra and Rüdiger Weber, Money in the Right Hands: The Price Effects ofSpecialized Demand (Jan. 27, 2022), available at https://ssrn.com/abstract=4022634 (retrieved
from SSRN Elsevier database). Also see Simon Schmickler, Identifying the Price Impact of Fire
Sales Using High-Frequency Surprise Mutual Fund Flows (Jul. 8, 2020) available athttps://ssrn.com/abstract=3488791 (retrieved from SSRN Elsevier database).

252

We recognize that the proposed rules may not address all of the mechanisms that amplify
dilution in the mutual fund sector, such as system-wide market stress, misaligned incentives offund managers and investors, or stale information used for pricing of funds’ portfolio holdings.
However, even if these dilution-amplification mechanisms were not present, several factors may
inhibit mutual fund managers’ ability to allocate trading costs to transacting investors by using
currently available swing pricing. First, as discussed above, funds generally do not havecomplete information regarding their order flows at the time the NAV is struck, which may
restrict the ability to operationalize swing pricing. These U.S.-market specific operational
impediments cannot be mitigated by any single fund, which presents a collective action problem.
Second, even if funds were currently able to obtain complete flow data prior to striking their
NAVs, funds may be hesitant to implement swing pricing to the extent that some investors areaverse to bearing the full costs of their transactions via swing pricing, even if it is in the bestinterest of fund shareholders overall, or because investors in U.S. funds are unfamiliar withswing pricing.409 In addition, there may be a stigma attached to being the first fund to implement
swing pricing. To the extent that such a stigma effect is present in relation to swing pricing, it
may deter investors from choosing funds that could implement swing pricing under the optional
approach, and that could be a reason why no fund currently chooses to implement swing pricing.
Finally, even where fund managers are willing and able to employ liquidity risk management
tools, they may not be able to forecast accurately the extent to which episodes of market stresscan create challenges for mitigating dilution and meeting shareholder redemptions.410
409

We recognize, however, that open-end funds in other jurisdictions have successfully
implemented swing pricing, as discussed in section I.B and accompanying notes 59-63.

410

See supra section I.B for a discussion of how market stress events in Mar. 2020 caused somefunds to explore the potential of various emergency relief actions due to the combination ofabnormally large redemptions and deteriorating liquidity in markets for underlying fundinvestments.

253

4.

Affected Entitiesa.

Registered Investment Companies

The proposed amendments would mainly affect open-end funds registered with theCommission that are ETFs and mutual funds, excluding money-market funds (hereafter “mutual
funds”). Based on Form N-CEN filing data as of December 2021, we estimate that there are
11,488 of such funds that hold approximately $26 trillion in net assets.411 Among these, there are
9,043 mutual funds that hold approximately $21 trillion in net assets and 2,445 ETFs that holdapproximately $5.1 trillion in net assets.412 In addition, there are 1,650 mutual funds of funds that
hold approximately $3.1 trillion in net assets,413 as well as 150 feeder funds structured as ETFs
that hold $0.6 trillion in net assets.414
411

We use information reported on Form N-CEN to the Commission for each fund as of Dec. 2021,
incorporating filings and amendments to filings received through May 15, 2022. Net assets aremonthly average net assets during the reporting period identified on part C.19.a of Form N-CEN,and validated with Bloomberg (for ETFs). Current values are based on the most recent filings andamendments, which are based on fiscal years and are therefore not synchronous. We exclude
money market funds identified in Item C.3.g of the Form N-CEN from the count of the affected
open-end funds. These exclusions were also applied to the estimates that follow.
We note that the submission on the Form N-CEN is required on a yearly basis. Therefore, theseestimates do not include newly established funds that have not completed their first fiscal year
and ,therefore, have not filed the Form N-CEN yet, as well as they do not account for the funds
that have been terminated since the last Form N-CEN was filed. Therefore, the estimates for thenumber of funds and their net assets may be over- or under-estimated.

412

See id. ETFs are identified on Form N-CEN, Item C.3.a.i and include 781 in-kind ETFs withaverage total net assets of $1.2 trillion. UIT ETFs and exchange-traded managed funds are
excluded from ETF totals. Mutual funds are identified as those funds that are not identified as
ETFs or money market funds.

413

Funds of funds are identified in Item C.3.e. A fund of funds means a fund that acquires securities
issued by any other investment company in excess of the amounts permitted under paragraph (A)of section 12(d)(1) of the Act (15 U.S.C. 80a-12(d)(1)(A)), but does not include a fund that
acquires securities issued by another investment company solely in reliance on rule 12d1-1 underthe Act (CFR 270.12d1-1). We note that at most 29 closed-end funds of funds with net assets of$10 billion may be affected by the proposal indirectly, to the extent that they hold shares of openend funds.

414

See note 411. Master-feeder fund means a two-tiered arrangement in which one or more funds(each a feeder fund) holds shares of a single fund (the master fund) in accordance with section
12(d)(1)(E) of the Act (15 U.S.C. 80a-12(d)(1)(E)) or pursuant to exemptive relief granted by theCommission. See Instruction 4 to Item C.3 of Form N-CEN. Feeder funds are identified on Form

254

Different parts of the proposal would affect these two subsets of open-end funds
differently. In particular, the proposed amendments to the liquidity management program andcertain reporting requirements would affect both mutual funds and ETFs and the proposed hardclose and swing pricing requirements and related reporting requirements would affect only
mutual funds that are not feeder funds.
We estimate that there are 12,153 funds currently required to file reports on Form NPORT415 and there are 2,754 registrants required to file reports on Form N-CEN that would be
affected by the proposed reporting requirements.416 Among these, we estimate that the proposedchanges to the reporting requirements on Form N-PORT would also affect 660 closed-end funds
and 5 ETFs registered as unit investment trusts with assets of $0.4 trillion and $0.7 trillion,
respectively.417
i.

Open-End Fund Characteristics

Table 2 below shows the number and total assets of open-end funds by fund type.418 The
largest share (by assets) of funds (approximately 63.5% of assets held by all open-end funds) thatwould be affected by the proposal are equity funds, including U.S. and international equity
N-CEN, Item C.3.f.ii.
415

See infra note 540 and accompanying text.

416

See infra note 547 and accompanying text.

417

Closed-end investment companies are identified on Form N-CEN, Item B.6.b. Unit investment
trust (UIT) ETFs are funds of Form N-8B-2 registrants identified in Item B.6.g. which are also
reported in Item E.

418

We note that these statistics are estimated with the Morningstar data; therefore, there is adiscrepancy in the number of funds estimated based on the Form N-CEN and the number of funds
estimated based on the Morningstar data. This discrepancy exists for two reasons. First,
Morningstar data may not include all open-end funds due to its voluntary submission nature; assuch, the number of funds based on the Morningstar data may be under-estimated. Second, funds
may submit their data to Morningstar on a monthly data, while the submission on the Form NCEN is required on a yearly basis. Therefore, the number of funds estimated based on the Form
N-CEN may be under-estimated because it may not include new funds that haven’t filed the Form
yet.

255

funds. The second largest type of funds affected by the proposal is taxable bond funds, which on
aggregate holds approximately 19.6% of all open-end fund assets.
Table 2. Number of Affected Funds by Fund Type, as of December 2021.419
Other Open-End (notTotalincluding MMFs)
CATEGORY% of# of Assets % of Total # of Assets,# of Assets, $Total
Funds , $ trln Assets Funds $ trln
Funds
trln
Assets
Allocation
90 $0.03
0.37%
377$1.58 7.59%
467
$1.61
Alternative
193 $0.01
0.21%
167$0.13 0.64%
360
$0.15
Bank Loan
7 $0.020.26%
53$0.10 0.47%60$0.12
Commodities
116 $0.14
1.88%
28$0.03 0.16%
144
$0.17
Intern. Equity
507 $1.10
15.20% 1,108$3.18 15.30% 1,615$4.29
Miscellaneous
246 $0.14
1.86%
90$0.01 0.03%
336
$0.14
Municipal Bond
68 $0.08
1.13%
546$0.98 4.71%
614
$1.06
Nontrad. Equity
33 $0.02
0.23%
92$0.03 0.13%
125
$0.04
Sector Equity
481 $0.84
11.62%
398$0.63 3.02%
879
$1.47
Taxable Bond2
426 $1.17
16.06% 1,268$4.32 20.77% 1,694$5.49
US Equity
684 $3.72
51.18% 1,952$9.82 47.18% 2,636 $13.54
TOTAL
2,851 $7.26
100% 6,079 $20.82
100% 8,930 $28.08
ETFs1

419

% of
Total
Assets
5.72%
0.53%
0.42%
0.60%
15.27%
0.51%
3.79%
0.15%
5.24%
19.55%
48.22%
100%

Morningstar data, excluding funds of funds, feeder funds, and money market funds. 5 UIT ETFs,
with assets of approximately $0.7 trillion are included in the Morningstar ETF totals.

256

1. Includes ETFs that are UITs.
2. Excludes bank loan funds.

The proposal would disproportionally affect open-end funds that hold less liquid
investments. Among the investments classified by open-end funds in December 2021, $27.3
trillion of all investments were reported as highly liquid, $441 billion of all investments werereported as moderately liquid, $276 billion of all investments were reported as less liquid, and$198 billion of all investments were reported as illiquid. Among the investments reported as lessliquid, 71% ($194 billion) are bank loan interests, 10% ($26 billion) are debt securities, 9% ($25billion) are equities, and 6% ($17 billion) are mortgage-backed securities.420 Therefore, we
believe that the proposal to remove the less liquid category would primarily affect open-end
funds that hold bank loan interests. As of December 2021, there are 746 open-end funds thatclassified approximately $204 billion in bank loan interests, which represents approximately
0.7% of all open-end fund investments classified,421 and makes up approximately 15% of thebank loan market.422 Among these bank loan interests, 95% were reported as less liquid. We
recognize that some open-end funds have large concentrations in bank loan interests and are
typically referred to as “bank loan” funds. As shown in Table 2 above, as of December 2021,
there are 53 bank loan funds that hold approximately 0.5% of total open-end fund assets.
The proposal would also disproportionally affect open-end funds that hold investments
whose fair value is measured using an unobservable input that is significant to the overall420

In addition to these, a smaller number of other categories are classified as less liquid
investments.

421

Source: Form N-PORT. Loan investments are identified via Form N-PORT, Item C.4.a andliquidity classifications are from Form N-PORT, Item C.7.

422

See Leveraged Loan Primer, supra note 99 (stating that the S&P/LSTA Loan Index, which isused as a proxy for market size in the U.S., totaled approximately $1.375 trillion as of Feb. 2022).

257

measurement.423 We estimate that, as of December 2021, 2,006 open-end funds reported $76.5
billion in investments that were valued using unobservable inputs that are significant to theoverall measurement, which is approximately 0.27% of all open-end fund assets.424 Among these,$16.9 billion were classified as highly liquid investments and $2.1 billion as moderately liquid
investments by 541 funds.425 In addition, $7.8 billion were classified into less liquid category and$49.8 billion were classified into the illiquid category.
ii.

Open-End Fund Flows

To inform our understanding of historical redemption and subscription patterns, weanalyzed daily fund flow data during the period between January 2009 and December 2021.426
Table 3 below shows net fund flow percentiles pooled across time and funds. Figure 6 below
shows the time series of daily fund flow percentiles for equity and fixed income funds, showing
1st, 5th, 50th, 95th, and 99th percentiles of fund flows for each day. Similarly, Figure 7 shows the423

See supra note 111.

424

Source: Form N-PORT. The fair value hierarchy for an investment are identified on Form NPORT, Item C.8., and liquidity classifications are identified on Form N-PORT, Item C.7. We
observed that the investments classified as highly liquid that were Level 3 investments primarily
were mortgage-backed securities.

425

Id.

426

Data source: Morningstar Fund Flow Data. We restrict our analysis to funds that have a “Global
Broad Category Group” of Equity or Fixed Income because we believe the data for other types offunds (e.g., Alternative and Commodity funds) contain more extreme values that may be
spurious. We restrict our analysis to include fund flow data starting 2009. While some
Morningstar data is available for 2008, we have not included that data in our historical flow
analyses because of gaps in the 2008 data (e.g., the 2008 dataset covers a more limited set offunds). We trim outliers from the dataset by restricting outflows from a fund to be no more than
100% of AUM and inflows to be no more than 300% of AUM on a given day or 1000% of AUM
for a given week when analyzing weekly flows. For daily flows, we determine the flow
percentage by dividing dollar flows on date T by total net assets on date T. This assume that total
net assets on a given day do not account for that day’s flows. Similarly, for weekly flows, weaggregate by business week, summing dollar flows over the course of the week and dividing by
the first available day’s net assets in that week. Making the opposite assumption, that total net
assets on a given day do incorporate that day’s flows, does not significantly alter our results.

258

time series of weekly fund flow percentiles for equity and fixed income funds, showing the 1st,
5th, 50th, and 95th, and 99th percentiles of fund flows for each week.
Table 3 shows, for example, that weekly outflows exceed roughly 7% in one out of one
hundred fund-week observations and that weekly outflows exceed 1.3% in five out of one
hundred observations.427 To help put these figures in context statistically, we see that the fundflow distribution exhibits heavy left (and right) tails relative to the normal distribution. That is,events such as outflows of 6.6% should occur far fewer than one out of one hundred times iffund flows were normally distributed. Similarly, events such as inflows of 8.3% should occur far
fewer than one out of one hundred times if fund flows are normally distributed.
Whereas Table 3 looks at percentages across all funds and days or weeks, Figure 6 shows
the cross-section of daily fund flows at each point in time and breaks up the fund universe into
fixed income and equity funds. Figure 6 shows that the dispersion of flows exhibits significant
variation; there are times when percentiles widen out considerably, even during non-stressedmarket conditions.428 Times of substantial flows into bond funds do not necessarily correspond toflows into equity funds. What this implies is that looking at the distributions separately may
reveal greater dispersion, as flows across the sectors diversify each other. For equities, a numberof time periods exhibit cross-sections in which the lowest percentile of funds have daily outflows
in excess of 10%. For bond funds, flows of this magnitude are rarer. However, such episodes do
427

See supra note 426 for a description of how the data set was constructed.

428

See id. Daily flows for equity funds have notable seasonal spikes that tend to occur during themonth of Dec., independent of market stress events. These flow spikes may be attributable to any
year-end rebalancing of investors from, e.g., underperforming funds into outperforming funds; toyear-end distributions that are characterized as flows by Morningstar and subsequently reinvested; or to spurious or errant data points. We believe that latter is less likely because theseseasonal spikes are still evident when the data is aggregated to the weekly level in Figure 7. To
the extent seasonal fund flow spikes are driven by predictable events such as, e.g., capital gains
distributions, fund managers are more likely to be able to plan for any impacts of such events on afund, include funds that hold investments with lower liquidity.

259

occur for bond funds and correspond with times of broader stress in fixed income markets.
Similarly, Figure 7, which shows weekly flows, also shows that outflows in the lowest percentileof funds of below 10% are not uncommon, both in bonds and in equities.429 For fixed income
funds, both the daily and weekly flow plots in Figures 6 and 7 show that during March 2020,
some funds experienced significant outflows, consistent with the aggregate monthly outflows
discussed in section I.B.
Table 3. Pooled Fund Flows, as a % of Net Assets.

Daily fund flows
Weekly fund flows

429

1st
-1.60%-6.60%

Percentile
5th
50th-0.30%
0%-1.30%
0%

See id.

260

95th
0.40%
1.80%

99th
2%
8.30%

Figure 6. Daily Equity and Fixed Income Fund Flows over Time, % of Net Assets.
Equity20

100Daily Fund Flow (%)

-10

-20

Fixed Income

20

10

0

-10

-20

2009

2010

2011

2012

2013

Flow Percentile:

2014

2015

2016

Date

1st and 99th2017

5th and 95th

261

2018

2019

2020

50th (median)

2021

2022

Figure 7. Weekly Equity and Fixed Income Fund Flows over Time, % of Net Assets.
Equity20

10Weekly Fund Flow (%)

0

-10

-20
Fixed Income

20

10

0

-10

-20
2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Date
Flow Percentile:

1st and 99th

5th and 95th

262

50th (median)

2021

2022

b.

Fund Intermediaries

As discussed above, the proposed hard close requirement would affect a large group ofintermediaries. Specifically, under the hard close requirement, intermediaries generally would
need to submit orders for fund shares earlier than they currently do for those orders to receivethat day’s price. As discussed in greater detail below, this may affect all market participantssending orders to relevant funds, including broker-dealers, registered investment advisers,
retirement plan recordkeepers and administrators, banks, insurance companies, and otherregistered investment companies.
i.

Broker-Dealers

Based on an analysis of Financial and Operational Combined Uniform Single (FOCUS)
Reports filings as of December 2021, there were approximately 3,508 registered broker-dealerswith over 240 million customer accounts.430 In total, these broker-dealers have over $5 trillion in
total assets as reported on Form X-17A-5.431 More than two-thirds of all broker-dealer assets andjust under one-third of all customer accounts are held by the 21 largest broker-dealers, as shownin Table 4.432 Of the broker-dealers registered with the Commission as of December 2021, 434
broker-dealers were dually registered as investment advisers.433
430

The data is obtained from FOCUS filings as of Dec. 2021. There may be a double-counting ofcustomer accounts among, in particular, the larger broker-dealers as they may report introducing
broker-dealer accounts as well in their role as clearing broker-dealers. Customer Accounts
includes both broker-dealer and investment adviser accounts for dual-registrants.

431

Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the FOCUS
filings (Form X-17A-5 Part II and Part IIA, available at https://www.sec.gov/files/formx-17a5_2.pdf) and correspond to balance sheet total assets for the broker-dealer. The Commission does
not have an estimate of the total amount of customer assets for broker-dealers because that
information is not included in FOCUS filings. The Commission estimates broker-dealer size fromthe total balance sheet assets as described above.

432

Approximately $4.97 trillion of total assets of broker-dealers (98.7%) are at broker-dealers withtotal assets in excess of $1 billion.

433

This estimate includes the number of broker-dealers who are also registered with either theCommission or a state as an investment adviser.

263

Table 4. Number of Broker-Dealers by Total Assets, as of December 2021.

Size of Broker-Dealer(Total Assets)

Total Num.
of BDs>$50 billion$1 billion to $50 billion$500 million to $1 billion$100 million to $500 million$10 million to $100 million$1 million to $10 million<$1 million
Total

21
124
30
147
532
1,065
1,589
3,508

ii.

Cumulative
Total Assets($ bln)Cumulative Num.
of Customer
Accounts

3,682
1,581
22
31
19
4
0.5
5,338

75,808,084
153,243,391
518,5459,559,082
128,669
885,269
10,854
240,153,894

Retirement Plans

Retirement plans and accounts are major holders of mutual funds. We estimate that, as of
2022Q1, approximately 54% of non-MMF mutual fund assets were held in retirement accounts,
which include employer-sponsored defined contribution (“DC”) plans and individual retirement
accounts (“IRAs”).434 At year-end 2021, mutual funds accounted for 58% ($6.4 trillion) of DC
plan assets and 45% ($6.2 trillion) of IRA assets.435 Among DC plans, 401(k) plans held $5
trillion of assets in mutual funds, 403(b) plans held $670 billion, other private-sector DC plans
held $539 billion, and 457 plans held $177 billion.436 Combined, the mutual fund assets held in
DC plans and IRAs at the end of 2021 accounted for 32% of the $39.4 trillion U.S. retirement
market.437

434

See Inv. Co. Inst. (ICI), The U.S. Retirement Market, First Quarter 2022 (June), Table 28,
available at https://www.ici.org/system/files/2022-06/ret_22_q1_data.xls.

435

See ICI, 2022 Investment Company Factbook, Chapter 8, available athttps://www.icifactbook.org/pdf/2022_factbook.pdf.

436

Id.

437

Id.

264

According to a recent study, DC plans vary in size by both number of participants andplan assets.438 For example, as shown in the Table 5 below, among 401(k) plans, 94.1% of plans
had less than $10 million of plan assets. While the number of plans with plan assets over $1
billion is relatively small, these largest plans manage approximately 47.8% of all assets held in
401(k) plans.
Table 5. Distribution of 401(k) Plans by Plan Assets, 2018.
Plan assets

Less than $1M$1M to $10M>$10M to $50M>$50M to $100M>$100M to $250M>$250M to $500M>$500M to $1B
More than $1B
All plans

Plans
Number
Percent
343,108
208,789
26,458
3,564
2,407
1,034
603
659
586,622

Participants
Thousands Percent

58.5%
35.6
4.5
0.6
0.4
0.2
0.1
0.1
100.0

6,007.5
13,660.6
9,894.5
4,808.0
6,744.8
5,395.1
4,763.9
20,073.4
71,347.7

8.4%
19.1
13.9
6.7
9.5
7.6
6.7
28.1
100.0

AssetsBillions Percent
of dollars$107.1
2.1%
620.7
12.2
532.4
10.4
247.1
4.8
374.7
7.3
362.1
7.1
424.1
8.3
2,439.7
47.8
5,108.0
100.0

The same study shows that mutual funds held 43% of private-sector 401(k) plan assets inthe sample in 2018. CITs held 33% of assets, guaranteed investment contracts (GICs) held 7%,
separate accounts held 3%, and the remaining 14% were invested in individual stocks (including
company stock), individual bonds, brokerage, and other investments.439 While mutual funds
438

See BrightScope & Investment Company Institute, 2021, The BrightScope/ICI DefinedContribution Plan Profile: A Close Look at 401(k) Plans, 2018 (“BrightScope/ICI Report”), at 7,
Ex. 1.2, available at www.ici.org/files/2021/21_ppr_dcplan_profile_401k.pdf. These data islimited to 401(k) plans covered in the Department of Labor Form 5500 research file, as we do nothave data on the size distribution for other types of DC plans. We note, however, that 401(k)plans represent approximately 70.4% of all DC plan assets. Investment Company Institute, “TheUS Retirement Market, First Quarter 2022” (June), Table 6, available athttps://www.ici.org/system/files/2022-06/ret_22_q1_data.xls.

439

Id.

265

accounted for at least 55% of assets in plans with less than $1 billion of plan assets, theyaccounted for only 23% of assets in plans with more than $1 billion of plan assets (dominated by
CITs that accounted for 49% of plan assets).440
iii.

Retirement Plan Recordkeepers

According to one source, as of September 2021, the total DC recordkeeping assets wereapproximately $9.7 trillion, as shown in Table 6 below.441 The largest recordkeeper managed
approximately 33% of all recordkeeping assets, and the 10 largest recordkeepers managed
approximately 83% of all recordkeeping assets.
Table 6. Largest Retirement Plan Recordkeepers, as of September 30, 2021.

Recordkeeper
Fidelity Investments
Empower
TIAA-CREF
Vanguard Group
Alight Solutions
Voya Financial
Principal Financial GroupBank of America
Prudential Financial
T. Rowe Price GroupAll others
TOTAL

Recordkeeping
Assets, $ billion$3,169$1,048
$710
$702
$545
$499
$449
$346
$283
$268
$1,676$9,695

440

Id.

441

Larry Rothman, Large Record Keepers Keep Dominating Market, PENSIONS & INVESTMENTS,(Apr. 11, 2022), available at https://www.pionline.com/interactive/large-record-keepers-keepdominating-market.

266

c.

Other Affected Entities

A significant portion of mutual fund orders are processed through NSCC’s Fund/SERV
platform: in 2021 Fund/SERV processed 261 million mutual fund transactions with the aggregate
value of $8.5 trillion,442 which we estimate to be at least 36.8% of the value of all mutual fundtransactions.443 A part of the platform, referred to as Defined Contribution Clearance &Settlement, focuses on purchase, redemption, and exchange transactions in defined contribution
and other retirement plans. This service handled a volume of nearly 154 million transactions in
2021.444
Mutual funds may employ the services of third-party or affiliate transfer agents. We
estimate that, as of March 2022, there are 99 mutual fund transfer agents that serve both openand closed-end funds for the 2021 reporting year.445
442

See Depository Trust and Clearing Corporation (DTCC), 2021 Annual Report, pg. 57, available
at https://www.dtcc.com/~/media/files/downloads/about/annual-reports/DTCC-2021-AnnualReport.

443

We do not have data to calculate the value of all mutual fund transactions directly. Therefore, we
use ICI data on long-term mutual funds’ portfolio purchases and sales as a proxy for the total
value of transactions in mutual fund shares, assuming that a significant portion of portfolio
purchases reflects investor subscriptions and a significant portion of portfolio sales reflects
investor redemptions. We estimate this value to be $27.07 trillion by adding the total value ofpurchases and the total value of sales for long-term mutual funds. See ICI, 2022 Investment
Company Factbook, Table 31, available at https://www.icifactbook.org/22-fb-data-tables.html.
We estimate the share of the value of mutual fund transactions processed by Fund/SERV as theaggregate value reported by Fund/SERV divided by the long-term mutual funds’ portfolio
purchases and sales. We recognize that mutual funds may effect portfolio purchases and sales forpurposes other than investing new cash from subscribing investors and meeting investor
redemptions, such as portfolio rebalancing. Therefore, the total value of transactions in long-term
mutual fund shares may be overestimated. Accordingly, the share of mutual fund transaction
value processed by Fund/SERV may be underestimated. We also recognize that the aggregate
value reported by Fund/SERV may or may not include the value of mutual fund transactions via
DCC&S. To the extent that the reported value excludes such transactions, the share of mutualfund transaction value processed by Fund/SERV may be further underestimated. We solicit
comments on these statistics.

444

See id.

445

Mutual fund transfer agents are those transfer agents that answered with a positive value for anyof Items 5(d)(iii-iv), 6(a-c)(iii-iv), or 10(a) on a Form TA-2. We note that the identified mutualfund transfer agents may serve both open-end and closed-end funds. To the extent that some of267

We expect that a range of other entities would be affected by the proposal:

Mutual fund order processing entities (besides Fund/SERV);

Mutual fund liquidity service providers;

Other third-party service providers.

We do not currently have data on the number and size of these entities. We solicit
comments on these statistics. In addition, we solicit comment on what other entities would be
affected by the proposed amendments.
C.

Benefits and Costs of the Proposed Amendments
1.

Liquidity Risk Management Program

The proposed rule would make several changes to the liquidity risk management
framework adopted in 2016. In particular, it makes changes to (1) the manner and frequency inwhich funds must classify each of their portfolio holdings into one of several liquidity buckets;(2) the minimum amount a fund must hold in the highly liquid investment category; (3) thetreatment of margin and collateral for certain derivatives transactions, for purposes of the highly
liquid investment minimum and 15% limit on illiquid investments, as well as the treatment of afund’s liabilities for purposes of the highly liquid investment minimum; and (4) the definition of
the liquidity buckets, including illiquid investments. Whereas the existing rule provides fundswith a considerable level of discretion regarding how fund investments are classified, as well as
regarding the determination of a highly liquid investment minimum, the proposed rule would
reduce that discretion and is intended to prepare funds for future stressed conditions byimproving the quality of liquidity classifications by preventing funds from over- or underestimating the liquidity of their investments, including in times of stress. The proposed rule isthe identified transfer agents only serve closed-end funds, the number of affected transfer agents
may be over-estimated.

268

also intended to provide classification standards that are consistent with more effective practices
the staff has observed across funds. As a result, we expect enhanced liquidity across open-end
funds and lower risk of a fund not being able to meet shareholder redemptions without
significant investor dilution, which could reduce the risk of runs arising from the first-moveradvantage. Thus, the proposed amendments may improve overall market resiliency.
The proposed amendments to the liquidity risk management program would impose costs
on open-end funds. We estimate, for Paperwork Reduction Act purposes, that the modification ofexisting collection of information requirements of rule 22e-4 will result in an annual cost
increase of $7,101 per fund.446 In addition, funds may experience other costs related to changing
business practices, computer systems, integrating new technologies, etc. We are not able toquantify many of these costs for several reasons. First, we do not have granular data on thecurrent systems, business practices, and operating costs of all affected parties, which would
allow us to estimate how their systems and practices would change along with any associatedcosts. Second, we cannot predict how many funds would respond to the proposed changes to theliquidity risk management program by changing their portfolio allocation in order to becompliant with the proposed highly liquid investment minimum and the 15% limit on the illiquid
investments and how many funds may choose to convert to the closed-end form or cease to exist.
Finally, we cannot predict how many investors would decide to exit open-end funds in a
response to the portfolio allocation changes that funds may implement as a result of the proposed
amendments to the liquidity risk management. We request comment on these and other potential
costs of the proposed changes to the liquidity risk management program, particularly any dollar
estimates of the costs that funds and other affected parties will incur as a result of the rule.
446

See infra section IV.B.

269

a.

Methodology for Liquidity Classifications

The proposed rule would substitute the fund’s reasonably anticipated trade size
determination with a stressed trade size (“STS”) determination, with an STS being a set
percentage of the fund’s net assets. The proposed rule would also prescribe specific methods todetermine when a price change should be considered “significant” and remove the funds’ ability
to perform liquidity classification at the asset-class level.
Generally, the three proposed amendments to the liquidity classification methodology
may help funds to prepare better for future stress events or periods of high levels of redemptions
by improving the quality of liquidity classifications via the requirement for more frequentclassification and making the methodology more disciplined, objective, and consistent acrossfunds. This, in turn, may help funds meet investor redemptions without significant trading costs,
potentially decreasing dilution risk. We recognize, however, that the proposed liquidity
classification methodology would still be dependent on the size of an investment position withina fund’s portfolio relative to the size of the market for the investment. Therefore, although funds
would follow a more standardized methodology for liquidity classifications, the same investment
could be classified differently by different funds, depending on how much of this investment a
fund holds, thereby reducing comparability of liquidity classifications between different funds.
The specific economic effects for each of three proposed amendments are discussed below.
i.
Replacing Reasonably Anticipated Trade Size with
Stressed Trade SizeFunds may currently use their subjective judgment when determining the meaning andcalculation of reasonably anticipated trade size. The proposed requirement to replace thereasonably anticipated trade size with the STS as a set percentage of a fund’s net assets would
decrease such subjectivity because funds would no longer have discretion in determining the270amount of each investment they should assume will be sold or disposed of in determining theliquidity classifications. A stricter methodology for liquidity classifications of funds’ investments
may be more objective and consistent, which would benefit investors by improving funds’ ability
to meet investor redemptions without significant levels of dilution in both normal and stressedmarket conditions. In particular, requiring a fund’s classification model to assume the sale of the
proposed stressed position size would better emulate the potential effects of stress on the fund’s
portfolio and help better prepare a fund for future stress or other periods where the fund faces
higher than typical redemptions. In addition, to the extent that the proposed STS would be
simpler and more objective than the determination of a reasonably anticipated trade size, all else
equal, the operational burden or costs that funds currently experience in making liquidity
classifications may be reduced.
We also propose to set the STS minimum of 10%. Based on an analysis of historical
weekly fund flows for equity and fixed income funds, we estimate that a random fund in arandom week has approximately a 0.5% chance of experiencing redemptions in excess of the
10% STS, and there were 3.4% of weeks where more than 1% of funds experienced net
redemptions exceeding 10%.447 Although this data analysis implies that funds infrequently
experience redemptions of 10% or more, we believe that the 10% STS has the advantage ofsimulating a stress event and would better prepare funds to accommodate redemptions during
such events. Although funds could consider events larger than 10% for their STS calculation
voluntarily, we believe that the proposed requirement would achieve a more consistent447

An analysis of historical Morningstar weekly fund flow data for equity and fixed income funds
from 2009 through 2021 shows that the 1st percentile flow is approximately -6.6% while the 5th
percentile flow is approximately -1.3%. The same analysis shows that the 10% STS corresponds
to approximately the 0.5th percentile of pooled weekly fund flows. The same analysis shows that
if the 5th percentile fund flow is computed for each week, it never exceeds the 10% STS. If the
1st percentile fund flow is computed for each week, it exceeds the 10% STS for approximately
3.4% of the weeks in the sample.

271

methodology for liquidity measurement across funds. However, we recognize that specific funds
may experience varying costs and benefits associated with the 10% STS. For example, two fundswith comparable levels of AUM but with underlying investments that have different liquidity
characteristics may experience stress at different levels of redemptions. For example, a large-cap
equity fund may not experience stress at the 10% level of redemptions, whereas a fixed income
fund with comparable AUM might. As such, the extent to which investors of a given fund benefit
from the 10% STS will vary based on the liquidity of its underlying investments.448
Funds and their investors may incur costs as a result of replacing reasonably anticipatedtrade size with the STS. To the extent that funds would assign a higher liquidity category under
the current reasonably anticipated trade size approach compared to the liquidity category thatwould be assigned using the proposed STS, the proposed amendment may result in funds
rebalancing their portfolios in order to meet the highly liquid investment minimum and tocomply with the limit on the illiquid investments. As such, a fund either may have to increase its
holdings of highly liquid investments or decrease its holdings of moderately liquid and illiquid
investments. As a result, the risk-return profile of the fund’s portfolio would change towards
more liquid and less risky investments that may have lower returns. To the extent that suchreallocation would result in deviations from a benchmark return (if any), funds may experiencehigher tracking error.449 In addition, to the extent that investors seek particular risk exposures andreturns that would be difficult for the affected funds to provide under the proposed amendments,
the proposed amendments may drive them towards other investment vehicles that do not face
daily redemptions, such as closed-end funds, or to other vehicles or means of investing that are448

See also section III.B.4.a.ii for discussion of fund flows based on fund type.

449

Tracking error is the difference between the fund’s return and that of the benchmark whichmeasures how closely a fund replicates the returns of the identified benchmark.

272

not subject to the liquidity rule, such as separately managed accounts or CITs. However, to theextent that these other vehicles or means of investing do not offer the same investment strategies
or do not provide the same benefits and protections as the open-end funds to investors, investors
may find such investment avenues less favorable compared to open-end funds. As a result, theset of investment options available to investors with particular risk-return preferences may
decrease.
ii.

Determining a Significant Change to Market Value

Under the current rule, a fund may determine value impact (a “significant price change”)
in a variety of ways, including methods that depend on the type of asset, or vendor, model, or
system used. The proposed amendments would establish a uniform standard of how funds should
determine what constitutes a significant price change, which would improve consistency andobjectivity of liquidity classification methodologies across mutual funds. To the extent that somefunds may currently use definitions of a significant price change that result in under-estimationof the price impact and classification of investments in more liquid categories, the proposal
would limit the extent to which funds are able to do so. This, in turn, would help funds to prepare
better for potential stress events and potentially reduce the risk of not being able to meetinvestors’ redemptions without incurring significant trading costs, thereby decreasing dilution
risk. The proposed amendment may also decrease ongoing costs related to the liquidity
classification process, all else equal, by reducing the number of determinations a fund must
perform during the liquidity classification process.
For shares listed on a national securities exchange or a foreign exchange, the proposed
rule would require funds to use an average daily trading volume threshold of 20% to determine273

whether a trade will cause a significant price change.450 Funds will have less discretion in thiscircumstance than under the existing rule. This should result in a more robust and consistentliquidity classification process that would help ensure that the liquidity classifications for all
holdings of a certain investment of particular size are classified in the same manner across funds
which, in turn, may help all funds to prepare better for periods of high investor redemptions.
For any investments other than shares listed on a national securities exchange or a foreignexchange, the proposed rule would define a significant change in market value as any sale ordisposition that a fund reasonably expects would result in a decrease in sale price of more than
1%, which is the measure used in several commonly employed liquidity models.451 This
alternative measure is proposed because we recognize that average daily trading volume in, forexample, a single bond issue would not be representative because it does not represent the fullpool of liquidity available for a debt security, since bonds are split into many different issues anddiffer from common shares, where volume is concentrated because there generally is only one
class of shares for each issuer.
Although not all liquidity classification models currently specify a price decrease
explicitly as the determination for a significant change in market value, we believe it would
improve the quality of classifications to require a more objective principle. However, theproposed rule may still result in some heterogeneity in how funds classify otherwise similar
holdings because funds and liquidity classification vendors would still be able to choose which
price impact model to use for their classifications,452 depending on the assumptions of the fund or
450

See supra section II.A.1.a.ii.

451

Id.

452

There are various estimation techniques for price impact (market impact), such as those that use
linear models, power law models, log models, I-STAR model, and other. See, e.g., Albert S.
Kyle, Continuous Auctions and Insider Trading, 53 ECONOMETRICA, 1315 (1985), Robert
Almgren et. al., Direct Estimation of Equity Market Impact, 18 RISK 58 (2005); Elia Zarinelli et.

274

a liquidity classification provider. As a result, liquidity classifications for the same investment of
the same size may vary across funds, to the extent that funds or liquidity classification vendors
have different theoretical assumptions about the same investment. For example, it may bedifficult to choose a price impact model for assets that do not have readily available recent priceinformation, and funds may have to use subjective judgment in determining the sale amount that
constitutes a significant change in market value. To the extent that such subjectivity could still
result in over-estimation of liquidity of funds’ investments, the potential increase in the ability offunds to meet investors’ redemptions without significant dilution under the proposed rule may belower than anticipated. In addition, to the extent that the reference price against which the priceimpact is calculated is stale for some investments (i.e., investments that are traded infrequently),
the estimated trading volume that would not cause a significant price change may be lessaccurate for such investments.
iii.

Removing Asset Class Classification

The proposal to remove funds’ ability to perform liquidity classifications at the assetclass level may improve the quality of liquidity classifications by reducing the potential of funds
over- or under-estimating the liquidity of their investments. Currently, because the definitions ofasset classes are not consistent across funds in terms of their scope and granularity, aninvestment (of the same size) could be classified as belonging to different asset classes byal., Beyond the Square Root: Evidence for Logarithmic Dependence of Market Impact on Sizeand Participation Rate, MARKET MICROSTRUCTURE AND LIQUIDITY no. 2 (Dec. 5, 2014)
available at https://arxiv.org/pdf/1412.2152.pdf; Bence Toth, et.al, Anomalous Price Impact andthe Critical Nature of Liquidity in Financial Markets (working paper, Nov. 1, 2011), available athttps://arxiv.org/abs/1105.1694; Robert Kissell et. al., OPTIMAL TRADING STRATEGIES:QUANTITATIVE APPROACHES FOR MANAGING MARKET IMPACT AND TRADING RISK, (AMACON
2003); Saerom Park et. al., Predicting Market Impact Costs Using Nonparametric Machine
Learning Models (research article Feb. 29, 2016), available athttps://journals.plos.org/plosone/article?id=10.1371/journal.pone.0150243.

275different funds. Moreover, if a classification is performed on an asset-class basis, changes inliquidity profiles of individual investments may not be accounted for in the way theseinvestments are classified, which may lead to an over- or under-estimation of funds’
investments’ liquidity. In contrast, under the proposal, funds would more specifically gauge theliquidity of each investment, which could strengthen their liquidity management, potentiallydecreasing the risk of not being able to meet investors’ redemptions without significant costs that
could arise from an over-estimation of fund’s investments’ liquidity. To the extent that theliquidity classifications of investments within the same asset class would not differ between
asset-level and investment-level classifications, the proposal to remove funds’ ability to perform
liquidity classifications on the asset-class level may increase ongoing operational burden forfunds that rely on this classification method without any commensurate benefits. However, theasset-class level classification is not expected to be compatible with other proposed changes tothe liquidity risk management program, such as the value impact standard. Specifically, a fundwould not be able meaningfully to apply a standard based on average daily trading volume or a
price decline in a given investment at the asset class level because the average trading volume, ormarket depth generally, can vary from investment to investment even within the same asset class.
b.

Removal of the Less Liquid Category

We propose to eliminate the less liquid investment category. Currently, investments aredefined as less liquid if it is reasonably expected that they could be sold within seven calendar
days but the sale is reasonably expected to settle in more than seven days. Under the proposal,
investments that do not sell and settle within seven calendar days without significant pricechange would be classified as illiquid. We believe that the proposal to remove the less liquid276

category would primarily affect open-end funds that hold bank loan interests, as the mostcommon type of investment in this category is bank loan interests.453
On the one hand, recent research suggests that during the period between March 1 and 23
of 2020, bank loan mutual funds experienced outflows of approximately 11% of their AUM;
substantially higher than high-yield bond funds (which investors may consider close substitutes
to bank loan funds) and all other types of funds.454 Moreover, these outflows had longer duration,
which suggests greater risk of investor runs in these funds. On the other hand, other research455
examines the resilience of bank loan funds to liquidity shocks and does not find substantial
evidence of lower liquidity among bank loan funds compared to corporate bond funds generally.
However, the risk of not being able to meet investor redemptions within seven days without
significant costs may be higher for bank loan funds compared with other types of funds, as the
trading costs related to bank loan fund outflows (including costs associated with obtaining
financing to bridge the settlement gap) may be larger than those of other types of funds.
Specifically, as noted by LSTA, over the course of the first three weeks of March of 2020, bidask spreads for bank loans widened by 288 basis points to a record 422 basis points.456 In
contrast, recent research shows that, between February 3 and March 20 of 2020, high-yield
453

See supra section III.B.4.a.

454

Nicola Cetorelli et. al., Outflows From Bank-Loan Funds During COVID-19, Federal Reserve
Bank of New York, LIBERTY STREET ECONOMICS (June 16, 2020), available athttps://libertystreeteconomics.newyorkfed.org/2020/06/outflows-from-bank-loan-funds-duringcovid-19/. See also Ayelen Banegas & Jessica Goldenring, Leveraged Bank Loan Versus High
Yield Bond Mutual Funds, FIN. & ECON. DISCUSSION SERIES 2019-047 (Board of Governors of
the Federal Reserve System, Washington, D.C.), Jun. 2019, (“Banegas/Goldenring paper”)
available at https://www.federalreserve.gov/econres/feds/leveraged-bank-loan-versushigh-yield-bond-mutual-funds.htm. This paper finds that, as of end of 2018, flows as a shareof assets have been larger and more volatile for bank loan funds than for high-yield bond funds.

455

Mustafa Emin et. al., How Fragile Are Loan Mutual Funds? (working paper, Nov. 18, 2021)
available at https://ssrn.com/abstract=4024592 (retrieved from SSRN Elsevier database).

456

See Loan Syndication & Trading Association (LSTA), March Loan Returns (April 2, 2020),
available at https://www.lsta.org/news-resources/march-loan-returns-total-12-37.

277

corporate bonds’ bid-ask spreads widened by an estimated range between 79457 and 166458 basis
points to 102 and 223 basis points respectively.
Moreover, bank loan funds, unlike other funds, experience specific trading costs related
to bridging the settlement gap, i.e., the costs related to using financing during the time it takes fora loan trade to settle. Although other types of open-end funds may use bank credit lines, most
instruments held by open-end funds do not come with the same level of settlement uncertainty.
Because the process of trade settlement for bank loans is not standardized and involves many
parties, the settlement process can take longer. Therefore, when an open-end fund sells a bankloan interest, it is possible that the trade will not be settled for an extended amount of time. As
shown in Table 7 below, bank loan funds on average use higher amounts of financing via credit
lines and use them for longer/shorter period of time on average.
Table 7: Open-End Funds’ Use of Credit Lines by Fund Type, as of December 2021. 459

Bank Loan
Other Categories
Total

Numberof Funds

Has Lineof Credit

Used Lineof Credit

Avg. Credit
Line Use

Avg. Number
of Days Used

56
8,979
9,035

48
5,462
5,510

9
969
978

$29,411,240$8,431,142$8,624,210

114
24
24

In contrast, high yield bonds primarily have T+2 settlement. Although high yield bonds
may have the same or lower liquidity compared to bank loans,460 from the perspective of funding
457

See Nina Boyarchenko, et. al., It's What You Say and What You Buy: A Holistic Evaluation of the
Corporate Credit Facilities (working paper no. 8679, Nov. 11, 2020), available athttps://ssrn.com/abstract=3728422 (retrieved from SSRN Elsevier database).

458

See Simon Gilchrist, et. al., The Fed Takes On Corporate Credit Risk: An Analysis of the
Efficacy of the SMCCF (working paper no. 2020-18, Apr. 20, 2021), available athttps://ssrn.com/abstract=3829900 (retrieved from SSRN Elsevier database).

459

N-1A RIC credit line usage is from Form N-CEN, and excludes ETFs and MMFs. Data is as ofDec. 2021, incorporating filings received through June 3, 2022.

460

See supra, note 455. Authors show that, controlling for the fund size and rating, bank loan278

investor redemptions, bank loans are less certain to be converted to U.S. dollars within a specifictimeframe. As a result, when engaging in financing to bridge the settlement gap, a fund that sells
a high-yield bond would likely use the credit line only for two days while a fund that sells a bankloan will have to use it for a longer period. This, in turn, may increase the risk of bank loan funds
not being able to meet investor redemptions within seven days without imposing additional
financing costs on fund investors, which may increase dilution. Therefore, we believe that a limiton the amount of time a trade is reasonably expected to settle and convert to U.S. dollars toqualify as a non-illiquid investment is intended to promote liquidity in open-end funds andreduce investor dilution from trading costs, including wide bid-ask spreads and the costs related
to bridging the gap between the maximum time allowed to meet investor redemptions andprolonged settlement of certain investments.461
The removal of the less liquid category may also reduce the risk of runs in the open-end
fund sector. As discussed above, bank loan funds may be more prone to sector-wide outflows
compared to other types of funds due to the low dispersion of returns across bank loan funds(i.e., the correlation of bank loan fund returns is higher relative to the correlation of returns forother types of funds), which may lead to further redemptions and higher investor dilution, andmay consequently be amplified by a fund’s usage of financing for a prolonged period of time. To
the extent that bank loan funds rebalance their portfolios to hold bank loans with shorter
settlement times, investor dilution and the risk of runs on bank loan funds may be reduced.
liquidity is similar to or greater than liquidity of similarly rated public bonds. The authors
construct two indirect measures of liquidity: the first measure is based on the difference between
the transaction prices and net asset values (NAVs) of shares of loan and high yield bond ETFs;
the second measure is the perceived liquidity of corporate bonds based on the relationship among
cash holdings, flow volatility, and fund holdings. See also Sergey Chernenko & Adi Sunderam,
Measuring the Perceived Liquidity of the Corporate Bond Market (working paper no. 27092,
May 2020), available at https://www.nber.org/papers/w27092.
461

See also section II.A.1.b.iii.

279

Open-end funds may experience costs as a result of this amendment.462 First, open-end
funds would experience a one-time switching cost to adapt the classification and reporting
systems for the removal of the less liquid category, which would be passed on to funds’
investors. To the extent that the settlement time for bank loan interests cannot be reduced, theseloan interests would have to be reclassified as illiquid. As a result, funds that hold theseinvestments may be required to rebalance their portfolio by divesting from bank loans interests inorder to comply with the maximum allowed allocation towards illiquid investments, which may
result in both aggregate holdings and individual portfolio concentrations of bank loan interests
among open-end funds to be reduced. Such portfolio reallocation may result in one-timeswitching costs that would be passed on to investors. In addition, to the extent that portfolio
concentration of bank loan interests decreases significantly for some bank loan funds as a resultof the proposal, these funds’ investment strategy would have to be redefined. Moreover, to theextent that some funds would not be able to successfully rebalance their portfolios away frombank loan interests with longer settlement times without losing investors, these funds may cease
to exist or may seek shareholder approval to convert to a closed-end form.
Furthermore, to the extent that such portfolio reallocation results in lower fund returns,
this may drive investors of these funds to either substitute their investments in open-end bankloan funds to other types of open-end funds or choose other types of funds or investment vehicles
that are able to hold higher amounts of bank loan interests. To the extent that these other vehicles
or means of investing do not offer the same investment strategies or do not provide the same
benefits and protections as the open-end bank loan funds to investors, investors may find such
462

We recognize that those funds that primarily hold bank loan interests with shorter settlement
times may be less affected by this proposed amendment. For example, loans that are larger insize, more standardized, and more frequently traded, such as those that are a part of S&P/LSTA
U.S. Leveraged Loan 100 Index, may have shorter settlement times.

280

investment avenues less favorable compared to open-end bank loan funds. As a result, the set ofinvestment options available to investors with this particular strategy preference may decrease.
This effect may be more pronounced for retail investors who generally have limited access to thebank loan market and to private funds that may hold bank loan interests.
To the extent that investor demand for holding bank loans in a fund structure is high,some funds may choose to restructure as closed-end funds, in order to be able to keep theircurrent holdings of bank loan interests. The funds that choose to do so may experience one-timeswitching costs related to shareholder votes for the fund conversion, such as costs of preparing
and distributing proxy materials and costs associated with the solicitation process.463 In addition,some investors may rush to redeem their shares before the conversion which may increase
dilution of the remaining investors.
However, we recognize that while operational constraints may play a role in why
settlement times for bank loan interests are prolonged, misaligned incentives of trading parties(such as delayed settlement compensation) and a collective action problem may also be
important factors in determining settlement time for bank loan interests.464 Therefore, to theextent that it is currently operationally possible to have a shorter settlement time for bank loaninterests, and to the extent that non-fund transaction parties would be able to speed up thesettlement process at a relatively low cost, open-end bank loan funds may not have to rebalance
their portfolios or restructure to a closed-end form under the proposal.

463

We recognize that there may be other costs funds could incur to convert to a closed-end fund,such as potential exchange listing costs or costs of conducting periodic repurchase offers.

464

See supra section II.A.1.b.i and note 106.

281

c.

Definition of Illiquid Investments

We propose to amend the definition of illiquid investments to include investments whose
fair value is measured using an unobservable input that is significant to the overallmeasurement.465 We recognize that, in light of the proposed removal of the less liquid category,
only a small fraction of these investments that are classified as highly liquid or moderately liquid
would be affected by this proposed amendment. We estimate that approximately 0.07% of all
open-end fund assets would be affected by this amendment.466 Therefore, we do not anticipate
that this amendment would significantly impact open-end fund sector.
This amendment may improve the quality of investments’ liquidity classifications. To theextent that valuation using unobservable inputs that are significant to the overall measurement
may have an increased risk that the fund cannot sell the investment in time to meet redemptions
without dilution, classifying such investments as illiquid may reduce this risk. To the extent that
this risk results in investor dilution, and to the extent that the overall open-end funds’ holdings ofthese investments would decrease as a result of this amendment, investor dilution may be
reduced and overall liquidity of funds that hold such investments may increase as a result.
Although we understand that some funds already have a practice of classifying theseinvestments as illiquid, this amendment may result in a one-time switching cost for funds that do
not currently follow this practice. In addition, to the extent that some funds hold a significant
share of their portfolio in such investments and these investments are not currently classified as
illiquid, these funds would have to rebalance their portfolios and potentially change theirinvestment strategy.

465

See supra note 112.

466

See supra section III.B.4.a.

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d.

Proposed Minimum for Highly Liquid Investments

Rule 22e-4 currently requires a fund to determine a highly liquid investment minimum if
it does not primarily hold investments that are highly liquid investments. We propose for openend funds to have a highly liquid investment minimum of at least 10% of the fund’s net assets,
which is the assumed stressed trade size.467 In addition, we propose to remove the provision
allowing funds not to establish a highly liquid investment minimum if they “primarily” holdhighly liquid assets.
Requiring a highly liquid investment minimum that is equal to or above the assumed
stressed trade size of 10% of net assets may benefit funds and their investors by creating more
standardized liquidity risk management among funds, thereby increasing their liquidity andhelping all mutual funds to be better prepared to meet investor redemptions without incurring
significant trading costs. A higher amount of liquid assets may help fund managers to avoid
transacting at fire-sale prices during market stress and, therefore, control trading costs better overtime. This, in turn, may decrease dilution risk for fund shareholders.468 By requiring a minimumof 10% of highly liquid assets, we set a minimum baseline level of liquidity that would help
reduce dilution risk.
Funds may experience costs as a result of the proposed requirement. We recognize thatfunds that currently have an established highly liquid investment minimum already have theprocedures in place for ongoing monitoring for meeting the minimum. As such, we do not expect
the direct compliance costs related to meeting the highly liquid investment minimum, such as
467

See supra note 69 (recognizing that in-kind ETFs would not be subject to the proposed highly
liquid investment minimum amendments).

468

Section III.B.3.b analyzes the frequency of large percentage redemptions from funds. We
recognize that if a fund were to experience a 10% redemption, it could sell primarily its highly
liquid assets (which would then be significantly more than 10% of each of these holdings), or it
could sell a vertical slice of its portfolio, in which case it would sell 10% of all assets.

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monitoring costs and costs related to shortfall policies and procedures, to increase for thesefunds. However, those funds that have an established minimum of less than 10% may have torebalance their portfolios in order to meet the proposed requirement if they do not hold more
highly liquid investments than the proposed requirement. In addition, funds may need to shift
their portfolios away from less liquid holdings, potentially leading to higher tracking error
relative to their benchmarks (if any)469 and lower returns. However, a higher amount of liquid
investments may help fund managers to control trading costs better over time, which may resultin a higher long-term returns for investors. Therefore, the return loss of holding more liquid
investments (relative to less liquid investments) may be fully or partially offset by the savings onfunds’ trading costs.470
To the extent that some open-end funds’ portfolio allocations change significantly as aresult of this proposal, these funds may experience additional costs related to disclosure ofchanges to the fund’s allocations and/or strategy and costs related to a potential change of thefund’s name. These costs would be passed on to fund investors.
Funds that do not currently have an established highly liquid investment minimum may
experience a one-time switching cost related to establishing shortfall policies and procedures andto reviewing the highly liquid investment minimum at least annually as a result of the proposed
amendment. Funds may also experience one-time switching costs related to establishingmonitoring procedures related to the highly liquid investment minimum. To the extent that somefunds that do not currently have an established highly liquid investment minimum are able toleverage the experience of the funds in the same complex that do have an established highly
liquid investment minimum, these one-time switching costs may be reduced for these funds.
469

See supra note 449.

470

See supra note 351 and accompanying text.

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The proposal to remove the provision allowing funds to not establish a highly liquid
investment minimum if they “primarily” hold highly liquid assets may eliminate compliancecosts related to monitoring whether a fund primarily holds highly liquid assets. Because funds
that hold a substantial amount of highly liquid investments would generally hold an amount ofhighly liquid investments that is above the proposed 10% highly liquid investment minimum, aseparate compliance system that would identify whether a fund “primarily” holds highly liquid
assets may be operationally inefficient. We believe that the “primarily” determination would
become unnecessary in light of the proposed highly liquid investment minimum that would beapplicable to all funds. We recognize that cost savings from the removal of the “primarily”
provision would be partially or fully offset by the cost increase stemming from the proposed
highly liquid investment minimum because funds currently relying on the “primarily” provision
would have to build a compliance and monitoring systems around the highly liquid investment
minimum.
e.

Amendments to Calculation of the Amount of Assets that

Count Toward the Highly Liquid Investment Minimum or the Limiton Illiquid Investments
We also propose to amend how the highly liquid investment minimum calculation andthe calculation of the 15% limit on illiquid investments account for the value of assets that are
posted as margin or collateral for certain derivatives transactions, as well as the value of fundliabilities in the case of the highly liquid investment minimum. Specifically, in assessing
compliance with the fund’s highly liquid investment minimum, the proposal would require afund to: (1) subtract the value of any highly liquid assets that are posted as margin or collateral inconnection with any derivatives transaction that is not classified as highly liquid; and (2) subtract285

any fund liabilities. In addition, the proposal would amend the rule’s limitation on illiquid
investments to provide that the value of margin or collateral that a fund could only receive upon
exiting an illiquid derivatives transaction would itself be treated as illiquid for purposes of that
limit.
The amendments to the highly liquid investment minimum calculation and the calculationof the 15% illiquid investment limit may benefit funds and investors. Particularly, theseamendments would require funds to calculate the amount of highly liquid investments andilliquid investments in a way that more accurately reflects the amount of assets a fund could sellquickly to meet redemptions without significant dilution and the amount of assets that could not
be sold within seven days without significant trading costs respectively. This, in turn, would
better prepare funds for periods of increased investor redemptions and thereby enhance investorprotection benefits of funds’ liquidity risk management programs.
More specifically, we recognize that, although investments used for collateral are
generally classified as highly liquid, the value of those highly liquid investments cannot be
accessed unless the derivative is exited, which takes a longer time for derivatives classified asmoderately liquid or illiquid. In addition, an unrealized loss on a derivative or other liability may
result in a margin call, for which highly liquid investments may be used. Moreover, if a fundmay use highly liquid investments to service its liabilities (e.g., paying interest on a loan), thisfraction of highly liquid investments would also be unavailable to meet investors’ redemptions.
While we recognize that funds generally already subtract investment liabilities when calculating
highly liquid investment minimum,471 subtracting all of the fund’s liabilities may further reduce
the amount of highly liquid investments available to satisfy the fund’s highly liquid investment
471

See supra section II.A.2.b.ii.

286

minimum. Therefore, the amendments to the highly liquid investment minimum calculation
would help to ensure that highly liquid investments used to satisfy the fund’s highly liquid
investment minimum actually are available to meet shareholder redemptions.
Similarly, the proposed amendment to add the value of excess collateral of illiquid
derivatives investments to the amount of illiquid investments for the purposes of determining
compliance with the 15% limit on illiquid investments would limit the extent to which the fund’s
assets would be unavailable to meet redemptions because of the fund’s associated illiquid
derivatives investments. This amendment would effectively increase the amount of illiquid
investments a fund holds, potentially pushing these holdings over the 15% limit and triggering
the compliance procedures for going over the limit, which may impose additional costs on thefund.
The proposed amendments may result in funds rebalancing their portfolios in order tomeet the highly liquid investment minimum and comply with the limit on illiquid investments.
Depending on the value of highly liquid assets a fund has that are posted as collateral or margin
for non-highly liquid derivatives and the value of the fund’s liabilities relative to the fund’s total
amount of highly liquid investments, under the proposed amendment, a fund may have to either
increase its holdings of highly liquid assets or decrease its holdings of moderately liquid andilliquid derivatives in order to meet the highly liquid investment minimum. A fund similarly may
have to decrease its holdings of illiquid investments or increase its holdings of highly liquid ormoderately liquid investments as a result of the proposed amendment to the calculation of thelimit on illiquid investments. To the extent that such portfolio reallocation would significantly
change a fund’s strategy, funds may experience additional costs related to disclosure of changes
to the strategy. In addition, the risk-return profile of the fund’s portfolio may change towards

287

more liquid and less risky investments that may have lower returns. To the extent that someinvestors demand higher returns, they may choose to invest in other investment vehicles that
could offer higher returns.
f.

Other Amendments Related to Liquidity Categories

We also propose other amendments related to the liquidity classification categories. First,
we propose to amend the term “convertible to cash” and its definition to instead refer toconversion to U.S. dollars, codifying prior Commission statements. Second, we propose to
specify that funds must count the day of classification when determining the period in which aninvestment is reasonably expected to be convertible to cash. Third, we propose to simplify thedefinition of moderately liquid investments as those that are neither a highly liquid investment
nor an illiquid investment.
To the extent that, at present, open-end funds use differing definitions of convertible tocash and may inconsistently include or exclude the day of liquidity classification when
performing the classifications, the two related proposed amendments would benefit funds andinvestors, as these amendments may improve the quality of liquidity classifications by reducing
over- or under-estimation of investments’ liquidity, thereby potentially reducing trading costs
related to investors’ redemptions. On the other hand, open-end funds that do not currently define“convertible to cash” as convertible to U.S. dollars, which may include some funds that invest in
foreign securities, and open-end funds that do not currently count the day of classification during
the classification process may experience a one-time switching cost. In addition, these funds may
have to rebalance their portfolios, to the extent that their current approach results in an overestimation of investments’ liquidity.

288

g.

Frequency of Liquidity Classifications

Currently, rule 22e-4 requires that funds review their liquidity classifications at least
monthly and more frequently if changes in relevant market, trading, and investment-specificconsiderations are reasonably expected to materially affect one or more of their investments’classifications. We propose to require that funds classify all of their portfolio investments eachbusiness day.
To the extent that funds already monitor their classifications on a daily basis in order tobe in compliance with the current highly liquid investment minimum and 15% limit on illiquid
investments requirements, we believe that this amendment likely will not produce significant
additional benefits or costs. However, to the extent that funds do not monitor their classifications
daily, or to the extent that monitoring classifications is a less stringent procedure relative toperforming classifications for the funds that do monitor classifications daily, this amendment
may produce benefits and costs.
On the one hand, requiring daily liquidity classification could help ensure efficient
implementation of funds’ liquidity management programs and enhance their investor protection
benefits. Specifically, daily liquidity classifications may help funds identify changes in liquidity
profiles of their investments in a timelier manner and monitor potential increases in trading costs
for specific investments, thereby preparing funds for more efficient trading during times ofincreased redemptions and increasing their ability to respond more quickly to rapid changes inliquidity of portfolio investments, which may decrease investor dilution. In addition, the dailyclassification requirement, in combination with the proposed standards for trade size and value
impact, may make the liquidity classification process more standardized, timely, and efficient.

289

On the other hand, funds may experience a one-time set-up cost and increased ongoingcosts as a result of this amendment. First, those funds that generally do not evaluate theirclassifications more frequently than monthly would have to change their systems for performingclassifications on a daily basis. In addition, these funds would experience increased ongoingcosts due to increased frequency of classifications.472 Second, those funds that already monitor
their classifications on a daily basis would have to change their systems, to the extent thatmonitoring classifications on a daily basis is a different procedure compared to the proposed
requirement to perform classifications.
In addition, in times of market stress some highly liquid investments may become lessliquid due to unusual selling pressure (e.g., Treasuries during March 2020), and more frequentclassification may move these investments to less liquid buckets. In such instances where funds
do not typically expect highly liquid investments to decrease in liquidity, more frequent
reclassification of these investments may not help funds better accommodate increased
redemptions compared to the baseline.473 However, to the extent funds would prefer to avoid
triggering events that would cause additional compliance requirements such as Form N-RN
filings, the potential for some investments to become less liquid in times of market stress could
incentivize funds to be more conservative, ex-ante, in how they classify holdings and manage

472

Under the proposed amendments, a more frequent classification may not necessarily result in
more frequent portfolio rebalancing. For example, if a fund exceeds the 15% illiquid threshold, itwould not have to sell its illiquid investments, rather it would not be able to acquire more. In
addition, if a fund falls below the highly liquid investment minimum, it would still be able topurchase and sell highly liquid investments. However, both of these events would trigger filing ofForm N-RN.

473

For example, during Mar. 2020 the liquidity of U.S. government securities unexpectedly
decreased. Under the proposal, this event would trigger more rapid re-classification into a lower
liquidity category. However, because of the unexpected nature of this event, a fund would still
not be prepared to immediately meet an increased level of redemptions.

290liquidity risk. This, in turn, may result in funds investing in more liquid assets, thereby
decreasing the dilution risk in the mutual fund sector.
2.

Swing Pricing

The proposed amendments would make several changes to the swing pricing frameworkadopted by the Commission in 2016. In particular, the proposed amendments would (1) require
funds to implement swing pricing for each pricing period when a fund has any amount of net
redemptions or when net subscriptions exceed 2% of the fund’s NAV; (2) establish specificthresholds that determine when a fund is required to adjust its NAV and the factors a fund needs
to incorporate into its swing factor; (3) require that swing factors are calculated assuming a
vertical slice of the fund’s portfolio; and (4) remove the upper limit on the swing factor of 2%.
By requiring all funds to implement swing pricing, the proposed amendments would impose theestimated trading costs associated with redemptions and subscriptions onto investors whosetransactions generate these costs, reducing the dilution of non-transacting fund shareholders. As
such, the proposed amendments are also intended to reduce the first-mover advantage that stems
from the dilution of non-transacting shareholders, particularly during stressed market conditions.
The proposed swing pricing framework would impose costs on mutual funds that would
be passed on to their investors. We estimate, for Paperwork Reduction Act purposes, that themodification of existing collection of information requirements of rule 22c-1 associated withestablishing and implementing swing pricing policies and procedures, board reporting, andrecordkeeping will result in an annual cost increase of $7,775 per fund.474 Funds would also incur
additional operational costs associated with establishing and implementing swing pricing policies
and procedures, including the periodic calculation of swing factors associated with the swing474

See infra section IV.C.

291

pricing framework’s thresholds.475 In addition, the economic benefits of swing pricing would beoffset by the costs associated with the proposed hard close requirement.476 Finally, to the extent
that the proposed swing pricing framework would make mutual funds less attractive to investors,
mutual funds may experience investor outflows and/or reduced inflows.
We are not able to quantify many of the costs associated with the proposed swing pricing
framework for several reasons. First, we do not have granular data on the current practices andoperating costs for all funds, which might allow us to estimate how their systems would change
as a result of the proposed swing pricing requirement. Second, we cannot predict the number ofinvestors that would choose to keep their investments in the mutual fund sector nor the numberof investors that would exit mutual funds and instead invest in other fund structures such as
ETFs, closed-end funds, or CITs. We also cannot estimate how many funds would choose to
upgrade their systems and processes in order to comply with the proposed swing pricing
requirement versus how many funds would instead convert to an ETF or a closed-end structure.
We request comment on the full costs of the swing pricing requirement, particularly any dollar
estimates of the costs that funds and other affected parties will incur as a result of the rule.
a.

Mandatory Swing Pricing

At present, rule 22c-1 permits mutual funds to use swing pricing, and yet no U.S. openend fund has chosen to use it as an anti-dilution tool. We propose to require all affected mutual
475

Note that the swing factor itself in theory does not impose a net cost across all types ofshareholders. Instead, swing pricing affects a zero-sum distribution of estimated future trading
costs among transacting and non-transacting shareholders. The dilution that different types offund shareholders ultimately experience will reflect this distribution in addition to the actual
trading costs incurred by the fund from transactions that accommodate investor subscriptions orredemptions. Beyond the economic effects of the swing factor itself, the processes for calculating
and applying the factor as well as the hard close will impose additional costs on all shareholders
and intermediaries, which are discussed below.

476

See infra section III.C.3 for a detailed discussion of benefits and costs of the proposed hard closerequirement.

292

funds to use swing pricing. In particular, we propose to require every fund to establish andimplement swing pricing policies and procedures that would adjust the fund’s NAV per share bya swing factor either if the fund has net redemptions of any amount or if the fund has net
subscriptions that exceed an identified threshold.
We expect the proposed mandatory swing pricing requirement to benefit investors. First,
swing pricing would protect non-transacting mutual fund investors because it would requiretransacting fund shareholders to bear the estimated trading costs that arise due to their trading
activity. In contrast, currently, investors transacting in fund shares generally do not bear the costs
associated with their trading activity, imposing dilution on non-transacting shareholders.477 For
example, an industry study on the use of swing pricing in other jurisdictions estimates that
dilution effects can be significant, with effects on annual returns of selected funds in one
complex ranging from 10 to 66 basis points in 2019.478 While these estimates from otherjurisdictions may be based on fund transaction cost components that differ from the U.S., such as
those associated with government taxes and levies, to the extent that dilution effects arecomparably significant in the U.S., the proposed mandatory swing pricing requirement would
reduce the dilution of non-transacting fund shareholders.479 Second, mandatory swing pricing
477

In this section when we discuss trading costs, we refer to both direct (e.g., spread costs) andindirect trading costs (e.g., market impact costs).

478

See BlackRock, Swing Pricing: The Dilution Effects of Investor Trading Activity on Mutual
Funds (white paper, Oct. 2020), available athttps://www.blackrock.com/corporate/literature/whitepaper/swing-pricing-dilution-effects-oftrading-activity-on-mutual-funds-october-2020.pdf. To our knowledge, such data on fund dilution
are not available for the U.S. and we solicit data that could enable quantification of the benefits ofswing pricing. See also supra section I.B and supra notes 59, 60, 61, and 161 for additional
discussion of swing pricing experience in other jurisdictions.

479

See supra section III.B.3 for a discussion of other sources that may contribute to dilution. We
solicit comment on the relative impact of these sources on dilution. While the proposed swing
pricing requirement is unlikely to reduce dilution associated with stale valuations directly, theproposed requirements would nevertheless help mitigate dilution resulting from trading costs
associated with strategic trading behavior that may seek to take advantage of stale valuations.

293

could benefit markets overall because it may reduce the first-mover advantage that arises from
dilution associated with trading costs. As a result, the proposed amendment may mitigate the riskof runs on mutual funds and may decrease the risk of fire-sales for the funds’ underlying
investments.
We believe that these benefits may be more pronounced in the case of net redemptions
because dilution may be more severe when net redemptions occur. One reason for thisasymmetry is that investor redemptions are required to be met within seven days, whereas themoney a fund receives from new subscriptions is not required to be invested within a specifictimeframe. Therefore, funds must incur the trading costs that exist during the seven days
following investor redemptions, regardless of how large or small these costs are. On the other
hand, while fund managers may generally accommodate new subscriptions by investing
promptly to increase fund returns and reduce tracking error, they may also elect to wait topurchase investments at more advantageous prices or lower trading costs, resulting in lower
dilution of non-transacting fund shareholders. Another reason for asymmetry in dilution fromredemptions and subscriptions is that large redemptions can have a greater correlation acrossfunds exposed to the same asset class in times of market stress, which in turn may induce more
redemptions and further increase trading costs and associated dilution.480 Therefore, while swing
pricing would reduce dilution from trading costs associated with both net subscriptions andredemptions, we believe that the magnitude of this anti-dilution benefit would be greater in thecase of net redemptions.

480

See, e.g., Dunhong Jin et. al., Swing Pricing and Fragility in Open-End Mutual Funds (working
paper, revised Jan. 7, 2021) available at https://ssrn.com/abstract=3280890 (retrieved from SSRN
Elsevier database). Also see section III.B.3 and note 395 for additional research references.

294

Another potential benefit of the mandatory swing pricing approach is that it would help
overcome the collective action problem that may exist under the current optional framework andmay have prevented voluntary swing pricing implementation due to the stigma that could be
attached to being the first fund to implement swing pricing. To the extent that such a stigma
effect is present in relation to swing pricing, it may deter investors from choosing funds that
could implement swing pricing under the optional approach, and that could be a reason why no
U.S. fund currently chooses to implement swing pricing.481 We also recognize that U.S. mutual
funds are currently also allowed to implement certain purchase and redemption fee approaches(which do not necessarily require substantial operational changes in contrast to swing pricing),
yet these funds do not widely use redemption fees as an anti-dilution tool, possibly because ofany stigma attached to anti-dilution tools generally.482
The mandatory swing pricing requirement would impose costs on mutual funds,
investors, their intermediaries, and other market participants. In addition to the costs associatedwith the proposed hard close requirement discussed below, mutual funds would experience
initial and ongoing operational costs associated with developing and administering swing pricing
policies and procedures, changing their systems to accommodate swing pricing, updating fundprospectuses, as well as any costs associated with educating investors about swing pricing
procedures. These costs would ultimately be passed on to fund investors.

481

While we recognize that swing pricing has been successfully implemented in other jurisdictions,these other jurisdictions do not have the same regulatory frameworks and investor base, which
may influence investors’ sentiment towards anti-dilution tools and the extent of the potential
stigma effects. In addition, other jurisdictions do not have the same intermediary structures
between funds and their investors as in the U.S. See supra section III.B.2.

482

See supra note 67 (stating that, based on staff review of fund prospectuses, fewer than 5% offunds impose a redemption fee on at least one share class).

295

To the extent that investors expect an increase in the costs of investing in mutual funds asa result of the proposed mandatory swing pricing, they may choose to divest from the mutualfund sector. To the extent that such investor outflows would be substantial, funds may
experience a reduction in their economies of scale, which may lead to a further increase in fundfees. In addition, the mandatory swing pricing approach would reduce the set of investment
choices available to investors, relative to the optional approach, where investors can choose toinvest in funds that use swing pricing or funds that do not use swing pricing.
The determination and application of a fund’s swing factor could delay the publicationand dissemination of the fund’s NAV relative to current practices. To the extent thatintermediaries require NAVs for purposes such as updating and publishing client accountstatements, they would incur costs updating their operations and systems to adapt to later NAV
publication times. In addition, any other market participants, such as financial data aggregators,
that depend on fund NAV publication would also incur costs updating their operations andsystems to adapt to later NAV publication times.
b.

Swing Threshold Framework

The current rule permits a fund to determine its own swing threshold for net purchases
and net redemptions, based on a consideration of certain factors the rule identifies.483 For a fundexperiencing net redemptions, the proposal would require the fund to apply a swing factor for
any level of net redemptions. In addition, the proposed rule would establish a threshold forinclusion of market impact costs in its swing factor when net redemptions exceed 1% of the483

The factors a fund currently must consider in determining the size of its swing threshold are: (1)the size, frequency, and volatility of historical net purchases or net redemptions of fund shares
during normal and stressed periods; (2) the fund’s investment strategy and the liquidity of thefund’s portfolio investments; (3) the fund’s holdings of cash and cash equivalents, and borrowing
arrangements and other funding sources; and (4) the costs associated with transactions in themarkets in which the fund invests. See rule 22c-1(a)(3)(i)(B).

296

fund’s net assets (the “market impact threshold”). For funds experiencing net subscriptions, theproposal would require funds to apply a swing factor that accounts for all trading costs (i.e.,
including market impact costs) when net purchases exceed the threshold of 2% (the “inflow
swing threshold”).
Under the current rule, funds are able to tailor their swing pricing thresholds to their size,
the characteristics of their underlying portfolio holdings, and the characteristics of their investor
base. While this principles-based approach may be less burdensome for funds, some funds may
find it suboptimal to implement swing pricing routinely due to the operational costs of doing so
frequently. As a result, they may choose thresholds that reduce the frequency and impact ofswing pricing on transaction prices for fund shares. This, in turn, could reduce the benefits of the
proposed swing pricing requirement, including protecting non-transacting investors from dilution
due to trading costs and reducing the first-mover advantage associated with such costs.
Therefore, we believe that a uniform approach to swing thresholds would better protect nontransacting investors in the mutual fund sector by ensuring that trading costs are passed on totransacting investors, regardless of which fund’s shares investors hold in their portfolios.
Trading costs incurred by a fund can be dilutive when a fund experiences either
redemptions or subscriptions. However, as discussed above, subscriptions are likely to be lessdilutive than redemptions. To the extent that determining the swing factor is costly, as discussed
below, only requiring funds to do so when net subscriptions exceed 2% would limit thefrequency with which funds incur such costs. Based on the analysis of historical daily fund flows
in Table 3, a random fund on a random day has approximately a 1% chance of exceeding the
inflow swing threshold. In addition, there were only 0.2% of days where more than 5% of funds297

in the sample experienced net subscriptions exceeding the inflow swing threshold.484 Therefore,
we do not expect most funds to experience the costs of applying a swing factor in the case of net
subscriptions frequently. The anti-dilutive benefits of swing pricing in response to net
redemptions are likely to be more than those associated with net subscriptions, as discussed
above. Therefore, we believe that applying swing factor on any day with net redemptions may
benefit non-transacting investors compared to applying swing factor only when a certain
threshold is crossed. However, to the extent that applying the swing factor more frequently iscostly, these benefits may be offset by such costs.
The proposed market impact threshold of 1% may result in varying costs and benefits forfunds and their investors. For example, two funds that invest in underlying assets with similar
liquidity characteristics may experience market impact at significantly different levels ofredemptions, as measured in percentage, if they are significantly different in size. A 1%
redemption from a fund with low AUM may not result in sales of assets that result in market
impact, whereas a 1% redemption from an otherwise similar fund with significantly larger AUM
might. Similarly, two funds with comparable levels of AUM holding investments with different
liquidity characteristics may experience market impact at different levels of redemptions. For
example, a large cap equity fund may not experience market impact at the 1% threshold, whereasa fixed income fund with comparable AUM might. As such, the extent to which a given fund andits investors benefit from evaluating market impact at the 1% threshold will vary based on
factors such as the fund’s size and the liquidity of its underlying investments. For funds that may
experience market impact even when redemptions are below the 1% threshold, we note thatfunds can choose to incorporate market impact into their swing factor at a lower threshold than484

The analysis also shows that if the 99th percentile net fund flow is computed on each date, it
exceeds the inflow swing threshold on approximately 34% of days.

298

1%. To the extent that calculating market impact may be costly, only requiring funds to do sowhen net redemptions exceed 1% would limit the frequency with which funds incur such costs.
We estimate that a random fund on a random date has approximately a 1.6% chance of
exceeding the market impact threshold, and there were 2.3% of dates where more than 5% offunds experienced net redemptions exceeding the market impact threshold.485
c.

Calculation of the Swing Factor

The current swing pricing framework provides an upper limit of 2% for the swing factor
and requires that the swing factor take into account only the near-term costs expected to be
incurred by the fund as a result of net purchases or net redemptions that occur on the day theswing factor is used,486 as well as borrowing-related costs associated with satisfying redemptions;however, it does not specify how a fund should select investments for the purposes of estimating
the trading costs and it does not require a fund to include market impact costs in the swing
factor.487 We propose removing the current upper limit of 2% for the swing factor and requiring afund’s swing pricing administrator to make good faith estimates, supported by data, of theoverall costs, including market impact costs under certain conditions, that the fund would incur if
it purchased or sold a pro rata amount of each investment in its portfolio equal to the amount of
net purchases or net redemptions (i.e., a vertical slice).488 Because a fund would need to calculate
its costs based on the purchase or sale of a vertical slice of its portfolio, rather than selecting
485

An analysis of historical Morningstar daily fund flow data for equity and fixed income funds
from 2009 through 2021 shows that the 1st percentile flow is approximately -1.6% while the 5th
percentile flow is approximately -0.3%. The same analysis shows that the 1% market impact
threshold corresponds to approximately the 0.016 percentile of pooled daily net fund flows. The
same analysis shows that if the 1st percentile fund flow is computed on each date, it exceeds themarket impact threshold on approximately 84.6% of dates.

486

These near-term costs include spread costs, transaction fees, and charges arising from asset
purchases or asset sales resulting from those purchases or redemptions.

487

See rule 22c-1(a)(3)(i)(C).

488

See proposed rule 22c-1(b)(2).

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specific investments to be sold/purchased and estimating the cost of selling/purchasing thosespecific investments, we propose removing borrowing costs from the swing factor calculation.
i.

Vertical Slice Assumption

The vertical slice assumption may benefit investors of the affected funds. Specifically,
the vertical slice assumption is designed to recognize the potential longer-term costs of reducing
a fund’s liquidity and would more fairly reflect the costs imposed by redeeming or purchasing
investors than an approach that focuses solely on the costs associated with the instruments that afund expects to buy or sell (or expected borrowing costs, in the case of redemptions). For
example, if investor redemptions continue for multiple days, a fund that sells its most liquid
investments on the first day could experience increased trading costs on subsequent days because
it has to sell a bigger fraction (relative to a vertical slice) of its less liquid assets. As a result,redeeming investors on subsequent days would be charged more than investors who redeemed on
the earlier date via a higher swing factor. In addition, the future costs associated with rebalancing
the fund portfolio to its pre-redemption level of highly liquid investments are not currently
permitted to be incorporated into the swing factor because they are not near-term costs that may
be considered under the current rule. Therefore, the proposed vertical slice assumption would
help to ensure that redeeming investors bear not just the immediate trading costs they impose on
the fund, but also, in cases where a fund sells its most liquid investments to meet redemptions
first, the estimated transaction costs associated with rebalancing the fund’s portfolio to its preredemption level of highly liquid investments, such that subsequent redeeming investors are notcharged for the costs associated with past redemptions.
We recognize that selling a vertical slice of a portfolio in order to meet investor
redemptions may not be a practice used by all mutual funds during all times. For example, recent

300research documents that during tranquil market conditions, corporate bond funds tend to reduce
liquid asset holdings to meet redemptions; however, when aggregate uncertainty rises thesefunds tend to scale down their liquid and illiquid assets proportionally to preserve portfolio
liquidity.489 Another paper finds that some funds holding less liquid assets reacted to redemptionsin March 2020 by adding to their cash buffers even after meeting investor redemptions, rather
than selling their most liquid assets first or selling a vertical slice of their portfolio. 490 Therefore,
we recognize that the vertical slice assumption could result in using estimates of transaction costsin the calculation of the swing factor that differ from the estimated trading costs tailored to adifferent asset liquidation approach. As a consequence, to the extent that the trading costs
estimated based on the vertical slice assumption are higher or lower than estimated trading costsof the fund’s portfolio liquidation strategy, redeeming investors may be over- or under-charged
relative to the immediate trading costs of a fund’s actual liquidation strategy.
ii.

Market Impact Costs

We propose requiring funds to include a good faith estimate of market impact costs in thecalculation of their swing factors when (1) net subscriptions are above the inflow swing
threshold or (2) when net redemptions exceed the market impact threshold of 1%. To the extent
that funds are able to forecast market impact costs accurately, this requirement would ensure thattransacting investors bear, in addition to direct transaction costs, the estimated impact of theirtransactions on the ultimate price a fund pays or receives for any investments it buys or sells.
This may allow non-transacting shareholders to recapture more of the dilution imposed on the489

See Hao Jiang, et. al,. Dynamic Liquidity Management by Corporate Bond Mutual Funds, J. FIN.
& QUANTITATIVE ANALYSIS 1622, no. 5 (Aug. 2021).

490

See Andreas Schrimpf, et. al., Liquidity Management and Asset Sales by Bond Funds in the Faceof Investor Redemptions in March 2020 (Mar. 17, 2021) available athttps://ssrn.com/abstract=3799868 (retrieved from SSRN Elsevier database).

301

fund by transacting fund investors. As a result, the proposed market impact inclusion may also
help reduce first-mover advantage.
Several factors may limit the anti-dilution benefits of including market impact costs inthe swing factor. First, funds may incur costs in obtaining reasonable ex-ante estimates of market
impact costs, either because they need to pay vendors for such estimates or because they need toexert costly effort to develop such estimates internally. These costs may ultimately be passed on
to investors. Second, it may be difficult and sometimes not feasible to develop objective
estimates of market impact for some of the investments that mutual funds hold, such as those thatgenerally lack a robust and liquid secondary market (e.g., municipal securities and small-cap
equities). In addition, market impact may be more difficult to estimate during periods of stresswhen trading in certain markets may be limited or stop. Therefore, funds may need to use
subjective discretion to determine market impact estimates in certain circumstances, which may
result in funds over- or under-estimating the true ultimate market impact costs associated with agiven day’s orders. This, in turn, would result in over- or under-charging transacting investors,
exposing them to additional risk regarding the price at which they will ultimately transact theirshares.491
Third, because funds would still have some discretion in determining their swing factors,
such as discretion over which price impact model is used to estimate market impact, some funds
may have an incentive to under- or overestimate their swing factors, depending on thecircumstances. For example, a fund may choose to underestimate market impact, biasing theswing factor estimate downwards, in order to attract investors that prefer less volatile transaction

491

Transacting investors already face market risk when submitting an order to buy or sell fundshares because these orders must be submitted prior to the time at which a fund determines its
NAV.

302

prices for fund shares. On the other hand, funds may have an incentive to overestimate market
impact and overcharge transacting investors relative to the trading costs they are expected to
impose on the fund, because doing so may increase the performance of the fund.492 However, theproposed requirement that funds report each swing factor on Form N-PORT may mitigate any
incentive funds have to under- or overestimate their swing factors, as it will provide public
transparency regarding the size of these NAV adjustments.493
iii.

Removal of the Upper Limit on the Swing Factor

The proposed removal of the upper limit on the swing factor may benefit fund investors
by permitting swing pricing to address the dilution that transacting investors impose on a fundmore fully. The magnitude of this benefit would depend on how often funds’ trading costs
exceed the current 2% swing factor. To the extent that trading costs are more likely to exceed
this threshold during stressed periods, we expect this amendment to benefit non-transacting fundinvestors during such periods when dilution may be increasing, which may further address thefirst-mover advantage related to dilution from trading costs. In addition, to the extent that trading
costs for certain types of funds are more likely to exceed the current 2% swing factor, theproposed amendment would ensure that investors in these funds are as protected from dilution as
investors in funds for which trading costs generally correspond to a swing factor lower than 2%.
These benefits may be partially offset because the removal of the upper limit for the swing factor
may also have a destabilizing effect during periods of stress. For example, if investors expectthat trading costs will continuously increase, and that the swing factor will increase accordingly,

492

When a fund overcharges transacting investors, the fund increases its assets and hence theperformance of the fund.

493

See supra section III.B.4.

303

they may be incentivized to redeem their shares at the onset of market stress, when the swing
factor is lower.
iv.

Removal of Borrowing Costs from the Swing Factor

We propose removing borrowing costs from the costs that should be included in theswing factor. To the extent that the vertical slice assumption would result in higher magnitude
swing factors, any decrease in swing factor magnitude due to the proposed removal of borrowing
costs from the swing factor calculation may be fully or partially offset. Therefore, we do not
expect this aspect of proposal to have substantial effects. Although affected funds would still beallowed to engage in bank or inter-fund borrowing in order to fund investor redemptions, theproposed swing factor calculation will not reflect potential borrowing costs for funds that do use
borrowing to fund redemptions.494 To the extent that these costs are higher than the estimatedcosts of buying or selling a vertical slice of a fund’s portfolio, they would be borne by investors
remaining in the fund, limiting the anti-dilution benefits of the proposal.
3.

Hard Close Requirement

With respect to putting swing pricing into practice, requiring a hard close would ensurethat funds receive more timely flow information. Because swing pricing requires both fund flows
and estimates of trading costs, requiring a hard close should reduce any flow estimation error thatwould otherwise occur if funds had to rely heavily on estimated fund flows in adjusting their
NAV. In addition, by providing funds with more complete flow information, the hard closerequirement could have auxiliary benefits unrelated to swing pricing, including settlement

494

Fund borrowing may defer but not always eliminate the need for a fund to sell portfolio
investments, as a fund will eventually have to re-pay the loan. As a result, a fund may incur
borrowing costs in addition to trading costs, but only the latter would be captured by the
adjustment of NAV by the swing factor under the proposal.

304

modernization, and order processing improvements.495 Also, a fund that knows its flows sooner
may be able to plan and implement trading strategies to meet those flows in a more cost effective
manner.
The hard close requirement may change operational burdens for mutual funds and otherparties related to mutual fund order processing. Currently, because mutual fund flows fromdifferent intermediaries and investors are received by funds at different times, fund transfer
agents may have to process the orders in multiple batches that may span until the next day. On
the one hand, if doing so is costly in terms of labor and/or strain on the processing systems and to
the extent that these costs are non-negligible, the hard close requirement may decrease
operational burden by allowing all orders to be processed within a shorter time frame. On theother hand, to the extent that processing all orders in a short amount of time, as it would be
implied under the proposal, requires more manpower and/or more processing capabilities, thehard close requirement may increase operational burden of open-end fund transfer agents. Thiseffect may be more pronounced for smaller transfer agents that do not enjoy economies of scale.
In addition, the hard close requirement may allow funds to plan next-day and future
activity related to today’s redemptions or subscriptions more efficiently. For example, the hardclose would in some cases improve the reliability of the flow information fund portfolio
managers use by eliminating cancellations and corrections. In addition, if a portfolio manager
uses flow information posted at the custodian, the hard close generally would provide timelier
flow information. To the extent that these effects are present, the hard close requirement would
allow funds to have timelier information that would permit them to plan and execute their trades

495

See supra section II.C.3.a for additional discussion.

305

in a more efficient manner. This, in turn, may reduce funds’ tracking errors and may help prevent
any error corrections or trade cancellations after the pricing time.
However, requiring a hard close may impose significant switching costs (e.g., changing
business practices, computer systems, integrating new technologies, etc.) on funds, theirintermediaries, and service providers that could ultimately be passed on to investors. We
recognize that these switching costs could be larger for certain types of intermediaries. For
example, some intermediaries may have more layers of intermediation than others, and,
therefore, would have to update more systems and processes. As another example, someintermediaries may have more reporting and recordkeeping requirements than others, and would
have to update more systems and processes to comply with the hard close requirement. In
addition, some intermediaries have their processes and systems set up such that the daily priceinformation is required before any orders can be processed. For example, retirement plan
recordkeepers and any affiliated brokers and trust companies, as well as DCS&S, would have tomodify their processes and systems substantially, as these processes currently require daily priceinformation for all investments prior to processing of any investment instructions from the plan
participants. In addition, retirement plans may have to modify their provisions, and employers
sponsoring these plans may need to modify payroll systems, as well as change the information(e.g., websites, manuals, and training materials) they provide to employees regarding how tosubmit orders, as a result of the hard close requirement.
A substantial number of affected retirement plans are small in size as shown in Table 5.
Therefore, a large number of small plans may be disproportionally affected by the
implementation costs related to the proposed hard close because they may not enjoy economies
of scale. To the extent that these costs are too large relative to the size of assets under306

management, some of the plans may cease to exist or choose to offer other investment vehicles
such as ETFs or CITs. For example, in 2003, one commenter stated that one cost related to a
hard close that was substantially similar to what we are proposing would be requiring submissionof trades on sub-account levels rather than on an omnibus level, which would result in an
incremental cost increase of $4.1 million per year for this commenter with 1.3 million ofomnibus trades per year.496 To the extent that not all investors have a choice of intermediary,
such as participants in employee-provided retirement plans, the costs stemming from the
proposed hard close requirement may be borne by either investors (i.e., plan participants) or theiremployers that sponsor the plan.
In addition, to the extent that not all intermediaries may be able to comply with the hardclose requirement, the investors that use these intermediaries may face a decreased ability toinvest in mutual funds via certain intermediaries. To the extent that the strategies that open-end
funds subjected to the proposed requirement cannot be replicated or to the extent that such
replication would be more costly outside of the mutual fund sector (e.g., via a separately
managed account), investors may end up with either less diversified portfolios, or experiencehigher costs of investing.
The hard close requirement may disadvantage certain investors that do not have a choicein their intermediary, if it precludes them from responding to market events after a specific cutoff time that is earlier than 4 p.m. ET or lengthens the amount of time for completing certain
types of transactions497 compared to investors that submit orders directly to funds. For example,
if an intermediary sets up a cut-off time for transactions that is earlier than the fund cut-off time
496

Comment Letter of Charles Schwab (Oct. 27, 2003) on 2003 Hard Close Proposing Release, FileNo. S7-27-03, available at https://www.sec.gov/rules/proposed/s72703/s72703-2.pdf.

497

See supra section II.C.3.d.

307

(4 p.m.), investors in mutual funds that use these intermediaries will not be able to react tomarket events that take place between an intermediary cut-off and the fund cut-off time, thereby
increasing a market risk for investors that trade via intermediaries with earlier cut-off times.
However, investors that trade directly with a fund or use intermediaries with later cut-off times
would have an advantage and still be able to respond to some or all market events during thistime frame (depending on the applicable cut-off time), allowing them to decrease their market
risk relative to investors that would be pushed to next-day pricing.
In addition, to the extent that investors designate their employers to make retirement
contributions to intermediaries via payroll procedures, and to the extent that payroll procedures
have to be performed during a specific time frame in order for transaction to receive that day’s
price, the employers may experience a cost of switching the system to accommodate an earlier
cut-off time for orders. These effects may be more pronounced for employers and investors in
the western regions of the U.S. who may not have a sufficient time window to processcontributions and/or (re)allocate their portfolios. In addition, to the extent that someintermediaries already impose an earlier cut-off time for investors’ orders, the hard close may
entail an even earlier cut-off time, which may further disadvantage investors.
In addition, the proposed hard close might affect current order processing for funds offunds. We understand that an upper-tier fund in a fund of funds structure may not submit its
purchase or redemption orders for lower-tier funds’ shares until after 4 p.m. Under the proposed
rule, the upper-tier fund would have to submit purchase or redemption orders for lower-tierfunds’ shares before the lower-tier funds’ designated pricing time in order to receive that day’s
price for the orders.

308

We are not able to quantify many of the costs of the hard close requirement for several
reasons. First, we cannot predict how the costs would be allocated between funds and theirintermediaries because we do not have detailed information about the number of intermediate
steps required to be completed between the time an investor places an order and the time a fundreceives this order for each type of an intermediary and which party currently bears the costs ofeach intermediate step. Second, we do not have granular data related to the current practices andoperating costs for each intermediary type, both those that are regulated by the Commission andthose that are not. Therefore, we cannot predict how their systems and practices would change in
response to the hard close requirement and estimate the associated costs of these changes. Third,
we cannot predict how many intermediaries will choose to upgrade their systems and processes
in order to maintain their ability to offer mutual funds to the client, how many intermediaries will
choose to impose an earlier cut-off time for investor orders, and the number of intermediaries
that will retain their existing systems and order cut-off times and offer products that would not be
subject to the proposed hard close requirement, such as CITs, ETFs, or closed-end funds in placeof mutual funds. Finally, we cannot predict how many investors will respond to changes thatintermediaries may implement in response to the hard close requirement by divesting from themutual fund sector. We request comment on these costs of the hard close requirement,
particularly any dollar estimates of the costs that funds, intermediaries, and other affected parties
will incur as a result of the rule.
4.

Commission Reporting and Public Disclosure

The Commission is proposing to change reporting frequency of Form N-PORT, to change
public availability of certain items on Form N-PORT, and to amend Forms N-PORT, N-CEN,
and N-1A. The proposed amendments are intended to increase transparency around funds’309

activities related to liquidity management and anti-dilution tools and to make information more
usable by filers, regulators, investors, and other potential data users. The proposed amendments
would also provide more information about a fund’s portfolio and its liquidity risk profile toinvestors, thereby improving their portfolio allocation decisions.
Open-end funds will experience costs as a result of the proposed changes to the threeforms. In connection with the proposed information collection requirements under the Paperwork
Reduction Act, we estimate that the proposed changes to Form N-PORT would result in aninternal cost increase of $2,472,356 and an external cost increase of $5,613,175, the proposedchanges to Form N-1A would result in internal cost increase of $10,609,390; and the proposedchanges to Form N-CEN would not on aggregate result in an increase of ongoing costs.498
a.

Commission Reporting Frequency

Currently funds file Form N-PORT reports for the first, second, and third months of eachfiscal quarter with the Commission 60 days after the end of the third month of the quarter. We
are proposing to require funds to file Form N-PORT reports with the Commission within 30 days
after the end of each month. We believe that this amendment would help the Commission to
oversee funds’ activities on a timelier basis. We do not expect this part of proposal to havesubstantial economic effects on funds, as funds already are required to maintain records of theinformation that Form N-PORT requires no later than 30 days after the end of each month andmany funds report monthly information about their portfolio holdings on a voluntary basis tothird party data aggregators, generally with a lag of 30 to 90 days, which in turn make themavailable to investors and other data users for a fee.499 To the extent it is less efficient for fund498

See infra sections IV.D, IV.E, and IV.F. These annual direct costs include ongoing as well as
initial costs, with the latter being amortized over three years.

499

See rule 30b1-9. Also see section II.E.1.b. and note 287.

310

groups to submit on a more frequent monthly basis instead of in one batch after quarter-end, thecosts borne by fund groups may marginally increase under the proposal.
The data the Commission would receive on Form N-PORT reports within 30 days ofmonth-end would include portfolio information which, depending on the fund, may not currently
be public. To the extent this nonpublic information was subject to a data breach before itsscheduled publication 60 days after month-end, unauthorized access could harm shareholders by
expanding the opportunities for professional traders or others to exploit the information.
However, the Commission has controls and systems for the use and handling of the proposed
modified and new data in a manner that reflects the sensitivity of the data and is consistent withthe maintenance of its confidentiality. In addition, as discussed below, many funds alreadypublicize their monthly holdings, which reduces the sensitivity of the information theCommission would store confidentially, and Form N-PORT reports would become publicly
available 60 days after month-end.
b.

Public Availability of Form N-PORT Data and Aggregate

Liquidity Disclosure
Currently, funds are required to make the report for the third month of every quarter
available to the public. We are proposing to make funds’ monthly reports on Form N-PORT
public 60 days after the end of each monthly reporting period. We are also proposing to require
an open-end fund to provide information regarding the aggregate percentage of its portfolio in
each of the three proposed liquidity classification categories, which would become public on thesame time frame.
Public disclosure of aggregate liquidity classifications would help investors to assess theliquidity profile of the funds in which they are investing, and may be more useful to investors

311

than the narrative liquidity disclosure the Commission adopted in 2018. The proposed disclosure
may provide more information about a fund’s liquidity risk profile to investors, thereby
improving their portfolio allocation decisions. In addition, observing other funds’ aggregateliquidity profiles might provide some information that is useful in a fund’s own liquidity
classification process. These benefits may be offset to the extent that liquidity classifications are
not directly comparable across mutual funds, although the proposal would establish minimum
standards that reduce the amount of discretion funds currently have in classifying theirinvestments. We expect that funds will incur one-time and ongoing costs associated withpreparing the portion of Form N-PORT associated with the aggregate liquidity profile, as
discussed in section IV.
The proposal would triple the amount of data made available to investors and otherpotential users on Form N-PORT in a given year. To the extent that investors currently are notable to obtain monthly portfolio data from other sources, such as fund websites or third-party
data aggregators the proposed requirement would enhance the ability of investors to monitor
funds’ portfolios, which in turn may help investors to make more efficient investment
decisions.500 Many funds report their monthly portfolios to third party data aggregators. Because
the data made available to data aggregators is inconsistent across funds and time, the proposed
amendment would increase consistency of portfolio data available to investors and other data
users. To the extent that 60 days is not a long enough delay in disclosure of portfolio data, funds
may be subject to predatory trading or “copycatting activities” that could potentially affect500

See e.g., Ji-Woong Chung et. al., Intended Consequences of More Frequent Portfolio Disclosure(working paper, Apr. 17, 2022), available at https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=4086186 (retrieved from SSRN Elsevier database).

312

portfolio returns.501 This effect may be more pronounced for funds with more proprietary trading
strategies.
c.

Other Amendments to Forms N-PORT, N-CEN, and N-1A

We are proposing to remove the reporting requirement for swing pricing on Form N-CEN
and replace it with a new reporting requirement on Form N-PORT that would require
information about the number of times the fund applied a swing factor during the month and theamount of each swing factor applied. We are also proposing amendments to Form N-CEN to
identify and provide certain information about service providers a fund uses to fulfill therequirements of rule 22e-4. In addition, instead of classifying an RSSD ID as an LEI, we propose
to provide separate line items where a fund would report an RSSD ID, if available, in the eventthat an LEI is not available for an entity. We also propose to amend certain items and definitions
on Form N-PORT to conform them to the proposed amendments. Finally, we propose to amend
Item 11(a) of Form N-1A to require, if applicable, that funds disclose that if an investor places anorder with a financial intermediary, the financial intermediary may require the investor to submit
its order earlier to receive the next calculated NAV. In addition, as a result of the proposed swing
pricing requirement, funds would be required to disclose information about swing pricing in
response to certain existing items in the form.502
The proposed amendments would increase transparency around funds’ activities inseveral ways. First, additional information about funds’ service providers would enable investors
and other data users to assess fund liquidity management practices and help the Commission
501

A recent working paper examines the costs of Form 13F disclosure and finds that additional
disclosure may harm portfolio returns over time. See David Kwon, The Differential Effects of the
13f Disclosure Rule on Institutional Investors (working paper, May 5, 2022), available athttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=4095482 (retrieved from SSRN Elsevier
database).

502

See Items 6(d), 4(b)(2)(ii), 4(b)(2)(iv)(E), and 13(a) of Form N-1A.

313

oversee the industry better. Second, information about swing pricing application can help theCommission and investors understand swing factor adjustments a given fund makes and evaluate
how often a fund has any net redemptions or has net subscriptions of more than 2% and theamount of the swing factor adjustment.
The proposed amendments would impose PRA costs, as discussed in above. Some funds
may already maintain some of the information they would be required to report under the
proposal in the ordinary course of business. However, we recognize that funds would incur somecosts in reporting the information. We recognize that, due to economies of scale, such costs may
be more easily borne by larger fund families, and that costs borne by funds would be passedalong to investors in the form of higher fees and expenses. In addition, the proposed disclosuresof each swing factor and the number of times a swing factor was applied may create incentives
for funds to compete on this dimension. Specifically, investors who prefer lower variability inthe value of their investments may move capital from funds that had high historical swing factors
to funds with lower swing factors. However, while NAV swings penalize redeemers orsubscribers under certain circumstances, they benefit investors remaining in the fund, which may
make funds actively using swing pricing more attractive to longer term investors.
The proposed amendments related to entity identifying information would help theCommission and market participants to identify entities related to funds’ businesses more
efficiently.
D.

Effects on Efficiency, Competition, and Capital Formation
1.

Efficiency

The proposed amendments may affect allocative efficiency in several ways. First, theproposed changes to the liquidity classification methodology, proposed public disclosure of314

funds’ aggregate liquidity classifications, and swing pricing disclosures are expected to benefit
investors by reducing information asymmetries between funds and investors. To the degree thatsome investors may currently be uninformed about liquidity risks of funds’ investments, theproposed disclosure requirements may increase transparency about liquidity costs transacting
investors impose on remaining fund investors and liquidity risks in open-end funds. To thedegree that greater transparency about liquidity risk of mutual funds may lead some risk averse
investors to use other instruments, in lieu of mutual funds for long-term investment, allocative
efficiency may increase.503 In addition, the increased transparency may result in greater allocative
efficiency as investors with low tolerance of liquidity risk and costs may choose to reallocate
capital to funds that have lower liquidity risk and costs. Further, to the degree that uncertainty
about the proposed swing pricing requirement may reduce the attractiveness of affected funds toinvestors, transparency about historical swing factors may reduce those adverse effects.
Second, market efficiency for funds’ underlying investments may increase, to the extent
that the proposed amendments mitigate the risk of runs on open-end funds and decrease fire-sales
for the funds’ underlying investments. In addition, a potential shift in demand from illiquid toliquid investments may encourage the development of market structures that increase theliquidity of investments that are currently less liquid. For example, currently, only a fraction of
traded bank loan interests has a standardized settlement process and transparent prices andquotations. To the extent that the proposed amendments would lead market participants tostandardize and shorten the settlement process for bank loan interests, the prices and spreads forbank loans may become more transparent at a sector level, increasing the efficiency in this503

See, e.g., Jennifer Huang et. al., Shifting and Mutual Fund Performance, 24 REV. FIN. STUD.
2575, no. 8 (2011). The paper argues that if investors are not fully aware of risk-shifting behavior
or if the changing risk level hampers their ability to assess fund performance, then individual
portfolios are less likely to be efficient.

315

market. On the other hand, the proposed liquidity requirements may lead funds to allocate less tothese investments. Absent other frictions, the difference in demand for these investments could
be made up for by other investors or other the same investors through other structures (such as
more direct investment). However, if this difference in demand is not fully absorbed by othermarket participants, the efficiency in this market may decrease.
Third, the hard close requirement may make portfolio allocation less efficient forinvestors, to the extent that intermediaries used by these investors would impose an earlier cutoff time for orders and investors would not be able to reflect the entire day’s market information
into their allocation decisions. In addition, to the extent that certain types of orders would nolonger be executed at today’s prices and rather would be sent to funds the next day, investors
may be exposed to additional market risk as well as potentially decreased portfolio returns
because an intermediary may hold the cash from investors’ orders submitted after the cut-off
time (but before 4p.m. ET) until it could submit these orders at the end of the next day.
The proposed amendments may affect funds’ portfolio efficiency. For example, funds
may start considering the liquidity of investments and their overall portfolios to a higher degree
when making portfolio allocation decisions and considering other factors, such as aninvestment’s risk and expected return, to a relatively lower degree. This may reflect an optimal
choice, to the extent that funds’ investors believe that illiquidity of a fund’s portfolio is morecostly relative to the cost of foregoing less liquid portfolio investments that may offer higher
returns. On the other hand, if liquidity considerations lead to deviations from the fund’sinvestment strategy or benchmark return, the proposed amendments may decrease the efficiency
of funds’ portfolios.

316

The proposed daily classifications may also affect funds’ portfolio efficiency. On the one
hand, if daily fluctuations in market values of a fund’s portfolio investments are large (andtherefore the daily changes in the dollar value of the stressed trade size is also large) but revert tothe mean within several days, liquidity classification for the same portfolio position may also
fluctuate daily while eventually reverting to the mean. In this scenario, funds may start managing
the portfolio positions inefficiently in order to be in compliance with the highly liquid investment
minimum and the 15% limit on illiquid investments. On the other hand, daily classifications may
increase informational efficiency of the funds’ investments, to the extent that funds’ demand fordaily information results in increased availability of such information offered by third-party
providers. As a result, funds’ portfolio allocation decisions may become more efficient.
The proposed amendments may also affect operational efficiency of funds andintermediaries. First, to the extent that the proposed removal of the less liquid category results in
an increased standardization of settlement practices and a reduction of settlements times for bankloan interests and other investments that are currently classified as less liquid, a reduction inallowed settlement time for investments in order to qualify as moderately liquid investments may
facilitate operational efficiency of funds that trade these investments. Second, the proposed
removal of the less liquid category may facilitate operationalizing funds’ swing pricing by
reducing uncertainty related to trading costs for investments that are currently classified as lessliquid. In particular, to the extent that open-end funds will become more certain about trades’
settlement dates, it may allow them to more accurately estimate trading costs and, therefore,
more accurately estimate the swing factor. Third, intermediaries may improve their order-

317

processing systems as a result of the proposed hard close requirement, improving ongoing
operational efficiency for both intermediaries and funds.504
2.

Competition

The proposed amendments may affect the competitive landscape for open-end funds.
There are two main economic effects discussed above that may cause the change in thecompetitive landscape for open-end funds: (1) cost increases for funds, fund managers, and fundadministrators stemming from proposed changes in the liquidity risk management program,proposed mandatory swing pricing, and the hard close; and (2) additional constraints on funds’
holdings of certain investments that could limit these funds’ investment strategies due toproposed changes to funds’ liquidity classifications, the proposed definition of illiquid
investments, and proposed changes to the highly liquid investment minimum.
Competition within the open-end fund sector may evolve as a result of the two effects
stated above in several ways. First, to the extent that certain funds substantially change theirinvestment strategies towards more liquid investments, the number of open-end funds that holdmore liquid investments may increase, and competition among those funds for investors may
increase. Conversely, competition among funds that hold less liquid investments may decrease.
These effects depend also upon how investor demand for funds with liquid and illiquid
investments may change with the proposed amendments. Second, to the extent that smaller openend funds would experience a more substantial operational burden compared to larger fundcomplexes that exhibit economies of scale and may be able to set up their trading desks in a more
efficient manner,505 smaller funds may become less competitive than larger funds. As a result,504

See supra section II.C.3 for additional discussion.

505

See e.g., Gjergii Cici et. al., Trading Efficiency of Fund Families: Impact on Fund Performanceand Investment Behavior, 88 J. BANKING & FIN.1 (Dec. 22, 2015, rev. Jan. 12, 2016), available
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2514203. The authors find that by318

smaller funds may decide to liquidate or to convert to other fund structures, such as ETF or
closed-end structures, to the extent such conversion would be less costly compared to remaining
a mutual fund. Third, to the extent that some open-end funds may currently deliver higher returns
because they set a lower highly liquid investment minimum and reasonably anticipated trade size
compared to other funds with similar investment strategies but higher highly liquid investment
minimums and reasonably anticipated trade sizes, the proposed amendments to apply uniform
minimum for the stressed trade size and highly liquid investment minimum may minimize such acompetitive advantage in performance and level the field among open-end funds. Finally, to theextent that investors would prefer funds with less volatile transaction prices for fund shares under
the proposed swing pricing requirement, funds with larger trading costs may become lesscompetitive relative to the funds with smaller trading costs.
Competition for investment flows between open-end funds and other collective
investment vehicles within retail and institutional non-retirement space may also be affected. To
the extent that the proposed amendments reduce investor dilution and the liquidity risk of openend funds, some investors may increase their holdings of open-end funds relative to otherinvestment vehicles. That said, we also recognize that some investors may attach more
importance to investing in less liquid investments through a pooled vehicle with the ability toredeem on a daily basis and may view potential costs of dilution as the price of shareholder
liquidity.
In addition, there are three reasons why investors may reduce their investment in openend funds, making open-end funds less competitive with other types of investment vehicles, suchas closed-end funds (e.g., interval funds), ETFs, or CITs. First, holding open-end funds may
operating more efficient trading desks that help reduce trading costs, fund families improve theperformance of their funds significantly relative to fund families with less efficient trading desks.

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become relatively more costly compared to these other collective investment vehicles. Second,some investors may prefer to have holdings of less liquid investments, such as bank loaninterests or investments that are valued using unobservable inputs that are significant to theoverall measurement, such as long-dated currency swaps and three-year options on exchangetraded shares, within a collective investment vehicle structure. Third, some investors may be
averse to the potential effects of the proposed swing pricing requirements, such as redeeming
investors that may be charged for more than the dilutive costs they impose on the fund, as well as
any investor averse to the increased uncertainty regarding the price at which the investor’s fundtransactions will ultimately execute.
For these reasons, some open-end funds may decide to offer their existing strategies inalternative fund structures, such as ETF or closed-end fund structures instead of maintaining
these strategies within open-end funds under the proposed rule.506 Funds may make such a
determination if doing so would be more cost-efficient, if they anticipate that investors would
prefer to invest in their strategies via these alternative structures, or if their existing strategies
would no longer be viable under the proposed amendments that call for an increased share ofmore liquid investments in funds’ portfolios. This may give fund complexes or other financial
institutions that have more experience in these alternative structures a competitive advantage
over those that do not. In addition, some open-end fund strategies may be more amenable tobeing migrated to other structures than others. For example, a passive open-end fund that does
not rely on specialized skills or knowledge of a fund manager may be relatively easy to offer as
an ETF. On other hand, while some active investment strategies are available as ETFs, funds
may consider the structure less attractive if they consider the daily revelation of their holdings
506

To the extent existing mutual funds convert to ETFs, certain investors in these funds may incur
long-term capital gains taxes as a result of such conversions.

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undesirable and they determine that obtaining the exemptive relief that would enable them tostructure the fund as a non-transparent ETF would be too costly.507 Such funds may end up at acompetitive disadvantage to those that can more easily offer their strategies in other structures
under the proposal.
Competition between open-end funds and other collective investment vehicles, such as
ETFs, and CITs,508 as well as separately managed accounts, within the retirement space may also
be affected. As discussed in section III.B.2, processes and systems related to executing investors’
orders within their retirement plans require knowledge of NAVs prior to sending investors’
trades to funds, and it may be costly to change these processes. To the extent that retirement
plans can offer collective investment vehicles or ETFs that are not open-end funds but have
similar investment strategies to open-end funds at a lower cost, open-end funds would becomeless competitive within the retirement sector. One type of a vehicle that offers similar investment
strategies to open-end funds at a lower cost is CITs. CITs differ in certain respects, however. For
instance, CIT fees are bespoke for each plan, meaning that fees are individually negotiated and aplan participant cannot roll a CIT investment to an IRA when leaving the plan. Recent analysis
from ICI demonstrates that, as of 2018, among all assets held in 401(k) plans, mutual funds
comprise 43% while CITs amount to 33%.509 To the extent that the proposed hard close

507

See Precidian ETFs Trust, et al., Investment Company Act Release Nos. 33440 (Apr. 8, 2019)[84 FR 14690 (Apr. 11, 2019)] (notice) and 33477 (May 20, 2019) (order) and related application(“2019 Precidian”) for an example of exemptive relief pertaining to non-transparent ETFs.

508

CITs are an alternative to mutual funds for defined contribution plans. Like mutual funds, CITs
pool the assets of investors and invest those assets according to a particular strategy. Unlike
mutual funds, which are regulated under the Investment Company Act of 1940, CITs are
regulated under banking laws and are not marketed as widely as mutual funds; which reduces
their operational and compliance costs compared with mutual funds.

509

See BrightScope/ICI working paper at 2.

321requirement would make mutual funds more costly or difficult to trade relative to CITs, the shareof CITs among retirement assets may further grow making open-end funds less competitive.
The proposed hard close requirement may have effects on competition amongintermediaries. First, to the extent that intermediaries that are affiliated with fund complexes
have an advantage in processing fund orders more swiftly compared to intermediaries that are
not affiliated with the funds they offer, the former may not have to impose earlier order deadlines
on investors, which would result in competitive advantage over intermediaries that are notaffiliated with the funds they offer. Second, to the extent that larger intermediaries enjoy
economies of scale and would be able to implement the hard close in a more cost-effective way
relative to smaller intermediaries, smaller intermediaries may become less competitive as they
may have to pass the implementation costs on to their investors.
To the extent that daily classifications would require a more frequent use of liquidity
classification providers, demand for liquidity classification providers may increase. To the extent
that funds would expand their outsourcing of liquidity classifications, competition among outside
liquidity classification providers may increase. However, to the extent that some liquidity
classification providers currently used by funds have operational capacity only for less frequent
than daily provision of services, they may become less competitive compared to those that can
provide the service on a daily basis.
The proposed amendments may also affect competition in markets for funds’ underlying
investments. To the extent that open-end funds would change their overall portfolio towards
more liquid investments as a result of the proposed amendments, and to the degree that suchreallocation would be correlated across funds, competition in the markets for more liquid
investments may increase, while competition in market for less liquid investments may decrease,322

which may further decrease the liquidity of these investments. For example, the proposed
removal of the less liquid category may affect competition in the secondary market for bank loaninterests. To the extent that open-end funds would demand bank loan interests that are more
liquid and standardized in terms of the settlement process, competition in the bank loan market
may be affected – both among the loan issuers and loan administrators. Specifically, increased
demand for shorter settlement may drive bank loan market participants to compete with eachother via offering shorter settlement for their trades, including among counterparties who arewilling to contract for expedited settlement, to the extent that 15% of bank loan interests held by
open-end funds510 is a substantial enough share of the bank loan market for funds to havebargaining power in this market. To the extent that settlement times do not improve as a result of
this amendment, bank loan interests with longer settlement times may become less competitive
with loan interests that have shorter settlement times. Third, to the extent that open-end fundinvestors would substitute funds that hold bank loans for funds that hold close alternatives, suchas high-yield bond funds, as a result of the proposal, demand for funds holding these instruments
may increase. In addition, to the extent that open-end funds become more limited in how muchof bank loan interests they can hold directly, open-end funds may increase their holdings of
CLOs, which in turn could increase demand for CLOs and competition among CLOs. Finally, tothe extent that the demand for bank loan interests decreases as a result of the proposal, these
instruments would become less competitive overall.
3.

Capital Formation

The proposed amendments may affect capital formation. First, to the extent that theabove efficiency and competition effects result in investor outflows from the mutual fund sector,

510

See note 422 and accompanying text.

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capital formation within the sector may be reduced, while capital formation via banks and trust
companies, ETFs, or other vehicles may increase. Second, to the extent that open-end funds
would demand more liquid investments, the capital formation for issuers of these investments
may increase. On the other hand, to the extent that funds would become more limited in theamount of investments with lower liquidity profiles they are able to make (such as investmentsthat are valued using unobservable inputs that are significant to the overall measurement andinvestments that are currently classified as less liquid and illiquid), the capital formation for
issuers of investments that are currently classified in less liquid categories may decrease.
For example, a recent paper511 shows that, although CLOs (the largest lender of leveragedloans) increase their purchases of outstanding bank loan interests in the secondary market attimes when bank loan funds face outflows, they reduce their lending in primary market at thesame time; which highlights the externality imposed by bank loan fund redemptions on capitalformation for non-investment grade firms. Therefore, to the extent that open-end funds would
hold fewer bank loans in their portfolios as a result of this amendment, the externality discussed
above may be reduced and capital formation for non-investment grade firms could improve. On
the other hand, to the extent that market settlement processes do not change, and to the extent
that open-end bank loan funds are not converted to closed-end funds, the demand for bank loaninterests may decrease, reducing capital formation for non-investment grade firms. This effectmay be more pronounced for smaller issuers, to the extent that their securities are classified intoless liquid categories more frequently compared to larger issuers.
Finally, the proposed amendments are expected to decrease the risk of fire sales of funds’
underlying investments that may occur as a result of an increased selling pressure experienced by
511

Thomas Mählmann, Negative Externalities of Mutual Fund Instability: Evidence from Leveraged
Loan Funds, 134 J. BANKING & FIN. (2022).

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open-end funds during periods of high redemptions. This, in turn may increase confidence inmarkets for investments held in open-end funds’ portfolios, thereby aiding capital formation forthese investments.
E.

Alternatives
1.

Liquidity Risk Managementa.

Stressed Trade Size and Significant Changes in Market Value

Although tightening of inputs would reduce fund discretion in the methodology for
liquidity classification relative to the baseline, funds would still have discretion in the use ofmodels to calculate price impact under the proposal. One alternative that could alleviate thisconcern would be to define a list of investments that qualify as highly liquid investments
explicitly, as well as the list of illiquid investments or to define liquidity of each security,
regardless of its amount held by a fund. For example, we could define highly liquid investments
similarly to the way Federal banking agencies define high quality liquid assets (“HQLA”) for the
purposes of liquidity coverage ratio rules.512 This approach would simplify funds’ complianceand may eliminate the need to calculate reasonably anticipated trade size or stressed trade size.
As a result, an investment would be more consistently classified across funds, regardless of theamounts of this investment held by each fund. However, this approach would put the512

See 12 CFR 50.20 (Office of the Comptroller of the Currency); 12 CFR 249.20 (Federal Reserve
Board); 12 CFR 329.20 (Federal Deposit Insurance Corporation). HQLA are composed of Level
1 and Level 2 assets. Level 1 assets generally include cash, central bank reserves, Treasuries,
certain agency securities, and certain marketable securities backed by sovereigns and central
banks, among others. Level 2 assets are composed of Level 2A and Level 2B assets. Level 2A
assets include, for example, certain debt guaranteed by a government sponsored entity or by asovereign entity. Level 2B assets include, for example, investment grade corporate bonds, andpublicly traded common equities that meet certain conditions, and investment grade municipal
obligations. See also Bank for International Settlements (BIS), Basel Committee on Banking
Supervision, LCR30 High-Quality Liquid Assets (final report, Dec. 31, 2019), available athttps://www.bis.org/basel_framework/chapter/LCR/30.htm?
tldate=20191231&inforce=20191215.

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Commission in the position of determining the liquidity of each investment or investment type inthe market, which may be difficult to maintain over time and may over- or under-include
securities that may demonstrate equal liquidity characteristics, as this alternative regime only
covers HQLA and not all investments that could be held by a fund.
As an alternative, we could have proposed a higher level of STS. For example, an STS
that is equal to 100% would assume a full liquidation of a position. Under this alternative, theclassification of an investment would depend on the absolute value of the whole position rather
than a percentage of a position. This approach may more accurately reflect liquidity needs during
the times of increased redemptions, to the extent that funds sell their most liquid holdings first inorder to meet redemptions.513 An STS that is higher than 10% but lower than 100% would havethe effect that is similar but lower in magnitude. While a higher STS might better reflect thatfunds may need to sell a higher fraction of a particular investment than 10%, it nonetheless could
be the case that a 10% STS is a better measure for determining liquidity under the proposed
requirement for vertical slice assumption.
As another alternative, we could have proposed a lower level of STS. To the extent thatsome funds currently set their reasonably anticipated trade size lower than 10%, these funds may
experience less changes in the classifications of their investments, which may result in lessportfolio adjustments in order to comply with the 15% limit on illiquid investments and thehighly liquid investments minimum. However, we believe that the 10% STS has the advantage ofsimulating a stress event and would better prepare funds to accommodate redemptions during
513

For example, if a fund experiences net outflows equal to 10% of its net assets, and the fund’s
highly liquid assets comprise 20% of its portfolio, the fund would be able to fund all outflows
with the proceeds from highly liquid assets. On the other hand, a 10% STS would test whether
10%x20%=2% of the fund’s holdings could be sold without significantly changing the price of
these holdings in order to meet redemptions. In this scenario, the fund may need to sell additional
holdings that may be more costly to trade due to their lower liquidity classification.

326

such events. We seek comment on whether a level of STS lower than 10% would be a more
appropriate STS that would ensure funds classify their investments in a way that would
safeguard the fund and its shareholders during stressed times.
As another alternative, we could have proposed an STS that would depend on an
individual fund’s flows. For example, each fund could be required to use an STS that is equal toa certain percentile (e.g., 99th percentile) of the fund’s highest week of absolute flows or net
outflows over a specified period of time (e.g., 3, 5, or 10 years).514 Under this alternative, funds
would have a liquidity classification approach that is more tailored to their strategy and investor
base. This approach would be less discretionary compared to the baseline but more discretionary
compared to the proposal. To the extent that some funds may never experience net outflows thatamount to 10% of their net assets, this alternative could be more appropriate for such funds.
However, this alternative may result in inconsistent classifications among funds that have similar
holdings. For example, if an established fund and a new fund have identical portfolios, the newfund would not have the same level of historical flows as the established fund, to the extent thatthe established fund existed during periods of stress and the new fund did not. This would resultin two different STSs for identical funds.
As another alternative, we could have proposed an STS that would differ for funds withdifferent investment strategies. For example, because during times of stress certain investments
generally remain relatively liquid, we could have proposed a lower STS for funds with strategies
that generally invest in more liquid assets, such as certain equities or government securities.
However, under certain circumstances, large concentrations of any asset type (including thoseassets that are generally very liquid) held by a fund may weaken the fund’s ability to dispose of
514

Basing the calculation on absolute, rather than net, flows would be designed to reflect that large
inflows have the possibility of translating to similarly large outflows.

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such assets without a significant cost imposed on the fund’s investors.515 Therefore, we believethat requiring funds with different types of strategies to have the same STS would appropriately
prepare all funds for stress events. In addition, although this approach would be more tailored to
net flows trends specific to particular types of funds, this alternative may result in inconsistent
application of the STS because there is no single taxonomy of fund types and there would be
limited utility in proposing a new taxonomy given the previously noted concerns about anapproach that differs by fund type.
For determining whether a sale or disposition would significantly change the market
value of an investment, we could have proposed a higher or lower value impact standard. For
example, we could have proposed that a sale or disposition of less than or more than 20% of asecurity listed on a national securities exchange or foreign exchange, or a decrease in sale priceof less than or more than 1% for other investments, would result in a significant change inmarket value. Setting a stricter test for what would constitute a significant change in market
value may lead funds to classify investments as less liquid than under the proposed rule, andcorrespondingly, setting a more lenient test would lead to more liquid classifications. Because
funds currently use different value impact standards today, increasing or reducing the thresholds
in the rule may align with some funds’ current practices, while the proposed rule may align withother funds’ current practices. Therefore, any approach to defining the value impact standard
would require some funds to change their current methodologies.

515

For example, during Mar. 2020, the U.S. Treasury market became less liquid than usual.

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b.

Amendments to Liquidity Classification Categories andDefinitions
As an alternative, we could have proposed an approach that provides additional time,
beyond seven calendar days, for a sale to settle and convert to U.S. dollars before a fund mustclassify the investment as illiquid. For example, we could have proposed to define moderately
liquid investments as those that a fund reasonably expects to be able to sell within seven days
without a significant change in market value and to be convertible to U.S. dollars within an
additional seven days. Under this alternative, all the economic effects of removing the less liquid
investment category discussed above would still be present, however, their magnitude may be
reduced. As a result, not as many bank loan funds would have to rebalance their portfolios
towards shorter-settlement loans and other investments, contract for expedited settlement, or
restructure as a different investment vehicle. At the same time, the potential need to arrange
expedited settlement to meet redemptions in the midst of market stress, as well as the potential
borrowing costs a fund incurs to meet redemptions and the resulting dilution of fund investors,
would not be reduced by as much as it would under the proposal. Therefore, we believe thataligning the time it takes to receive proceeds from the trade with the statutory requirement tomeet investor redemptions within seven days would be a more economically sound step towards
helping to ensure funds can meet redemptions within seven days and reducing investor dilution.
We could have proposed that a fund start measuring the number of days in which itreasonably expects a stressed trade size would be convertible to U.S. dollars without
significantly changing its market value after the date of classification, instead of on the date ofclassification as proposed. Under this alternative, funds’ liquidity classifications would be
marginally less liquid. We understand some funds are using this method of counting the number329

of days currently and would not have to make any changes to their methodology; however, those
funds that begin counting on the date after classification would need to make changes and theirclassifications would be more liquid than they are currently. We believe that funds shouldmeasure days consistently in order to help funds meet redemptions within seven days without
significant trading costs.
c.

Frequency of Liquidity Classifications

As an alternative, we could have proposed to require classification on a less frequentbasis, for example, weekly. Under this alternative, funds would have less operational burden
relative to the proposed daily classification requirement. In addition, to the extent that portfolio
allocations of funds are noisy on a daily basis due to, for example, trading related to tracking
errors or inability to invest newly incoming cash from investors immediately, weeklyclassifications may be more appropriate from an operational perspective. However, weeklyclassifications could reduce the effectiveness of the rule by delaying the identification ofsignificant liquidity issues, such as a rise in illiquid investments or a drop in highly liquid
investments, particularly at the onset of market stress when a fund might begin to face increasinglevels of redemptions. Therefore, we believe daily classifications would promote better
monitoring of a fund’s liquidity and ability to more rapidly understand and respond to changes
that affect the liquidity of the fund’s portfolio.
d.

Definition and Calculation of Highly Liquid Investment

Minimum and Proposed Limit on Illiquid Investments
As an alternative, we could have proposed different highly liquid investment minimums
for different type of funds, with lower highly liquid investment minimums for funds withstrategies that generally invest in more liquid assets, such as equities or government securities.

330

However, under certain circumstances, large concentrations of any asset type (including thoseassets that are generally very liquid) held by a fund may weaken the fund’s ability to dispose ofsuch assets without a significant cost imposed on the fund’s investors.516 Therefore, we believethat requiring funds with different types of strategies to have a highly liquid investment
minimum of at least 10% would appropriately prepare all funds for stress events. In addition,although this approach would be more tailored to net flows trends specific to particular types offunds, this alternative may result in the inconsistent application of highly liquid investment
minimums because there is no single taxonomy of fund types and there would be limited utility
in proposing a new taxonomy given the previously noted concerns about an approach that differs
by fund type.
As another alternative, we could have proposed to require funds to maintain a highly
liquid investment minimum that is lower or higher than the proposed 10% minimum, such as aminimum of at least 5% or 15%. A lower required threshold would require fewer changes tosome funds’ portfolios and would be less likely to affect performance. However, a lower
minimum would result in funds being less prepared to meet redemptions in stressed periods. A
higher highly liquid investment minimum would better ensure that a fund can meet redemptions
in stressed periods, but would require more significant changes to some funds’ portfolios andwould likely have a larger effect on fund performance. Further, to the extent that certain funds
would benefit from a highly liquid investment minimum that is greater than 10% because, forexample, they have a concentrated shareholder base, such funds could establish a higher
minimum under the proposal. Similarly, we considered a lower limit on a fund’s illiquid
investments, such as a 5% or 10% limit. The alternatives would further limit a fund’s ability to
516

See note 515.

331

acquire illiquid investments, which would limit the mismatch between the time a fund must pay
redemptions and the time it can sell its investments without significant dilution. However,lowering the limit on illiquid investments while also expanding the definition of illiquid
investment would more significantly affect funds that currently invest in less liquid investments.
As another alternative, we could have proposed to define investments used for collateraland margin purposes of moderately liquid and illiquid investments as moderately liquid andilliquid respectively. However, by reducing the fund’s highly liquid investments by the value ofamounts posted as margin or collateral, the proposed approach would avoid burdens associatedwith tracking specific securities posted as margin or collateral and reclassifying investments asthey are posted as margin or collateral and recalled. The proposed approach also would notunderstate the liquidity of securities that are posted as margin or collateral because each security
would continue to be classified based on its own characteristics rather than based on thecharacteristics of the derivative it is tied to, and instead the adjustments would only be made at
the aggregate level.
2.

Swing Pricing

This section discusses alternatives to the proposed swing pricing requirements. These
alternatives include variations on the swing pricing requirements, variations on the thresholds
used to determine the swing factor, and tools other than swing pricing that may achieve some ofthe same anti-dilutive goals of the proposed rule. These alternatives could be used independently
or in combination with each other, and also could be paired with a hard close or the alternatives
to the hard close we discuss in the next section, depending on the degree to which a given
alternative does or does not require a fund to have complete order flow information at the time afund strikes its NAV.

332

a.

Alternative Approaches within the Swing Pricing Framework

As an alternative, we could have proposed different thresholds for net redemptions, net
subscriptions, and inclusion of market impact. For example, we could have required funds toadjust the NAV only when net redemptions exceed a specified swing threshold, allowing funds
to not adjust the NAV at all when redemptions are low in magnitude, as the proposal does for net
subscriptions. To the extent that determining a swing factor is costly, only requiring funds to doso when net redemptions exceeded a threshold would limit the frequency with which funds incursuch costs. However, because net redemptions are likely to dilute fund shareholders by a larger
magnitude compared to net subscriptions, such an alternative may forego some of the benefits
non-transacting fund shareholders would be expected to receive under the proposal.
The proposal also could have used a different market impact threshold, or no threshold,requiring that funds always include market impact in their swing factor calculations. A higher(lower) market impact threshold would reduce (increase) the number of days for which affected
funds must calculate market impact costs for their portfolio investments, reducing (increasing)
any related costs and operational challenges. However, a higher (lower) market impact thresholdwould also reduce (increase) the amount of dilution from redemptions that is recaptured by funds
and accrued to non-transacting shareholders, assuming some funds do not opt to set lower market
impact thresholds, as permitted under the proposal.
Similarly, the proposal could have used a different swing threshold for net subscriptions,or no threshold, requiring that funds always adjust their NAV in response to net subscriptions. A
higher (lower) threshold for net subscriptions would reduce (increase) the number of days forwhich affected funds must calculate swing factors, reducing (increasing) any related costs andoperational challenges. However, a higher (lower) threshold for net subscriptions would also333

reduce (increase) the amount of dilution from subscriptions that is recaptured by open-end funds
and accrue to non-transacting shareholders, assuming some funds do not opt to set lower
threshold for net subscriptions, as permitted under the proposal.
As another alternative, we could have required that funds only apply a swing factor when
they experience net redemptions rather than requiring that they also apply a swing factor when
net subscriptions exceed 2%. Removing the requirement that funds apply a swing factor for net
subscriptions would remove any operational costs funds may incur in implementing swing
pricing for net subscriptions and may reduce the uncertainty that subscribing investors face
regarding the share price at which their subscription orders will ultimately transact. However,while we recognize that subscriptions tend to be less dilutive than redemptions, the trading costs
incurred by funds to accommodate subscriptions can still be dilutive. Therefore, non-transacting
investors would be exposed to more dilution risk under this alternative.
As an alternative, the proposal could have also permitted funds to use a default swing
factor (e.g., 2% or 3%) when estimating trading costs accurately may be more difficult, such as
in times of market stress. A fund’s swing pricing administrator, adviser, or a majority of thefund’s independent directors could be permitted to determine whether market conditions are
sufficiently stressed to invoke this default swing factor. This alternative could benefit investors
by mitigating shareholder dilution during periods of increased market uncertainty when standard
analyses that funds use to estimate trading costs may fail to capture these costs accurately, to theextent that the standard analyses result in underestimation of trading costs. However, thisalternative would provide funds with more discretion in determining when their swing factor
applies in a way that is less transparent and consistent for fund shareholders, which increases the
chance that funds may take advantage of such discretion in order to boost the performance of a334

fund. In addition, a default swing factor may not be a good approximation of the actual trading
costs a fund will incur during the periods it is applied, which could either overcharge transacting
investors relative to the trading costs they impost on a fund or undercharge transacting investors,
limiting the extent to which non-transacting shareholder dilution is mitigated.
As another alternative, the proposal could have defined the market impact threshold or
inflow swing threshold on a fund-by-fund basis, with a reference to a fund’s historical flows. For
example, each fund could have been required to determine the trading days for which it had its
highest outflows over a set time period, and set its market impact threshold based on the 1-5% oftrading days with the highest redemptions. Similarly, each fund could have been required todetermine the trading days for which it had its highest inflows or outflows over a set time period,and set its inflow or outflow swing threshold based on the 1-5% of trading days with the highest
redemptions or subscriptions. While this alternative could allow funds to customize their swing
thresholds to their historical flows, such an alternative may create strategic incentives for fundcomplexes to open and close funds depending on historical transaction activity. For example, tothe degree that the estimation of market impact factors or other trading costs may be costly, or to
the extent that investors prefer funds that do not apply swing factors as frequently, fund families
may choose to close funds that experienced high redemptions to avoid the application of market
impact factors. In addition, allowing funds to determine their own thresholds based on historical
data may lead to less comparability across funds with respect to when investors expect funds toincorporate market impact or swing their NAV in response to net subscriptions or net
redemptions.

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b.

Alternatives to Swing Pricing
i.

Liquidity Fees517

As an alternative to the proposed swing pricing requirement, we could have proposed torequire funds to charge liquidity fees to transacting investors. There are various types of fees that
we considered, which are discussed below.
(a)Dynamic Liquidity Fee

As an alternative, we could have proposed a dynamic liquidity fee that could, inprinciple, be equivalent to swing pricing from the point of view of the transacting investor. For
example, this alternative could charge transacting investors the estimated trading, spread, and, insome cases, market impact costs associated with their subscription or redemption activity,
allowing remaining shareholders to recoup these costs and mitigate dilution. Under thisalternative, like under the proposed swing pricing framework, a fund would be required todetermine a given day’s liquidity fee for subscribers or redeemers based on the fund’s net flows.
Specifically, on a day with net redemptions (subscriptions), the fund would determine a liquidity
fee that reflects the costs redeeming (subscribing) investors are expected to impose on the fundand would only charge redeeming (subscribing) investors the fee.
From an economic (namely non-operational) perspective, the difference between aliquidity fee and swing pricing is the effect on subscribing (redeeming) investors when a fundexperiences net redemptions (subscriptions) and how the anti-dilution benefit is shared amongtransacting and non-transacting fund investors. Specifically, under swing pricing, in the case of
net redemptions, subscribing investors would purchase fund shares at a discount relative to the
NAV because there will be only one transaction price for fund shares determined by swing

517

See also section II.D.1.a for additional discussion of liquidity fee alternatives.

336

pricing. Similarly, in the case of net subscriptions, redeeming investors would receive a premiumfor their redeemed shares because the transaction price for fund shares would be adjusted above
the NAV. As a result, some of the recouped dilution costs from net redemptions (subscriptions)are diverted to other transacting investors – subscribers (redeemers) – rather than to nontransacting fund investors.518 If the fund charges a liquidity fee, on the other hand, subscribing(redeeming) investors would not be purchasing (selling) fund shares at a discount (premium) in
the case of net redemptions (subscriptions). Instead, the fee would be borne by redeemers(subscribers) without the commensurate benefit to subscribers (redeemers) and would fully
accrue to the fund instead.519 From this perspective, a liquidity fee may be fairer to redeeming(subscribing) fund investors in the case of net redemptions (subscriptions) compared to swing
pricing. In addition, relative to swing pricing, liquidity fees would be more transparent regarding
the liquidity costs transacting investors are charged and would not change day-to day fundreturns that investors observe.520
However, liquidity fees may be more operationally challenging to implement relative tothe proposed swing pricing requirement. With swing pricing, a fund can pass liquidity costs on toredeeming or purchasing investors via downward or upward adjustments in the NAV to
determine the transaction price for fund shares, with intermediaries receiving this price at the end
518

Under the proposed swing pricing requirement, a fund would still recoup the full dilution costs
associated with net redemptions by charging redeemers for both the dilution cost of redemptions
as well as the cost of allowing subscribers to fund shares at a discount when the fund experiences
net redemptions. Similarly, a fund would still recoup the full dilution costs associated with net
subscriptions by charging subscribers for both the dilution cost of subscriptions as well as the costof allowing redeemers to sell shares at a premium when the fund experiences net subscriptions inexcess of 2%.

519

See e.g., Eaton Vance Comment Letter at https://www.sec.gov/comments/s7-16-15/s71615151.pdf for a description of mechanics and an assertion that fees are economically superior.

520

We recognize that while swing pricing may change the returns that investors see on a daily basis,
it would not change monthly returns and returns reported on a fund’s statement relative to a fee.

337

of the trading day. With a liquidity fee, however, a fund would have to rely on intermediaries topass the liquidity costs on to transacting investors, which may involve greater operational
complexity for intermediaries compared to swing pricing. While we recognize that some funds
and their intermediaries are currently able to apply redemption fees under rule 22c-2, applying
dynamic liquidity fees that may change in size from day-to-day may involve greater operational
complexity and costs. For instance, liquidity fees may require more coordination with a fund’sintermediaries because these fees need to be imposed on a transaction-by-transaction basis byeach intermediary involved—which may be difficult with respect to omnibus accounts thatintermediaries may create to aggregate all customer activity and holdings in a fund. We could
instead require intermediaries to submit purchase and redemption orders separately to transact ina fund’s shares, as some intermediaries already do. This could allow funds or their transfer
agents to apply fees directly, but this type of requirement would also require some intermediaries
to make operational changes because they would no longer be able to net otherwise offsetting
customer purchases and redemptions.
As noted above, this type of dynamic fee would depend on fund flow information. A
dynamic fee could be applied at the time of an investor transaction, in which case a hard close
would still be required so that a fund has complete flow information by the time the NAV is
struck, allowing the fund to determine the corresponding dynamic fee. Alternatively, the fee
could be processed separately and applied to an investor’s account on a delayed basis, obviating
the need for a hard close because funds would no longer need complete flow information at thetime of the initial investor transaction.521 Delayed application of the fee, however, may raisecomplications related to collecting fee amounts from investors, particularly when an investor has
521

See also section II.D.1.a for additional discussion of delayed fee application.

338

otherwise redeemed the full amount of its holdings. Follow-on fees also significantly increase thenumber of transactions to process, and may complicate reporting for custodians and advisers insituations where a transaction may occur in one reporting period but the fee related to thetransaction is not applied until the next reporting period. In addition, an intermediary may facedifficulties projecting upcoming cash balances in its client accounts if there are upcoming fees tobe charged, but the amounts of those fees are unknown. The fund itself may also have challenges
with projecting its own cash balance if it cannot predict when accrued fees will be received fromeach intermediary.
(b)

Set Fee

Another alternative could be a simple fee framework that would require funds to charge a
set fee of a specified percentage of the transaction (e.g., 1%). This fee could be designed to either
apply for all investor transactions, apply if redemptions or subscriptions exceed certain
thresholds, or apply only on the redemption side or only on the purchase side. Such an alternative
could reduce the operational burdens imposed on funds with respect to estimating trading costs
and market impact and, in the case of a fee that is always charged, also would not require that afund receive full order flow data before its NAV is struck. However, this alternative could also
lead funds to over- or under-charge transacting investors because the trading costs a fundexperiences for a given level of net redemptions or subscriptions may vary nonlinearly with thesize of net redemptions or net subscriptions. For example, a fund trading to accommodate
relatively small redemptions or subscriptions would most likely not result in market impact costs,
while accommodating substantial redemption or subscription activity might result in market
impact costs. As a result, a fund might undercharge transacting investors relative to the trading
costs their activity imposes on a fund in cases when the set fee is lower than the trading costs339

implied by the fund’s aggregate investor activity. Therefore, in such instances this alternative
may be less effective than swing pricing at mitigating dilution. Similarly, a fund might
overcharge transacting investors relative to the trading costs their activity imposes on a fund incases when the set fee is higher than the trading costs implied by the fund’s aggregate investor
activity, non-transacting investors are enriched at the expense of transacting investors. If such a
set fee could be calibrated correctly, the effects of under- or over-charging transacting investors
might offset each other. However, perfectly calibrating a fee would require that a fund correctly
forecast the likelihood and magnitude of net redemptions and net subscriptions, as well as thecorresponding trading costs associated with such flows, which may not be feasible.
(c)
Fee Adjusted for Bid-Ask Spreads or otherTransaction Costs
Relatedly, another simpler liquidity fee alternative could still use fees that are dynamic in
the sense that they respond to market conditions such as bid-ask spreads or other known
transaction costs associated with trading underlying investments, but are not tailored to the order
flow a fund receives on a given day. For example, a fund could charge a liquidity fee on bothsubscriptions and redemptions on a given day that reflects the estimated costs of buying andselling the fund’s underlying assets, respectively, excluding factors that depend on order flow,such as market impact. Such an alternative would still require funds to estimate trading costs, butwould not require that a fund receive full order flow data before its NAV is struck.
Economically, this alternative is equivalent to dual pricing, discussed below, which instead
charges these costs by establishing separate transaction prices for subscriptions and redemptions.

340

(d)
Liquidity Fee When Trading Costs Significantly
Increase522
As another alternative, we could have proposed a liquidity fee that would only apply
under certain conditions, such as when trading costs are significantly above those typicallyexperienced. Under this approach, either the Commission could define the circumstances thatwould trigger the fee or funds could define the conditions under which the fee would apply. In
the latter case, a fund would establish written policies and procedures designed to mitigate
dilution and recoup the costs the fund reasonably expects to incur as a result of shareholder
redemptions.
In both scenarios, this alternative may be less costly for funds relative to the above
alternatives, to the extent that applying the fee less frequently is less operationally burdensome.
Under this alternative, funds would be able to recoup trading costs when these costs significantly
increase (e.g., during periods of market stress), without increasing the costs of operation duringother times. The benefits of this approach to investors would depend on the relative magnitude ofdilution realized during normal periods when trading costs are not significantly increasing versus
the cost of applying an anti-dilution tool on a daily basis. To the extent that dilution during
normal times is negligible while the operational burden of applying the fee is not, a fee thatapplies only when trading costs increase significantly may benefit fund investors. However, tothe extent that dilution during normal times can accumulate to a significant amount over time,
fund investors would not be protected against it. The benefit of this alternative would also
depend on whether the specified conditions that trigger the fee could be anticipated by investors
prior to the fund imposing the fee. To the extent that investors would be able to forecast that afund is moving closer to the fee trigger, they may decide to preemptively redeem their shares
522

See also section II.D.3.b for additional discussion of this alternative.

341

before the fee is initiated, potentially exacerbating the first-mover advantage and contributing tofurther fund stress.
The economic tradeoffs of this alternative would also depend on whether a fund defines
the circumstances under which the fee would apply or the Commission would define suchcircumstances. Under the first scenario, funds would be able to tailor the triggers to their specificcircumstances, such as the fund size, the portfolio characteristics, and investor base composition,
as well as the historically observed dilution. As a result, funds may be better equipped to protect
their investors during times of increased trading costs. However, under this scenario, funddiscretion over the fee triggers may result in some funds defining triggers in a suboptimal way inorder to compete with similar funds for investors. Under the second scenario, funds would nothave such discretion, which could better protect investors from dilution. However, because
mutual funds vary significantly in their portfolios and sizes, it would be challenging to establish
a trigger that is not dependent on timely flow information and would equally protect investors of
all funds from dilution.
(e)Liquidity Fee for Funds That Are Not Primarily
Highly Liquid When Trading Costs Increase Significantly
As another alternative, we could have proposed a liquidity fee only for certain types offunds. For example, we could have proposed a fee that funds that are not primarily highly liquid(e.g., funds that hold less than an identified percentage of their portfolio in highly liquid assets,such as less than 50%, 66%, or 75%) would be required to impose during periods of increased
trading costs. Under this alternative, affected funds and their investors would experience similar
benefits and costs as in the alternative above. However, the aggregate magnitude of these effects
would be smaller because it would not affect all mutual funds. To the extent that funds thatinvest primarily in highly liquid investments do not experience trading cost increases that are as342

substantial as all other funds during periods of market stress, this alternative may benefit
investors in primarily highly liquid funds by not imposing additional costs related to establishingpolicies and procedures related to the liquidity fee. However, all funds would have to establish
procedures for monitoring whether they hold primarily highly liquid investments or not.
The cost savings of this alternative relative to the alternative that would require a fee for
all funds during periods of increased trading costs would depend on how often highly liquid
investments may become temporarily less liquid. To the extent that funds expect certain
investments that are highly liquid during normal times to become less liquid during stressperiods, these funds may have to preemptively establish compliance around the liquidity fee
implementation. This effect would be more pronounced for funds that are near the 50%
threshold.
This alternative may also affect competition in the mutual fund sector, to the extent it
could make investment in mutual funds that are not primarily highly liquid less attractive toinvestors. In addition, some funds may exit some of their moderately liquid and illiquid
investments in order to fall under the definition of primarily highly liquid. This, in turn, may
make markets for moderately liquid and illiquid investments more illiquid and negatively affectcapital formation for these investments.
ii.

Dual Pricing523

As an alternative to the proposed swing pricing requirement, we could have required thatfunds implement dual pricing, which is used in some other jurisdictions. Dual pricing would
effectively set two transaction prices for a fund: one price for purchases and another for
redemptions. The price adjustments for the funds’ shares could either be constant or calculated to523

See also section II.D.1.b for additional discussion of this alternative.

343

reflect the estimated costs of buying and selling the fund’s underlying investments, excluding
factors that depend on order flow, such as market impact. The first approach would be similar to
one of the set fee alternative discussed above, as it would be less reliant on fund flow
information than the proposed swing pricing requirement, but the charge imposed on transacting
investors would also less accurately reflect the specific liquidity features of the fund’s current
investments in light of the size of the redemptions the fund is experiencing. As an example of thesecond approach, a fund would set its purchase price to be the fund’s NAV on that day plus anamount that reflects the potential trading costs such as bid-ask spreads that subscriptions impose
on a fund given current market conditions, and exclude factors such as market impact that may
require knowledge of the fund’s order flow on that day. Similarly, the redemption price of a fundshare would be the fund’s NAV minus an amount that reflects the potential trading costs
redemptions would impose on a fund given current market conditions. Operationally, dual
pricing would not require that funds receive complete order flow data prior to determining theirdual transaction prices, removing the need for a hard close. However, dual pricing would requireintermediaries and other market participants to update their processes to handle two potential
transaction prices rather than a single NAV, which would impose costs on such intermediaries.
In addition, intermediaries that currently submit a single net order (e.g., using omnibus
accounting) would need to separately submit aggregate purchases and aggregate redemptions to afund, which would impose costs on such intermediaries.
iii.
Spread Cost Adjustment on Days with Estimated Net
Outflows524
Another alternative to the proposed swing pricing requirement would be to require thatfunds use estimated flows to determine whether they expect to have net redemptions on a given
524

See also section II.D.3.a for additional discussion of this alternative.

344

day and, if so, to require that the fund adjust its current NAV to reflect good faith estimates of
spread costs.525 This alternative would not require funds to assess market impact, nor would it
require that funds use swing pricing on days when a fund estimates that there will be net
subscriptions. By setting the price for fund shares to reflect good faith estimates of spread costs
on days when a fund estimates it will have net outflows, the fund would protect non-transacting
investors from dilution due to the spread costs, to the extent that the fund correctly estimates the
direction of the net flows. This approach could ameliorate first-mover advantage because
redeeming shareholders would be required to pay at least the spread component of transaction
costs imposed on the fund by their redemptions on days where the fund accurately predicts that it
will experience net redemptions. As a result, this alternative may help to mitigate run risk andpotential fire sales of funds’ portfolio holdings. However, basing the decision to apply a spread
cost adjustment on estimated flows may reduce the effectiveness of this alternative by possibly
causing the fund to adjust its share price down on days where transacting investors ultimately do
not dilute remaining fund shareholders. While applying a spread cost adjustment on days when afund incorrectly predicts net redemptions could result in more shareholder dilution than if anadjustment had not been applied, this possibility would not impede the effectiveness of thealternative to mitigate first-mover advantage.
The alternative would impose lower costs on funds and intermediaries relative to the
proposed swing pricing requirement because there would be no requirement for a hard close and525

U.S. GAAP states that if an asset measured at fair value has a bid price and an ask price (forexample, an input from a dealer market), the price within the bid-ask spread that is mostrepresentative of fair value in the circumstances shall be used to measure fair value, and that theuse of bid prices for asset positions is permitted but not required for these purposes. See FASBASC 820-10-35-36C. Therefore, we recognize that requiring a fund’s share price to be
determined using bid-side values for the underlying investments would introduce inconsistency ininstances where the fund does not use bid prices to value securities for purposes of U.S. GAAP.
As a result, funds needing to apply different pricing for these different purposes could experience
incremental effort and cost.

345

no requirement to estimate market impact factors or other transaction costs. By limiting theadjustment of the share price to a step function (i.e., share price is either adjusted to reflectspread costs or not at all), the alternative avoids any imprecision that may be introduced byhaving the size of the fund’s share price adjustment also depend on the size of predicted net
outflows. To the extent that funds currently do not implement swing pricing because of existing
operational challenges or any stigma that may be associated with the use of that tool, thisalternative would likely overcome these challenges by prescribing an approach that is mandatory
and that could be implemented more easily under existing operational structures compared to the
proposed swing pricing requirement that would rely on a hard close while still providing someanti-dilution benefits to mutual fund investors.
iv.

A Choice of an Anti-Dilution Tool

As another alternative to the proposed swing pricing requirement, we could haveproposed to require all funds to implement an anti-dilution tool, while allowing them to choose
among several tools, such as swing pricing, liquidity fees, or other alternative approaches
discussed above. This alternative may benefit funds and their investors, to the extent that certain
anti-dilution tools are better suited for certain types of funds in reducing investor dilution. For
example, funds that have infrequent subscriptions or redemptions may find a liquidity fee lessoperationally costly to implement compared to other tools. Similarly, funds that have morevolatile flows on a day-to-day basis may find that swing pricing would be a more effective
approach to combat dilution because the trading costs would be recouped instantaneously withinvestors’ trading activity, compared to liquidity fees that would not be recouped by a fund untila later date. Further, funds that have de minimis transaction costs for prolonged periods of time
may find a liquidity fee that would only apply during stressed conditions more appropriate from346the operational prospective. This alternative may benefit mutual fund investors by increasing
investor choice relative to the proposal. To the extent that different investors have varying
preferences for anti-dilution tools, they would be able to invest in the mutual fund sector
according to their preferences. As such, this alternative may increase competition in the mutualfund sector. However, this alternative could be more costly relative to the proposal and otheralternatives discussed above because fund intermediaries and service providers would need toestablish systems that accommodate all the anti-dilution options that would exist across mutual
funds.
3.

Hard Close Requirement

The proposal would require a hard close, meaning that an order may be executed at thecurrent day’s price only if the fund or its designated parties receive the order before 4 p.m. ET.
As discussed in section III.B.3, funds and intermediaries are likely to incur significant costs inorder to comply with the hard close requirement. Therefore, we have considered alternative
approaches to the hard close requirement.
a.

Indicative Flows526

One alternative to the proposed hard close requirement would be to require that funds
receive indicative flow information from intermediaries by an established time. This approach
would be less likely to affect investors who place orders near the 4 p.m. ET pricing time, asintermediaries may not necessarily need to establish earlier cut-off times. While intermediaries
would incur one-time costs to update their systems and processes to calculate indicative flow
information, as well as ongoing costs related to the transmission of the indicative flow
information to funds or their designated parties, these costs would be lower than the costs
526

See also section II.D.2.a for additional discussion of this alternative.

347

intermediaries would incur under the proposed hard close requirement. The proposed hard closerequirement, however, would likely not result in the same ongoing costs for intermediaries that
this alternative would require. For example, intermediaries may need to develop a process for
estimating indicative flows and sending them to funds, separate from the process of submittingorders to fund transfer agents and Fund/SERV. Likewise, funds would need to develop processes
for receiving the indicative flow information and monitoring whether each intermediary has
provided indicative flow information in a timely manner. Moreover, indicative flow information
likely would be less accurate and complete than the flow information funds would receive under
the proposed hard close requirement. As a result, funds’ swing pricing determinations may beless accurate than under the proposal (e.g., a fund may not adjust its NAV when it should have,or vice versa, due to incomplete flow information), which would limit a fund’s ability to mitigate
dilution through swing pricing.
b.

Estimated Flows527

Another alternative approach to a hard close would be to continue allowing funds to use
reasonable estimates of their flows in determining transaction costs from investors’ trading
activity and to provide them with a safe harbor in cases where the produced estimates of thefunds’ net flows are different from realized net flows. This approach would have limited effecton intermediaries, as funds would base their estimates on models incorporating available
information. However, because funds would base anti-dilution decisions on less precise flow
data, this alternative could reduce the effectiveness of a fund’s swing pricing by possibly causing
it to adjust its NAV on days where transacting investors ultimately do not dilute remaining fundshareholders. On days where a fund estimates the direction of flows incorrectly, e.g., if a fund527

See also section II.D.2.b for additional discussion of this alternative.

348

forecasts that it will experience net subscriptions but actually experiences net redemptions,applying a swing factor could result in more shareholder dilution than if a swing factor had notbeen applied. This may make mutual funds less attractive to investors. However, the success of
this approach would depend on how well funds can predict the additional flows that they receive
after their NAV has been determined.
c.

Later Cut-Off Times for Intermediaries528

Another alternative is to establish later cut-off times for intermediaries to submit order
flow information, for example, two or three hours after the fund’s pricing time (e.g., 6 or 7 p.m.
ET if the fund’s pricing time is 4 p.m. ET). Under this alternative, intermediaries would havemore time to submit their orders to funds and may not need to impose a cut-off time for investor
orders earlier than the pricing time. To the extent that investors would not be subjected to an
earlier cut-off time under this alternative, investors that use affected intermediaries would notexperience disadvantage over investors that trade with the fund directly in terms of different
degree of market risk described above. However, although this alternative may be more
beneficial to investors compared to the proposed hard close requirement, it would require similar
operational changes and impose similar costs. For example, retirement plan recordkeepers would
still need to submit orders before receiving funds’ prices. This alternative, however, may be lessdisruptive than the proposed hard close requirement for intermediaries that typically provide
orders by around 6 or 7 p.m. ET, which we understand is the case for many broker-dealers.
Under this approach, funds would likely need to publish their prices later than current practice toprovide time to make swing pricing decisions. This could delay the distribution of pricing
information to the public and to intermediaries. However, because intermediaries would no528

See also section II.D.2.c for additional discussion of this alternative.

349

longer be revising orders contingent on the fund’s share price to the same extent, this may not be
as disruptive as a later NAV publication would be under the status quo.
4.

Commission Reporting and Public Disclosure

As an alternative, we could have proposed public disclosure of position-level liquidity
classifications. This alternative may provide more information about a fund’s liquidity risk
profile to investors, thereby improving their portfolio allocation decisions. While funds may havegained some insight into how other funds manage liquidity risk via their narrative disclosures, tothe extent those disclosures tended to be boilerplate, observing other funds’ liquidity profiles
might provide some information that is useful in a fund’s own liquidity classification process.
Although the process for funds’ liquidity classifications will be more uniform across funds under
the proposal, we recognize that the same investment may still be classified differently bydifferent funds due to classifications being position-dependent (i.e., the more of a security is heldby a fund, the less liquid its classification would be). Therefore, even if position-level liquidity
classifications are disclosed, the comparison of classifications across funds may still not be as
meaningful for investors in all cases. Position-level disclosure also could potentially reveal
additional information about a fund’s trading strategy if, for example, a security was classified as
illiquid solely because the fund had material non-public information about the security. In
addition, investors also may find the proposed aggregate liquidity information more useful, to theextent that they are focused on a fund’s overall liquidity profile rather than the liquidity of any
particular investment.
We also could have proposed filings would become public when they are filed as
opposed to keeping the filings confidential until 30 days after they are filed (60 days after theend of the reporting period). This could take several forms. For example, we could maintain the350

proposed filing deadline, which would mean that a fund’s filing would be due and become public
30 days after the end of the reporting period. Alternatively, we could pair a publication-uponfiling framework with lengthening the delay between the end of the reporting period (forexample, to 45 days after the end of the period). Making filings public immediately upon filing
could improve investor understanding of fund portfolios because they would be able to review
the information closer to real time (though still with a substantial delay), assuming that the filingdeadline was 30 days after each month end as proposed. This would enhance the ability ofinvestors to choose the right fund that suits their portfolio construction goals. Many funds
already make portfolio information public with a 30-day delay on a voluntary basis, but thisalternative would result in a consistent framework across the entire open-end fund industry. Thisapproach would also reduce the amount of information the Commission would be required tokeep confidential.529 On the other hand, to the extent funds are at risk of predatory trading or
copy-catting when their portfolios become public sooner, this approach could serve to increase
those risks.530
We could have taken the inverse approach as well. Instead of providing for publication at
the same time information is filed, we could have provided for a longer period between the time
information is filed and when it is made public, and also could have extended the deadline forfiling. The benefits and costs of this alternative would likewise be the reverse of the publicationupon-filing alternative. Namely, this alternative could reduce the risks of predatory trading or
copy-catting because by the time the information became public, it would be more likely to be
529

Certain data would remain confidential, such as the composition of the fund’s “miscellaneoussecurities.” See supra section II.E.1.d.

530

See supra note 287 (comment letter from major industry participant citing research showing thatrisk of predatory trading or copycatting as a result of increased publication frequency isoverstated).

351

stale. On the other hand, it would also be less useful to investors seeking to understand theirfunds and, if we paired a delay in publication with a delay in the deadline for filing with theCommission, it would be less useful to the Commission as well.
F.

Request for Comment

We request comment on all aspects of the economic analysis of the proposed
amendments. To the extent possible, we request that commenters provide supporting data andanalysis with respect to the benefits, costs, and effects on competition, efficiency, and capitalformation of adopting the proposed amendments or any reasonable alternatives. In particular, we
ask commenters to consider the following questions:234.

What additional qualitative or quantitative information should be considered aspart of the baseline for the economic analysis of these amendments?
235.

Are the benefits and costs of proposed amendments accurately characterized? If

not, why not? Should any of the costs or benefits be modified? What, if any, othercosts or benefits should be taken into account? If possible, please offer ways of
estimating these benefits and costs. What additional considerations can be used toestimate the benefits and costs of the proposed amendments?
236.

Are the benefits and costs of the proposed swing pricing amendments accurately

characterized? If not, why not? What, if any, other costs or benefits should be taken
into account? If possible, please offer ways of estimating these benefits and costs.
237.

Are the effects on competition, efficiency, and capital formation arising from the

proposed amendments accurately characterized? If not, why not?

352

238.

Are the economic effects of the above alternatives accurately characterized? If

not, why not? Should any of the costs or benefits be modified? What, if any, othercosts or benefits should be taken into account?
239.

Are the economic effects of the alternative approaches to implementing swing

pricing adequately characterized? If not, why not? Should any of the costs or benefits
be modified? What, if any, other costs or benefits should be taken into account?
240.

Are there other reasonable alternatives to the proposed amendments that should

be considered? What are the costs, benefits, and effects on competition, efficiency,
and capital formation of any other alternatives?
241.

What effects would the proposed changes have on (1) investment options

available to investors if certain asset classes are not available or are less available inopen-end vehicles (including UITs); and (2) the markets for those underlying assets,
including, but not limited to, the market for bank loan interests.
242.

How likely is it that open-end fund managers will choose to offer their products

via different structures, such as ETFs, closed-end funds, or CITs, rather than comply
with the proposed requirements? Relatedly, how likely is it that investors will moveassets from open-end funds to other types of funds in response to the proposed
requirements?
243.

Are there data sources or data sets that can help refine the estimates of thebenefits and costs associated with the proposed amendments? If so, please identify
them.
244.

Are there data sources that can help us estimate the aggregate number and valueof transactions in mutual fund shares with more accuracy? If so, please identify them.

353

245.

Which third-party service providers would be affected the most by the proposed

amendments? Please explain why. If possible, please provide data on the number andsize of such entities.
246.

Would these amendments cause a fund or any third-party service providers

assessing liquidity to have new or unforeseen burdens? Would this increase the costof third-party services?
247.

Would certain types of funds have to substantially rebalance their portfolios as aresult of the proposed changes to the liquidity risk management program? Provide alist of specific investments that funds would have to hold in limited amounts under
the proposed amendments. Are there close alternatives to these investments that funds
would be able to hold? For example, can bank loan interests be substituted with
CLOs? If no, please explain why.
248.

Can the vertical slice assumption for the purposes of calculation of stressed tradesize be implemented for all types of fund investments? For example, are there
indivisible minimum trade units for any investments for which 10% of such aninvestment would not be possible to sell due to such indivisibility? How do funds
currently operationalize the calculation of the reasonably anticipated trade size: via a
vertical slice assumption or in any other way for indivisible investments?
249.

What price impact models do funds currently use for liquidity classifications of

their investments? Are there advantages of using one model over another? Are there
price impact models available to use only through certain third-party service
providers assessing liquidity? Do service providers assessing liquidity vary in costs
for their services?

354

250.

What would be the costs of obtaining daily pricing and liquidity information forthe purposes of daily liquidity classifications? What are the current costs related toobtaining such information?
251.

Do funds currently monitor their liquidity classifications on a daily basis? Are

there specific types of funds that do not currently evaluate their classifications more
frequently than monthly?
252.

To what extent would funds implement swing pricing if it were optional, rather

than mandatory, as long as funds received complete order flow data prior todetermining their NAVs on a given day?
253.

How dilutive are fund purchases relative to fund sales? How do the benefits ofswing pricing in response to purchases compare to the benefits of swing pricing in
response to sales?
254.

Which components of trading costs contribute the most to fund dilution? How

significant are market impact costs? If we adopted an alternative that excluded market
impact from swing factor calculations, would the rule’s effectiveness at mitigating
dilution be significantly reduced?
255.

Of the alternatives to swing pricing discussed above, which strikes the mostappropriate balance of investor benefits and implementation costs? Is it more
operationally complex and costly to charge fund investors a liquidity fee, or to use
dual pricing?
256.

What are the benefits of processing trade information via omnibus accounts? How

costly would transmitting individual investor order information to funds be forintermediaries? Are per-trade costs the same for all intermediaries? Would there be355other ancillary benefits associated with a move away from omnibus account and order
netting?
257.

What other costs or impediments beyond system switching costs would the

proposed hard close requirement impose? Will these costs be different for different
types of intermediaries? If so, what is the differential? How do these costs compare to
the potential future benefits of the hard close, such as more efficient orderprocessing?
258.

Will certain intermediaries be unable to bear the costs of the proposed hard closerequirement? If yes, please explain why. Would the costs differ, depending onwhether an intermediary or a service provider is affiliated with a fund family or not?
259.

What effect will a hard close requirement have on the availability of certaintransaction types offered to investors? Please list the types of transactions that would
become unavailable under the proposed hard close requirement?
260.

Would investors and other data users benefit significantly from the proposedmonthly N-PORT disclosures? Would the quality and availability of mutual funds’
portfolio data available to investors and other users improve significantly under the
proposed amendments?
261.

Would the proposed aggregate liquidity disclosure benefit investors? What are thebenefits and costs of such disclosure relative to investment-by-investment liquidity
classification disclosure? Are there any substantial burdens that funds would
experience with the detailed liquidity classification disclosure beyond the costs
associated with the disclosure process itself?

356

IV.

PAPERWORK REDUCTION ACTA.

Introduction

Certain provisions of the proposed amendments contain “collection of information”
requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).531 We aresubmitting the proposed collections of information to the Office of Management and Budget(“OMB”) for review in accordance with the PRA.532 The proposed amendments would have aneffect on the current collection of information burdens of rules 22e-4 and 22c-1 under theInvestment Company Act, as well as Forms N-PORT and N-CEN under the Investment
Company Act and Form N-1A under the Investment Company Act and the Securities Act.
The titles for the existing collections of information we are amending are: (1) “Rule 22e4 (17 CFR 270.22e-4) under the Investment Company Act of 1940, Investment Company
Liquidity Risk Management Programs” (OMB control number 3235-0737); (2) “Rule 22c-1
Under the Investment Company Act of 1940, Pricing of redeemable securities for distribution,
redemption and repurchase” (OMB control number 3235-0734); (3) “Rule 30b1-9 and Form NPORT” (OMB control number 3235-0730); (4) “Form N-1A under the Securities Act of 1933and under the Investment Company Act of 1940, Registration Statement of Open-End
Management Investment Companies” (OMB control number 3235-0307); and (5) “Form NCEN” (OMB control number 3235-0729).
An agency may not conduct or sponsor, and a person is not required to respond to, acollection of information unless it displays a currently valid OMB control number. Eachrequirement to disclose information, offer to provide information, or adopt policies andprocedures constitutes a collection of information requirement under the PRA. These collections
531

44 U.S.C. 3501 through 3521.

532

44 U.S.C. 3507(d); 5 CFR 1320.11.

357

of information would help funds manage liquidity, mitigate dilution of shareholders’ interests,
and provide information to the Commission and investors. The Commission staff would also use
the collection of information in its examination and oversight program in identifying patterns andtrends across registrants. We discuss below the collection of information burdens associated withthe proposed rule and form amendments.
B.

Rule 22e-4

Rule 22e-4 requires funds to establish a written liquidity risk management program that isreasonably designed to assess and manage liquidity risk. Several of the proposed amendments torule 22e-4 would modify existing collection of information requirements. These amendments
include:

Changing the framework for classifying the liquidity of a fund’s portfolio
investments, including requiring use of a stressed trade size, defining the value
impact standard, and requiring daily reviews of the fund’s liquidity classifications.
We believe funds would update their policies and procedures that incorporate
liquidity risk management program elements to reflect these proposed
amendments.



Expanding the scope of funds that must determine and maintain a highly liquid
investment minimum. As a result of this proposed change, additional funds would
be required to comply with the current rule’s collection of information
requirements related to highly liquid investment minimums. These collection of
information requirements include:o The fund’s investment adviser or officers designated to administer theliquidity risk management program must provide a written report to the358fund’s board at least annually that describes a review of the adequacy andeffectiveness of the fund’s liquidity risk management program, including
the operation of the highly liquid investment minimum.
o The fund must adopt and implement policies and procedures forresponding to a shortfall of the fund’s assets that are highly liquid
investments below its highly liquid investment minimum, which must
include reporting to the fund’s board of directors with a brief explanationof the causes of the shortfall, the extent of the shortfall, and any actions
taken in response, and, if the shortfall lasts more than 7 consecutive
calendar days, an explanation of how the fund plans to come back into
compliance with its minimum within a reasonable period of time.
o A fund must maintain a written record of how its highly liquid investment
minimum and any adjustments to the minimum were determined, as wellas any reports to the board regarding a shortfall in the fund’s highly liquid
investment minimum, for five years, the first two years in an easily
accessible place.
The respondents to rule 22e-4 are open-end management investment companies,
including, under certain circumstances, in-kind ETFs and the principal underwriters or depositorsof unit investment trusts, but excluding money market funds. None of the proposed amendments
would affect the rule’s collection of information requirements for unit investment trusts or inkind ETFs. Compliance with rule 22e-4 is mandatory for funds. Information provided to theCommission in connection with staff examinations or investigations is kept confidential subject
to the provisions of applicable law. If information collected pursuant to rule 22e-4 is reviewed by359

the Commission’s examination staff, it is accorded the same level of confidentiality accorded toother responses provided to the Commission in the context of its examination and oversightprogram.
In our most recent Paperwork Reduction Act submission for rule 22e-4, we estimated a
total aggregate annual hour burden of 28,150 hours, and a total aggregate annual external costburden of $0.533 Based on filing data as of December 2021, we estimate that 11,488 funds would
be subject to these proposed amendments.534 The proposed collections of information are
designed to help increase the likelihood that funds are better prepared to manage liquidity during
stressed conditions, and help protect investors from dilution. These collections would also help
facilitate the Commission’s inspection and enforcement capabilities.
The table below summarizes our PRA initial and ongoing annual burden estimatesassociated with the proposed amendments to rule 22e-4. The following estimates of averageburden hours and costs are made for purposes of the Paperwork Reduction Act.
Table 8: Rule 22e-4 PRA EstimatesInternal
initialburden hours

Internal annual
burden hours1

Internal time
costs

Annual external
cost burden$4634$1,852$1,0005$3,3136$3,313$0

Wage rate2

RULE 22e-4 PRA ESTIMATES
Adopting and implementing
revised policies andprocedures

9 hours

4 hours

3 hours

1 hour

3

533

The most recent rule 22e-4 PRA submission was approved in 2020 (OMB Control No. 32350737). That PRA estimated that 846 fund complexes were subject to rule 22e-4. We continue tobelieve that funds within the same fund complex would experience certain efficiencies in
responding to the collection of information requirements and, depending on the size of the fundcomplex, per fund costs may be higher or lower than our estimated averages; however, we arechanging from a fund complex to a per fund estimate based on staff experience with per fundburdens and to improve the quality of this estimate.

534

As of Dec. 2021, we estimate 11,488 open-end funds, excluding money market funds.

360

Internal
initialburden hours

Internal annual
burden hours1

Wage rate2

Internal time
costs

Annual external
cost burden

RULE 22e-4 PRA ESTIMATES
Board reporting

7

1 hour

$3198

$319

$5319

Recordkeeping

1 hour

$8610

$86

$0

Total new annual burden
per fund7 hours$5,570$1,531

Number of funds

× 11,488
funds11

× 11,488 funds

× 11,488 funds

Total new aggregate annual
burden80,416 hours$63,988,160$17,588,128

TOTAL ESTIMATED BURDENS INCLUDING AMENDMENTS
Current aggregate annual
burden estimates+ 28,150 hours+ $0

Revised aggregate annual
burden estimates

108,566 hours$17,588,128

Notes:. Includes initial burden estimates annualized over a 3-year period.
2. The Commission’s estimates of the relevant wage rates are based on the salary information for the securities industry compiled by Securities
Industry and Financial Markets Association’s Office Salaries in the Securities Industry 2013, as modified by Commission staff (“SIFMA Wage
Report”). The estimated figures are modified by firm size, employee benefits, overhead, and adjusted to account for the effects of inflation.
3. Reflects 9 hours of initial internal burden hours of amending existing policies and procedures, annualized over a 3-year period, and 1 hour ofongoing annual internal burden to maintain the policies and procedures.
4. This blended rate is based on the following: $360 (hourly rate for a senior portfolio manager); $510 (hourly rate for an assistant general
counsel); $580 (hourly rate for a chief compliance officer); and $400 (hourly rate for a compliance attorney).
5. We estimate that the average cost of external services is $1,000 per fund. The Commission’s estimates of the relevant wage rates for external
time costs, such as outside legal services, take into account staff experience, a variety of sources including general information websites, andadjustments for inflation. The cost of external services for rule 22e-4 has not been previously estimated. We estimate this cost for external
services for the proposed amendments to rule 22e-4 taking into account staff experience and outreach on liquidity classification vendors.
6. This blended rate is based on the following estimates: 2 hours of time for a board of directors at an average cost per hour of $4,770 and 1 hourof time for a compliance attorney to prepare materials for the board’s review at an average cost per hour of $400. This estimated cost for a boardof directors assumes an average of 9 board members and has been adjusted for inflation.
7. Although the average reporting burden per fund may be greater than 1 hour when a fund has to report a highly liquid investment minimum
shortfall to its board, we estimate that not all funds would experience a highly liquid investment minimum shortfall each year.
8. This blended rate is based on the following: $360 (hourly rate for a senior portfolio manager); $339 (hourly rate for a compliance manager);$510 (hourly rate for an assistant general counsel); and $68 (hourly rate for a general clerk).
9. This estimated burden is based on the estimated wage rate of $531/hour, for 1 hour, for outside legal services. The Commission’s estimates of
the relevant wage rates for external time costs, such as outside legal services, take into account staff experience, a variety of sources including
general information websites, and adjustments for inflation.
10. This blended rate is based on the following: $104 (hourly rate for a senior computer operator); and $68 (hourly rate for a general clerk).
11. Includes open-end funds, excluding money market funds, as reported on Form N-CEN as of Dec. 2021. The internal and external burdens in
the table represent per fund estimates. The most recent rule 22e-4 PRA submission approved in 2020 (OMB Control No. 3235-0737) used per
fund complex estimates. We continue to believe that funds within the same fund complex would experience certain efficiencies in responding to361

the collection of information requirements and, depending on the size of the fund complex, per fund costs may be higher or lower than ourestimated averages.

C.

Rule 22c-1

Rule 22c-1 enables funds to use swing pricing as a tool to mitigate shareholder dilution.
Swing pricing is currently optional for certain open-end funds. The proposed amendments would
amend rule 22c-1 to make swing pricing for open-end funds (other than ETFs or money market
funds) mandatory instead of optional. Funds that would be required to implement swing pricing
under our amendments must establish and implement swing pricing policies and procedures.535
The policies and procedures must: (1) provide that the fund will adjust its net asset value if thefund has net redemptions or if it has net purchases exceeding the inflow swing threshold; and (2)specify the process for determining the swing factor. The rule also would require a fund to retain
a written copy of the periodic report provided to the board prepared by the swing pricing
administrator that describes, among other things, the swing pricing administrator’s review of theadequacy of the fund’s swing pricing policies and procedures and the effectiveness of theirimplementation. The retention of these records is necessary to allow the staff during
examinations of funds to determine whether a fund is in compliance with its swing pricing
policies and procedures and with rule 22c-1.
Compliance with rule 22c-1(b) would be mandatory for funds subject to the proposedswing pricing requirements. Based on filing data as of December 2021, we estimate that 9,043
funds would be subject to these proposed amendments.536 Information provided to theCommission in connection with staff examinations or investigations is kept confidential subject
to the provisions of applicable law. If information collected pursuant to rule 22c-1 is reviewed by
the Commission’s examination staff, it is accorded the same level of confidentiality accorded to535

See proposed rule 22c-1(b).

536

As of Dec. 2021, we estimate 9,043 open-end funds, excluding money market funds and ETFs.

362

other responses provided to the Commission in the context of its examination and oversightprogram.
The most recent PRA submission estimated that 5 fund complexes had funds that might
adopt swing pricing policies and procedures under the optional rule.537 The current estimatedhour burdens and time costs associated with rule 22c-1, including the burden associated with therequirements that funds adopt policies and procedures and obtain board approval of them,provide periodic written reports by the swing pricing administrator to the board, and retain
certain records and written reports related to swing pricing, are an average aggregate annual
burden of 113 hours and average aggregate time costs of $73,803.538
The table below summarizes our PRA initial and ongoing annual burden estimatesassociated with the proposed amendments to rule 22c-1. The following estimates of averageburden hours and costs are made solely for purposes of the Paperwork Reduction Act.
Table 9: Rule 22c-1 PRA Estimates
Initial internalburden hours

Internal annual
burden hours1

12 hours

5 hours3

3 hours

1 hourx

Wage rate2

Internal time
costs

Annualexternal costburden$4094$2,045$1,0005$3,3136$3,313$0

Swing Pricing Policies
and Procedures

537

The most recent rule 22c-1 PRA submission was approved in 2020 (OMB Control No. 32350734). We continue to believe that funds within the same fund complex would experience certain
efficiencies in responding to the collection of information requirements and, depending on thesize of the fund complex, per fund costs may be higher or lower than our estimated averages;
however, we are changing from a fund complex to a per fund estimate based on staff experience
with per fund burdens and to improve the quality of this estimate.

538

The estimated burden hours include 280 total hours (or 56 hours per fund complex) to initiallyprepare and approve swing pricing policies and procedures, amortized over 3 years, and 20 total
hours (or 4 hours per fund complex) to retain swing pricing records under rule 22c-1 each year.

363

Swing Pricing Board
Reporting

2 hours

Swing Pricing
Recordkeeping

1 hourTotal new annual
burden per fund

$4007

$800

$5318

$869

$86

$0

9 hours$6,244$1,531

Number of funds

× 9,043 funds10

× 9,043 funds10

× 9,043 funds10

Total new annual
burden81,387 hours$56,464,492$13,844,833

x

TOTAL ESTIMATED BURDENS, INCLUDING AMENDMENTS
Current burden
estimates

113 hours$73,803

Revised burden
estimates

81,387 hours$56,464,492$13,844,833

Notes:
1. Includes initial burden estimates annualized over a 3-year period.
2. See supra Table 8, at note 2.
3. We estimate that each fund would spend 1 hour each year, on average, to update its swing pricing policies and procedures.
4. The $409 wage rate reflects current estimates of the blended hourly rate for a senior accountant ($237) and a chief compliance officer($580).
5. We estimate that the average cost of external services is $1,000 per fund. The Commission’s estimates of the relevant wage rates forexternal time costs, such as outside legal services, take into account staff experience, a variety of sources including general information
websites, and adjustments for inflation.
6. This blended rate is based on the following estimates: 2 hours of time for a board of directors at an average cost per hour of $4,770
and 1 hour of time for a compliance attorney to prepare materials for the board’s review at an average cost per hour of $400. Thisestimated cost for a board of directors assumes an average of 9 board members and has been adjusted for inflation.
7. Reflects an estimated wage rate of $400 per hour for a compliance attorney.
8. This estimated burden is based on the estimated wage rate of $531/hour, for 1 hour, for outside legal services. The Commission’s
estimates of the relevant wage rates for external time costs, such as outside legal services, take into account staff experience, a variety ofsources including general information websites, and adjustments for inflation.
9. The $86 wage rate reflects current estimates of the blended hourly rate for a senior computer operator ($104) and a general clerk($68).
10. Includes open-end funds, excluding money market funds and ETFs, as reported on Form N-CEN as of Dec. 2021. The internal andexternal burdens in the table represent per fund estimates. The most recent rule 22c-1 PRA submission approved in 2019 (OMB Control
No. 3235-0734) used fund complex estimates. We continue to believe, however, that funds within the same fund complex would
experience certain efficiencies in responding to the collection of information requirements and, depending on the size of the fund complex,
per fund costs may be higher or lower than our estimated averages.

D.

Form N-PORT

Form N-PORT requires registered management investment companies (except for money
market funds and small business investment companies) and ETFs that are organized as unit
investment trusts to report portfolio holdings information in a structured, XML format. The form
is filed electronically using the Commission’s electronic filing system, EDGAR. We propose thefollowing amendments to Form N-PORT:

364



The proposed amendments to Form N-PORT would require filing Form N-PORT on
a monthly basis, within 30 days after the end of each month. Currently, a fund must
maintain in its records the information that is required to be included on Form NPORT not later than 30 days after the end of each month, but is only required to filethat information within 60 days after the end of every third month. We are notproposing to adjust the estimated collection of information burden in connection withthis change, in part because we believe the reduced recordkeeping burden iscommensurate with the increased burden associated with filing the information that
previously would have been preserved as a record. The Commission similarly did not
adjust the PRA burden estimate when it amended Form N-PORT to move from arequirement to file reports monthly to a requirement to prepare the information
monthly but file it quarterly.539

We are proposing to require each open-end fund (other than money market funds andin-kind ETFs) to report the aggregate percentage of its portfolio represented in eachof the three proposed liquidity categories, which would be publicly available. These
funds would be required to adjust the reported amounts to account for the amounts ofmargin or collateral posted in connection with certain derivatives transactions as wellas outstanding liabilities, and to report information about the value of theseadjustments. Currently, these funds are required to report position-level liquidity
information on a non-public section of Form N-PORT, meaning the amendments
would require aggregating that information, making the required adjustments, and539

See 2018 Liquidity Disclosure Adopting Release, supra note 22, at section IV.B.

365

reporting the adjusted aggregate information as well as information about theadjustments that were made.
For open-end funds that would be subject to the swing pricing requirement under the
proposal, we are proposing to provide enhanced transparency into the frequency andamount of each fund’s swing pricing adjustments. Specifically, the proposal would
require these funds to report information about the number of days a fund applied aswing factor during the month and the amount of each swing factor applied.



We also propose conforming amendments to certain existing items to account forother aspects of the proposal, including amendments to the filing frequency of
unstructured portfolio information on Part F of Form N-PORT and miscellaneous
holdings disclosure to account for the proposal to make monthly Form N-PORT
information available to the public, amendments to reflect the proposed amendments
to rule 22e-4, and amendments to certain entity identifiers.

The respondents to these collections of information will be management investmentcompanies (other than money market funds and small business investment companies) and ETFs
that are organized as unit investment trusts. We estimate that there are 12,153 such funds
required to file on Form N-PORT, although certain of the proposed new collections of
information would apply to subsets of these funds, as reflected in the below table.540 The
proposed collections of information are mandatory for the identified types of funds. Certain
information reported on the form is kept confidential, and we propose that this would continue tobe the case.541 We propose that all other responses to Form N-PORT reporting requirements
540

The most recent Form N-PORT PRA submission was approved in 2022 (OMB Control No.
3235-0730). That PRA submission estimated that 11,980 funds were required to file on Form NPORT. Our current estimate has increased due to changes in the numbers of funds.

541

See General Instruction F of Form N-PORT; General Instruction F of proposed Form N-PORT.

366

would not be kept confidential, and instead would be made public 60 days after the end of themonth to which they relate (30 days after they are filed); currently, only the report for every third
month is made public. The proposed amendments are designed to assist the Commission in its
regulatory, disclosure review, inspection, and policymaking roles, and to help investors and othermarket participants better assess different fund products.
In our most recent PRA submission for Form N-PORT, we estimated the annual
aggregate compliance burden to comply with the current collection of information requirements
in Form N-PORT is 1,839,903 burden hours with an internal cost burden of $654,658,288 and an
external cost burden estimate of $113,858,133. We estimate that funds prepare and file theirreports on Form N-PORT either by (1) licensing a software solution and preparing and filing thereports in house, or (2) retaining a service provider to provide data aggregation, validation,
and/or filing services as part of the preparation and filing of reports on behalf of the fund. We
estimate that 35% of funds subject to the N-PORT filing requirements will license a software
solution and file reports on Form N-PORT in house, and the remaining 65% will retain a service
provider to file reports on behalf of the fund.
Table 10 below summarizes our initial and ongoing annual burden estimates associatedwith the proposed amendments to Form N-PORT. The following estimates of average burden
hours and costs are made solely for purposes of the Paperwork Reduction Act.
Table 10: Form N-PORT PRA Estimates
Initial internalburden hours

Internal annual
burden hours1

Wage rate2

Internal time
costs

Annual external
cost burden

$762

$2505

× 4,021 funds6

× 4,021 funds6

PROPOSED AMENDMENTS TO FORM N-PORT
Aggregate Liquidity Classification Reporting
Funds that license asoftware solution toprepare Form N-PORT
Number of funds

3 hours

2 hours3

x

× 4,021 funds6

367

$3814

Funds that retain theservices of a third-party
vendor to prepare Form
N-PORT

3 hours

Number of funds
Subtotal:
Aggregate
Liquidity
Classification

2 hours3

$3815

$762

$2867

× 7,467 funds6

× 7,467 funds6

× 7,467 funds6

22,976 hours$8,753,856$3,140,819$1,524$2506

× 3,165 funds8

× 3,165 funds8$1,524$2867

× 5,878 funds8

× 5,878 funds8

× 5,878 funds8

36,172 hours$13,781,532$2,472,356

Swing Pricing Reporting
Funds that license asoftware solution toprepare Form N-PORT

9 hours

Number of funds
Funds that retain theservices of a third-party
vendor to prepare Form
N-PORT
Number of funds
Subtotal:
Swing Pricing
Reporting

4 hoursx$3815

× 3,165 funds8

9 hours

4 hoursx$3815

Other Proposed Amendments to Form N-PORT
Funds that license asoftware solution toprepare Form N-PORT
Number of funds
Funds that retain theservices of a third-party
vendor to prepare Form
N-PORT
Number of funds
Subtotal:
Other
Proposed
Amendments

1 hoursx$3815

× 4,254 funds9

1 hours$381
× 4,254 funds9

x

$3815

$381

× 7,899 funds9

× 7,899 funds9

12,153 hours$4,630,293

Total estimated burdens for proposed amendments
Total new annual burden

71,301 hours$27,165,681$5,613,175

TOTAL ESTIMATED BURDENS, INCLUDING AMENDMENTS
Current burden
estimates

1,848,326 hours$108,457,536

Revised burden
estimates

1,919,627 hours$114,070,711

Certain products and sums do not tie due to rounding.
Notes:
1. Includes initial burden estimates annualized over a 3-year period.
2. See supra Table 8, at note 2.
3. Reflects estimated initial internal burden of 3 hours, annualized over 3 years, as well as an estimated ongoing annual internalburden of 1 hour.
4. The $381 wage rate reflects current estimates of the blended hourly rate for a senior programmer ($362) and a compliance attorney($400).
5. Represents additional licensing fees that may be incurred as a result of required new functionality.

368

6. Based on Commission filings, we estimate that there are 11,488 open-end funds that would be required to report aggregate liquidity
classification information. We estimate that 35% of these funds (or 4,021) would license a software solution to prepare Form N-PORT
while 65% (7,467) would rely on a third-party vendor.
7. Represents an assumed 2.5% increase in the current $11,440 external cost associated with the proposed collection of information(5% in aggregate for liquidity classification and swing pricing reporting).
8. Based on Commission filings, we estimate that there are 9,043 open-end funds that would be required to report swing pricing
information. We estimate that 35% of these funds (or 3,165) would license a software solution to prepare Form N-PORT while 65%(5,878) would rely on a third-party vendor.
9. Based on Commission filings, we estimate that there are 12,153 funds that file reports on Form N-PORT. We estimate that 35% of
these funds (or 4,254) would license a software solution to prepare Form N-PORT while 65% (7,899) would rely on a third-party vendor.

E.

Form N-1A

Form N-1A is used by registered open-end management investment companies (except
insurance company separate accounts and small business investment companies licensed under
the United States Small Business Administration), to register under the Investment Company Act
and to offer their shares under the Securities Act. Unlike many other Federal informationcollections, which are primarily for the use and benefit of the collecting agency, this informationcollection is primarily for the use and benefit of investors. The information filed with theCommission also permits the verification of compliance with securities law requirements and assures
the public availability and dissemination of the information. In our most recent Paperwork

Reduction Act submission for Form N-1A, we estimated for Form N-1A a total annual aggregate
ongoing hour burden of 1,672,077 hours, and the total annual aggregate external cost burden is$132,940,008.542 Compliance with the disclosure requirements of Form N-1A is mandatory, andthe responses to the disclosure requirements will not be kept confidential.
We propose to amend Item 11(a) of Form N-1A to require, if applicable, that funds
disclose that if an investor places an order with a financial intermediary, the financial
intermediary may require the investor to submit its order earlier to receive the next calculated
NAV. In addition, as a result of the proposed amendments to rule 22c-1 to require that certain
funds use swing pricing, we estimate that additional funds would be required to disclose
542

The most recent Form N-1A PRA submission was approved in 2021 (OMB Control No. 32350307).

369

information about swing pricing in response to certain existing items in the form.543 The
Commission previously estimated that 474 funds would choose to use swing pricing under the
optional framework.544 We now estimate that 9,043 funds would be required to use swing pricing
and to disclose relevant information on Form N-1A.545 We also propose to remove therequirement to provide an upper limit on the swing factor from Item 6(d).
Table 11 below summarizes our initial and ongoing annual burden estimates associatedwith the proposed amendments to Form N-1A. The following estimates of average burden hours
and costs are made solely for purposes of the Paperwork Reduction Act.
Table 11: Form N-1A PRA Estimates
Initial internalburden hours

Internal annual
burden hours1

Wage rate2

Internal time
costs

$3814

$572

Annual external
cost burden

Hard Close
Disclosure of Information
Related to Hard Close

3 hours

Number of funds
Subtotal:
Hard Close

1.5 hours3x

× 9,043 funds

× 9,043 funds

× 9,043 funds

13,565 hours$5,168,075$0

Swing Pricing Reporting
Swing Pricing Disclosure
Number of funds
Subtotal:
Swing Pricing

2 hours

1.67 hours5
× 8,569 funds

x

$3814

6

14,282 hours$635
× 8,569 funds6

× 8,569 funds6$5,441,315$0Total estimated burdens for proposed amendments
Total new annual burden

27,846 hours$10,609,390

TOTAL ESTIMATED BURDENS, INCLUDING AMENDMENTS
Current burden
estimates

1,672,102 hours$132,940,008

Revised burden
estimates

1,699,948 hours$132,940,008

Certain products and sums do not tie due to rounding.
Notes:
1. Includes initial burden estimates annualized over a 3-year period.
2. See supra Table 8, at note 2.
543

See Items 6(d), 4(b)(2)(ii), 4(b)(2)(iv)(E), and 13(a) of Form N-1A.

544

See Swing Pricing Adopting Release, supra note 11, at n.544 and accompanying text.

545

This estimate, which is as of Dec. 2021, is based on Form N-CEN filings received through May
2022.

370

3. Reflects estimated initial internal burden of 3 hours, annualized over 3 years, as well as an estimated ongoing annual internalburden of 0.5 hours.
4. Reflects current estimates of the blended hourly rate of a compliance attorney and a senior programmer.
5. Reflects estimated initial internal burden of 2 hours, annualized over 3 years, as well as an estimated ongoing annual internalburden of 1 hour.
6. Reflects the number of registered open-end funds (other than money market funds and ETFs) minus 474 funds. While all registeredopen-end funds (other than money market funds and ETFs) would be required to provide the swing pricing disclosure, the Commission
previously estimated that 474 funds would opt to provide optional swing pricing disclosure on Form N-1A and has already accounted
for the filing burden of such funds in its PRA estimates for Form N-1A. See Swing Pricing Adopting Release, supra note 9, at Section VI.

F.

Form N-CEN

Form N-CEN requires registered investment companies, other than face-amountcertificate companies to report annual, census-type information. Filers must submit this reportelectronically using the Commission’s EDGAR system in XML format. We propose thefollowing amendments to Form N-CEN:Adding a requirement that an open-end fund that uses a liquidity service provider
report: (a) the name each liquidity service provider; (b) identifying information,
including the legal entity identifier and location, for each liquidity service provider;(c) if the liquidity service provider is affiliated with the fund or its investment adviser;(d) the asset classes for which that liquidity service provider provided classifications;and (e) whether the service provider was hired or terminated during the reporting
period;

Removing requirements that a filer report certain information regarding its use ofswing pricing; and

Revising the approach to certain entity identifiers.546

The respondents to these collections of information will be registered investmentcompanies with the exception of face amount certificate companies. We estimate that there are546

We do not believe that the proposed amendments to separate the concepts of LEI and RSSD ID
more clearly in the form would change the burdens of the current form, as the form alreadyrequires a fund to report the RSSD ID, if any, if a financial institution does not have an assigned
LEI.

371

2,754 such registrants required to file on Form N-CEN.547 The proposed collections of
information are mandatory. Responses are not kept confidential. The purpose of Form N-CEN is
to satisfy the filing and disclosure requirements of section 30 of the Investment Company Act,and of rule 30a-1 thereunder. The proposed amendments are designed to facilitate theCommission’s oversight of registered funds and its ability to assess trends and risks.
In our most recent PRA submission for Form N-CEN, we estimated the annual aggregate
compliance burden to comply with the current collection of information requirements in Form NCEN is 54,890 burden hours with an internal cost burden of $19,267,461 and an external costburden estimate of $1,344,981.548
Table 12 below summarizes our initial and ongoing annual burden estimates associatedwith the proposed amendments to Form N-CEN. The following estimates of average burden
hours and costs are made solely for purposes of the Paperwork Reduction Act.
Table 12: Form N-CEN PRA Estimates
Initial internalburden hours

Liquidity Service
Provider Reporting

1.5 hours

Internal annual
burden hours1

1 hour3x

Wage rate2

Internal time
costs

$3814

$381

Number of registrants

x 2,754
registrants

x 2,754
registrants

Subtotal: Liquidity
Service Provider
Reporting

2,754 hours$1,049,274

Removal of Swing
Pricing Reporting(0.5) hours5

Number of funds

x 9,854 funds5

x 9,854 funds5

Subtotal: Removal of(4,927 hours)($1,729,377)

x

$3515

Annualexternal costburden$(175.5)

547

This estimate, which is as of Dec. 2021, is based on Form N-CEN filings received through May
2022.

548

The most recent Form N-CEN PRA submission was approved in 2021 (OMB Control No. 32350729). The previous PRA submission estimated that 2,835 registrants were required to file on
Form N-CEN. Our current estimate has decreased due to changes in the numbers of registrants.

372

Swing Pricing
ReportingTotal new annual
burden(2,173 hours)($680,103)

TOTAL ESTIMATED BURDENS, INCLUDING AMENDMENTS
Current burden
estimates

54,890 hours$1,344,981

Revised burden
estimates

52,718 hours$1,344,981

Notes:
1. Includes initial burden estimates annualized over a 3-year period.
2. See supra Table 8, at note 2.
3. Reflects an initial burden of 1.5 hours, annualized over a 3-year period, with an estimated ongoing annual burden of 0.5 hours.
4. The $381 wage rate reflects current estimates of the blended hourly rate for 15 minutes each from a senior programmer ($362) anda compliance attorney ($400).
5. In the most recent PRA submission for Form N-CEN, we estimated that 9,854 funds would incur an additional burden of 0.5 hours
per fund at an internal cost of $351 per hour to report use of swing pricing. The estimated reduced burden on Form N-CEN differs fromthe increased burden we are estimating for Form N-PORT due to the differing requirements. In addition, because it is reversing apreviously estimated increase, the estimated reduced burden on Form N-CEN uses the same estimated wage rate as the previous
estimate, even though we estimate that wage rates have increased.

G.

Request for Comment

We request comment on whether these estimates are reasonable. Pursuant to 44 U.S.C.
3506(c)(2)(B), the Commission solicits comments in order to: (1) evaluate whether the proposedcollection of information is necessary for the proper performance of the functions of theCommission, including whether the information will have practical utility; (2) evaluate theaccuracy of the Commission’s estimate of the burden of the proposed collection of information;(3) determine whether there are ways to enhance the quality, utility, and clarity of theinformation to be collected; and (4) determine whether there are ways to minimize the burden of
the collection of information on those who are to respond, including through the use of
automated collection techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information requirements of the
proposed amendments should direct them to the OMB Desk Officer for the Securities andExchange Commission, MBX.OMB.OIRA.SEC_desk_officer@omb.eop.gov, and should send a
copy to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street373

NE, Washington, DC 20549-1090, with reference to File No. S7-26-22. OMB is required tomake a decision concerning the collections of information between 30 and 60 days after
publication of this release; therefore a comment to OMB is best assured of having its full effect if
OMB receives it within 30 days after publication of this release. Requests for materials
submitted to OMB by the Commission with regard to these collections of information should bein writing, refer to File No. S7-26-22, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736.
V.

INITIAL REGULATORY FLEXIBILITY ANALYSISThe Commission has prepared the following Initial Regulatory Flexibility Analysis(“IRFA”) in accordance with section 3(a) of the Regulatory Flexibility Act (“RFA”).549 It relatesto: (1) the proposed amendments concerning funds’ liquidity risk management programs underrule 22e-4; (2) the proposed swing pricing amendments under rule 22c-1(b); (3) the proposed
hard close requirement under rule 22c-1(a); and (4) the proposed disclosure amendments to Form
N-1A, Form N-PORT, and Form N-CEN.
A.

Reasons for and Objectives of the Proposed Actions

The Commission is proposing amendments to its current rules for open-end funds
regarding liquidity risk management programs and swing pricing. The proposed amendments
would provide additional standards for making liquidity determinations, amend certain aspects of
the liquidity categories, and require more frequent liquidity classifications. The objectives of the
proposed liquidity amendments are to improve liquidity risk management programs to better
prepare these funds for stressed conditions and improve transparency in liquidity classifications.
The proposed amendments also require any open-end fund, other than a money market fund or549

5 U.S.C. 603(a).

374exchange-traded fund, to use swing pricing. The objectives of swing pricing are to more fairly
allocate costs, reduce the potential for dilution of investors who are not currently transacting in
the fund’s shares, and reduce any potential first-mover advantages. In addition, the Commission
is proposing a “hard close” requirement for these funds. The proposed hard close amendments
would serve multiple objectives, including facilitating funds’ ability to operationalize swing
pricing by ensuring that funds receive timely flow information and to modernize orderprocessing generally. Finally, the Commission is proposing amendments to reporting
requirements that apply to certain registered investment companies, including registered openend funds (other than money market funds), registered closed-end funds, and unit investment
trusts. These proposed amendments seek to improve fund disclosure by requiring more timely
reporting of monthly portfolio holdings and related information to the Commission and the
public, amend certain reported identifiers, and make other amendments to require additional
information about open-end funds’ liquidity risk management and use of swing pricing. Each ofthese objectives is discussed in detail in section II above.
B.

Legal Basis

The Commission is proposing the rule and form amendments contained in this document
under the authority set forth in the Investment Company Act, particularly sections 6, 8, 22, 24,
30, 31, 34, 38, and 45 thereof [15 U.S.C. 80a-1 et seq.], the Investment Advisers Act, particularly
section 206 thereof [15 U.S.C. 80b-1 et seq.], the Exchange Act, particularly sections 10, 13, 15,
23, and 35A thereof [15 U.S.C. 78a et seq.], the Securities Act, particularly sections 7, 10, 17,
and 19 thereof [15 U.S.C. 77a et seq.], and the Trust Indenture Act, particularly section 319
thereof [15 U.S.C. 77aaa et seq.].

375

C.

Small Entities Subject to the Amendments

An investment company is a small entity if, together with other investment companies inthe same group of related investment companies, it has net assets of $50 million or less as of theend of its most recent fiscal year.550 Commission staff estimates that, as of June 2022, there were46 open-end management investment companies that would be considered small entities; thisnumber includes 2 money market funds and 11 open-end ETFs. Commission staff also estimates
that, as of June 2022, there were 31 closed-end investment management companies and 5 unit
investment trusts that would be considered small entities.
D.

Projected Reporting, Recordkeeping, and Other Compliance Requirements
1.

Liquidity Risk Management Programs

The proposed amendments to rule 22e-4 would provide additional standards for making
liquidity determinations, amend certain aspects of the liquidity categories, and require more
frequent liquidity classifications. Specifically, the proposal would provide objective minimum
standards that funds would use to classify investments, including by: (1) requiring funds toassume the sale of a stressed trade size, rather than the rule’s current approach of assuming thesale of a reasonably anticipated trade size in current market conditions; (2) defining the value
impact standard with more specificity on when a sale or disposition would significantly change
the market value of an investment; and (3) removing classification by asset class. The proposed
amendments would also remove the less liquid investment category, which would reduce thenumber of liquidity categories from four to three, and expand the scope of the illiquid investment
category. In addition, the proposed amendments would extend the requirement to maintain ahighly liquid investment minimum to a broader scope of funds and would change how the highly
liquid investment minimum calculation and the calculation of the 15% limit on illiquid550

See 17 CFR 270.0-10(a).

376investments take into account the amount of assets that are posted as margin or collateral for
certain derivatives transactions. Finally, the proposal would require daily classifications.
We estimate that approximately 44 funds are small entities that would be required tocomply with the proposed amendments to the liquidity risk management program requirement.551
The proposed amendments would impose burdens on all open-end funds subjected to the rule,
including those that are small entities. We discuss the specifics of these burdens in the Economic
Analysis and Paperwork Reduction Act sections above. These sections also discuss theprofessional skills that we believe compliance with this aspect of the proposal would require.
While we would expect larger funds or funds that are part of a large fund complex to incur
higher costs related to the proposed liquidity rule amendments in absolute terms relative to asmaller fund or a fund that is part of a smaller fund complex, we would expect a smaller fund tofind it more costly, per dollar managed, to comply with the proposed requirements because it
would not be able to benefit from a larger fund complex’s economies of scale. For example,
larger fund complexes would have economies of scale in amending existing liquidity risk
management policies and procedures and in revising their frameworks for classifying theliquidity of investments.
2.

Swing Pricing

Under the proposal, every open-end fund other than an excluded fund would be required
to establish and implement swing pricing policies and procedures that adjust the fund’s current
NAV per share by a swing factor either if the fund has net redemptions or if it has net purchases
551

See text following supra note 550. Money market funds are excluded from the proposed liquidity
risk management program requirement. In addition, in-kind ETFs are not subject to the current
rule’s classification requirements or highly liquid investment minimum requirements and,
therefore, would not be subject to the proposed amendments to these provisions. Because in-kind
ETFs are subject to certain of the proposed amendments, such as amendments to the calculationof the 15% limit on illiquid investments, we include all 11 of the small funds that are open-end
ETFs in the estimated number of small entities affected.

377

of more than 2% of the fund’s net assets. The swing pricing administrator would be required toreview investor flow information to determine: (1) if the fund experiences net purchases or net
redemptions; and (2) the amount of net purchases or net redemptions. In determining the swing
factor, the proposed rule would require a fund’s swing pricing administrator to make good faithestimates, supported by data, of the costs the fund would incur if it purchased or sold a pro rata
amount of each investment in its portfolio to satisfy the amount of net purchases or net
redemptions (i.e., a vertical slice). Additionally, under the proposed rule, the fund’s board of
directors would be required to: (1) approve the fund’s swing pricing policies and procedures; (2)designate the fund’s swing pricing administrator; and (3) review, no less frequently thanannually, a written report prepared by the swing pricing administrator. Finally, under the
proposed rule the fund would be required to maintain the swing pricing policies and procedures
and a copy of the written report in an easily accessible place.
We estimate that approximately 33 funds are small entities that would be required tocomply with the proposed swing pricing requirement.552 The proposed requirement would
impose burdens on all open-end funds (other than money market funds and ETFs), including
those that are small entities. We discuss the specifics of these burdens in the Economic Analysis
and Paperwork Reduction Act sections above. These sections also discuss the professional skills
that we believe compliance with this aspect of the proposal would require. While we would
expect larger funds or funds that are part of a large fund complex to incur higher costs related tothe proposed swing pricing requirement in absolute terms relative to a smaller fund or a fund thatis part of a smaller fund complex, we would expect a smaller fund to find it more costly, perdollar managed, to comply with the proposed requirement because it would not be able to benefit
552

See text following supra note 550. ETFs and money market funds are excluded from the
proposed swing pricing requirement.

378

from a larger fund complex’s economies of scale. For example, a larger fund complex would
have economies of scale in developing and adopting swing pricing policies and procedures. Thisis particularly true for larger fund complexes that currently employ swing pricing in theiroperations in a foreign jurisdiction, such as in Europe.
3.

Hard Close

We are proposing amendments to rule 22c-1 to require a hard close for funds that are
subject to the proposed swing pricing requirement. The hard close would provide that a request
to redeem or purchase a fund’s shares may be executed at the current day’s price only if the fund,its designated transfer agent, or a registered securities clearing agency receives the eligible order
before the pricing time as of which the fund calculates its NAV. Orders received after the fund’s
established pricing time would receive the next day’s price.
We estimate that approximately 33 funds are small entities that would be required tocomply with the proposed hard close requirement.553 The proposed amendments would impose
burdens on all open-end funds (except for money market funds and ETFs), including those thatare small entities. We discuss the specifics of these burdens in the Economic Analysis section
above. The proposed hard close may involve costs to change business practices, operations, andcomputer systems, including integration of new technologies, for funds, including small entities,
which may require specialized operational and technology skills. We would expect that theburdens of these changes would be greater for smaller entities relative to the size of theirbusiness than for larger entities, which would benefit from economies of scale.

553

See text following supra note 550. ETFs and money market funds are excluded from the
proposed hard close requirement.

379

We estimate that the proposed hard close would also affect 8 small transfer agents.554
Intermediaries that are small entities would also be affected; however, we lack data for
accurately estimating the number of these other intermediaries that are small entities that service
open-end fund shareholders and would be affected by the proposed hard close amendments.
Those other intermediaries may include a subset of: 471 small advisers,555 731 small brokerdealers,556 1,280 small recordkeepers,557 3,529 small bank entities,558 and small insurance
554

A “small transfer agent” is a transfer agent that: (1) received less than 500 items for transfer andless than 500 items for processing during the preceding six months (or in the time that it has been
in business, if shorter); (2) transferred items only of issuers that would be deemed small
businesses or small organizations; and (3) maintained master shareholder files that in theaggregate contained less than 1,000 shareholder accounts or was the named transfer agent for lessthan 1,000 shareholder accounts at all times during the preceding fiscal year (or in the time that it
has been in business, if shorter); and (4) is not affiliated with any person (other than a natural
person) that is not a small business or small organization. See rule 0-10(h) under the ExchangeAct. We estimate 8 affected small transfer agents, based on the number of small transfer agents
reporting mutual fund activity in their filings on Form TA-2 as of Mar. 31, 2022.

555

A “small adviser” is a SEC-registered investment adviser that: (1) has assets under management
having a total value of less than $25 million; (2) did not have total assets of $5 million or more on
the last day of the most recent fiscal year; and (3) does not control, is not controlled by, and is notunder common control with another investment adviser that has assets under management of $25
million or more, or any person (other than a natural person) that had total assets of $5 million ormore on the last day of its most recent fiscal year. We estimate 471 small advisers, based on
filings on Form ADV as of Dec. 2021.

556

A “small broker-dealer” is a broker or dealer that: (1) had total capital (net worth plus
subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared pursuant to rule 17a-5(d) under the Exchange Act or,
if not required to file such statements, a broker or dealer that had total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year
(or in the time that it has been in business, if shorter); and (2) is not affiliated with any person(other than a natural person) that is not a small business or small organization. See rule 0-10(c)under the Exchange Act. We estimate 731 small broker-dealers, based on filings of FOCUS
Reports as of Dec. 2021.

557

See Pension Benefit Statements—Lifetime Income Illustrations [85 FR 59132 (Sept. 18, 2020)],
at n.71 and accompanying text. We estimate 1,280 small recordkeepers, based on filings of Form
5500 as reported by the Department of Labor, in the 2017 plan year. According to that data, there
were 1,725 recordkeepers servicing defined contribution plans. The 445 largest recordkeepers
serviced plans holding approximately 99% of total plan assets, while the remaining 1,280 (small
recordkeepers) serviced plans holding a mere 1%. The Department of Labor considered otherthresholds for recordkeepers and selected the 99 percent threshold for recordkeepers toinclude more recordkeepers in cost estimates, and thus avoid underestimating costs.

558

See Rules Regarding Availability of Information [85 FR 57616 (Sept. 15, 2020)], at n.7 and380

companies.559 Furthermore, how much these proposed amendments would affect theseintermediaries would be determined largely by the importance these intermediaries and theirclients place on receiving the NAV calculated on the day a client places an order.
4.

Reporting Requirementsa.

Form N-1A

Form N-1A is the form used by certain open-end management investment companies toregister under the Investment Company Act and to register their securities under the Securities
Act. We propose to amend Item 11(a) of Form N-1A to require, if applicable, that funds disclosethat if an investor places an order with a financial intermediary, the financial intermediary may
require the investor to submit its order earlier to receive the next calculated NAV. We also
propose to remove the requirement to provide an upper limit on the swing factor from Item 6(d).
We estimate that approximately 33 funds are small entities that would be required tocomply with our proposed amendments for Form N-1A.560 The proposed amendments would
impose burdens on all open-end funds (other than money market funds and ETFs), including
those that are small entities. We discuss the specifics of these burdens in the Economic Analysis
and Paperwork Reduction Act sections above. These sections also discuss the professional skills
that we believe compliance with this aspect of the proposal would require. We recognize that,
due to economies of scale, the costs associated with the proposed amendments to Form N-1A

accompanying text (stating that as of Mar. 2020, there were approximately 2,925 small bankholding companies, 132 small savings and loan holding companies, and 472 small State member
banks). We estimate a total of 3,529 small banks supervised by the Federal Reserve as of Mar.
2020.
559

We lack data for estimating the number of small insurance companies.

560

See text following supra note 550. ETFs and money market funds file reports on Form N-1A but
would not be impacted by our proposed amendments.

381

may be more easily borne by larger fund complexes than smaller ones, and that costs borne byfunds would be passed along to investors in the form of higher fees and expenses.
b.

Form N-PORT

Form N-PORT requires open-end and closed-end funds, as well as ETFs organized as
UITs, to report monthly portfolio holdings information on a quarterly basis in a structured, XML
format. We propose the following amendments to Form N-PORT: (1) require funds to file Form
N-PORT on a monthly basis, within 30 days after the end of each month; (2) require open-end
funds to report the aggregate percentage of a fund’s portfolio represented in each of the three
proposed liquidity categories, which would be publicly available; (3) provide enhanced
transparency into the frequency and amount of a fund’s swing pricing adjustments; and (4)changes to entity identifiers.
We estimate that approximately 75 open-end and closed-end funds are small entities thatwould be required to comply with our proposed amendments for Form N-PORT.561 The proposed
amendments would impose burdens on all Form N-PORT filers, including those that are small
entities. We discuss the specifics of these burdens in the Economic Analysis and Paperwork
Reduction Act sections above. These sections also discuss the professional skills that we believecompliance with this aspect of the proposal would require. We recognize that, due to economies
of scale, the costs associated with the proposed amendments to Form N-PORT may be moreeasily borne by larger fund complexes than smaller ones, and that costs borne by funds would be
passed along to investors in the form of higher fees and expenses.

561

See text following supra note 550. Money market funds do not file Form N-PORT. While
exchange-traded funds organized as unit investment trusts file Form N-PORT, there are no suchfunds that would be considered small entities.

382

c.

Form N-CEN

Form N-CEN is used to collect annual, census-type information for all registeredinvestment companies, other than face-amount certificate companies. Filers must submit thisreport electronically using the Commission’s EDGAR system in XML format. We propose
amendments to Form N-CEN that would identify liquidity service providers and certain related
information, as well as remove the requirements that a filer report information regarding its useof swing pricing, which is being moved to Form N-PORT. We also propose amendments related
to entity identifiers.
We estimate that approximately 82 funds are small entities that would be required tocomply with our proposed amendments for Form N-CEN.562 The proposed amendments would
impose burdens on all Form N-CEN filers, including those that are small entities. We discuss the
specifics of these burdens in the Economic Analysis and Paperwork Reduction Act sections
above. These sections also discuss the professional skills that we believe compliance with this
aspect of the proposal would require. We recognize that, due to economies of scale, the costs
associated with the proposed amendments to Form N-CEN may be more easily borne by larger
fund complexes than smaller ones, and that costs borne by funds would be passed along toinvestors in the form of higher fees and expenses.
E.

Duplicative, Overlapping, or Conflicting Federal Rules

We do not believe that the proposed amendments would duplicate, overlap, or conflictwith other existing Federal rules.
562

See text following supra note 550. In-kind ETFs would not be affected by the proposed
amendments to report information about liquidity classification vendors but, to avoid underestimating the number of small entities, we assume that the 11 small entity ETFs are not in-kind
ETFs and would be affected by the change. We similarly assume that all 44 funds that are small
entities would use a liquidity classification vendor, although this may not be the case. If a funddoes not use a liquidity classification vendor, it would not be required to report information abouta vendor on Form N-CEN.

383

F.

Significant Alternatives

The RFA directs the Commission to consider significant alternatives that would
accomplish our stated objectives, while minimizing any significant economic impact on small
entities. We considered the following alternatives for small entities in relation to the proposed
amendments to rules 22e-4 and 22c-1, as well as the proposed disclosure and reporting
requirements: (1) establishing different requirements that take into account the resources
available to small entities; (2) exempting small entities from all or part of the requirements; (3)clarifying, consolidating, or simplifying requirements under the rules for small entities; and (4)using performance rather than design standards.
We do not believe that establishing different requirements for, or exempting, any subset
of funds, including funds that are small entities, from the proposed amendments to rule 22e-4
would permit us to achieve our stated objectives. As discussed above, we believe that the
proposed liquidity amendments would improve liquidity risk management programs to better
prepare funds for stressed conditions and improve transparency in liquidity classifications. Small
funds do not entail less liquidity risk than larger funds, and investors in small funds would
benefit from improvements in the liquidity risk management programs and more transparent
liquidity classifications just as investors in larger funds would. We therefore do not believe it
would be appropriate to establish different requirements for, or exempt, funds that are small
entities from the proposed liquidity risk management amendments to rule 22e-4. Similarly, ourobjectives would not be served by clarifying, consolidating, or simplifying the liquidity
requirements for small entities. With respect to using performance rather than design standards,
the proposed amendments primarily use design rather than performance standards to better384

prepare funds for stressed market conditions, prevent funds from over-estimating the liquidity of
their investments, and improve transparency of fund liquidity.
Regarding the proposed changes to the liquidity classification framework, we
acknowledge that to the extent that small funds would experience a more substantial operationalburden compared to larger fund complexes that exhibit economies of scale, smaller funds may
become less competitive than larger funds. However, we believe there are no significant
alternatives for smaller funds other than exemption, and providing an exemption from the
proposed liquidity classification changes could subject investors in small funds to greaterliquidity risk and would create diverging liquidity frameworks among funds, as small funds are
already subject to the current rule’s liquidity classification requirements.
Additionally, we are not establishing different requirements for, or exempting, funds thatare small entities from the swing pricing requirement, because we believe that all funds should
be required to use swing pricing as a tool to mitigate potential shareholder dilution. We do notbelieve that the potential dilution that proposed rule 22c-1(b) is meant to prevent would affectlarge funds and their shareholders more significantly than small funds and their shareholders. We
acknowledge that a fund that is a small entity would need to incur the costs of compliance withthe proposed amendments to the rule, which may constitute a greater percentage of the small
fund’s net assets than with a larger fund. We also acknowledge that certain larger fund groups
with both U.S. and European operations may already have experience with swing pricing that
smaller funds would not, which could result in greater costs, relative to a fund’s net assets, forsmaller funds than larger ones. However, despite these considerations, we do not believe thatinvestors in small funds should be afforded less protection against the risk of dilution thaninvestors in large funds.

385

We therefore do not believe it would be appropriate to establish different requirements
for, or to exempt, funds that are small entities from the proposed swing pricing requirement. For
example, we are not allowing funds that are small entities to use a different inflow swing
threshold or market impact threshold than those the proposed rule identifies. As discussed above,
we do not believe the potential dilution that the proposed swing pricing requirement is meant toprevent would affect large funds and their shareholders more significantly than small funds andtheir shareholders. Permitting funds that are small entities to use higher thresholds could subject
small funds to greater dilution than larger funds, and we believe all investors should be afforded
the same protection against the risk of dilution.563 Similarly, our objectives would not be servedby clarifying, consolidating, or simplifying the swing pricing requirements for small entities.
With respect to using performance rather than design standards, the proposed amendments
primarily use design rather than performance standards to promote more consistent and uniform
standards for all funds. We are also not establishing different requirements for, or exempting,funds that are small entities from the proposed hard close requirement because we believe therequirement is important to every fund’s ability to operationalize swing pricing. Our hard close
proposal is designed to support the proposed swing pricing amendments by facilitating the more
timely receipt of fund order flow information. We believe that requiring a hard close would
reduce a fund’s reliance on estimates, providing more accurate swing factor determinations. We
do not believe investors in smaller funds would benefit from a greater use of estimates thaninvestors in larger funds. We therefore do not believe it would be appropriate to establish
different requirements for, or exempt, funds that are small entities from the proposed hard close
563

While we recognize that smaller funds may be less likely than larger funds to have market
impact costs at the 1% threshold for net redemptions or the 2% threshold for net purchases, as
discussed above, we believe uniform thresholds for all funds would provide a consistent andobjective threshold for all funds to consider market impacts.

386

requirement in rule 22c-1. Similarly, our objectives would not be served by clarifying,
consolidating, or simplifying the hard close requirement for small entities. With respect to using
performance rather than design standards, the proposed amendments primarily use design rather
than performance standards to promote more consistent and uniform standards for all funds.
Finally, we do not believe that the interest of investors would be served by establishingdifferent requirements for, or exempting, funds that are small entities from the proposed
disclosure and reporting amendments, or subjecting these funds to different disclosure andreporting requirements than larger funds. We believe that all fund investors, including investors
in funds that are small entities, would benefit from disclosure and reporting requirements thatwould permit them to make investment choices that better match their risk tolerances.
Furthermore, we note that the current disclosure requirements on Form N-1A, Form N-PORT,
and Form N-CEN do not distinguish between small entities and other funds. Similarly, ourobjectives would not be served by clarifying, consolidating or simplifying the proposed
disclosure and reporting requirements for small entities. With respect to using performance
rather than design standards, the proposed amendments primarily use design rather thanperformance standards to promote more consistent and uniform standards for all funds.
We recognize that, due to economies of scale, the costs associated with the proposed
amendments to these forms may be more easily borne by larger fund complexes than smaller
ones, and that costs borne by funds would be passed along to investors in the form of higher feesand expenses. However, we believe there are no significant alternatives for smaller funds otherthan exemption, and providing exemptions for smaller funds from the proposed reporting anddisclosure requirements would disadvantage investors in smaller funds by creating a lack of
information about these funds’ use of swing pricing or aggregate liquidity classifications.

387

G.

General Request for Comment

The Commission requests comments regarding this IRFA. We request comments on thenumber of small entities that may be affected by our proposed amendments, including for theaffected small intermediaries that we lack data to quantify with accuracy, and whether the
proposed amendments would have any effects not considered in this analysis. We request thatcommenters describe the nature of any effects on small entities subject to the rules and forms,
and provide empirical data to support the nature and extent of such effects. We also request
comment on the proposed compliance burdens and the effect these burdens would have on
smaller entities.
VI.

CONSIDERATION OF IMPACT ON THE ECONOMY
For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or“SBREFA,”564 we must advise OMB whether a proposed regulation constitutes a “major” rule.
Under SBREFA, a rule is considered “major” where, if adopted, it results in or is likely to resultin (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or
prices for consumers or individual industries; or (3) significant adverse effects on competition,
investment or innovation.
We request comment on whether the proposal would be a “major rule” for purposes of
SBREFA. We request comment on the potential impact of the proposed rule on the economy onan annual basis; any potential increase in costs or prices for consumers or individual industries;
and any potential effect on competition, investment, or innovation. Commenters are requested toprovide empirical data and other factual support for their views to the extent possible.

564

Public Law 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).

388

STATUTORY AUTHORITYThe Commission is proposing the rule and form amendments contained in this document
under the authority set forth in the Investment Company Act, particularly sections 6, 8, 22, 24,
30, 31, 34, 38, and 45 thereof [15 U.S.C. 80a-1 et seq.], the Investment Advisers Act, particularly
section 206 thereof [15 U.S.C. 80b-1 et seq.], the Exchange Act, particularly sections 10, 13, 15,
23, and 35A thereof [15 U.S.C. 78a et seq.], the Securities Act, particularly sections 7, 10, 17,
and 19 thereof [15 U.S.C. 77a et seq.], the Trust Indenture Act, particularly section 319 thereof[15 U.S.C. 77aaa et seq.], and 44 U.S.C. 3506-3507.
List of Subjects in 17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements, Securities.
Text of Proposed Rules and Rule and Form Amendments
For the reasons set forth in the preamble, the Commission is proposing to amend title 17,
chapter II of the Code of Federal Regulations as follows:
PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for part 270 continues to read, in part, as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, and Pub. L. 111-203, sec.
939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *Section 270.22c-1 also issued under secs. 6(c), 22(c), and 38(a) (15 U.S.C. 80a-6(c), 80a22(c), and 80a-37(a));* * * * *Section 270.31a-2 is also issued under 15 U.S.C. 80a-30.
2. Amend § 270.22c-1 by revising it to read as follows:389

§ 270.22c-1 Pricing of redeemable securities for distribution, redemption and repurchase.
(a) Forward pricing required. No registered investment company issuing any redeemablesecurity, no person designated in such issuer’s prospectus as authorized to consummate
transactions in any such security, no principal underwriter of, or dealer in, any such security shallsell, redeem, or repurchase any such security except at a price based on the current net asset
value of such security established for the next pricing time after receipt of a direction to purchaseor redeem such security.
(1) The investment company’s board of directors must initially set the pricing time(s),and must make and approve any changes to the pricing time(s).
(2) The investment company must calculate the current net asset value of any redeemablesecurity at least once daily, Monday through Friday, at the pricing time(s) its board of directors
set, except on:(i) Days during which the investment company receives no direction to purchase orredeem its redeemable securities; or(ii) Customary national business holidays described or listed in the prospectus and local
and regional business holidays listed in the prospectus.
(3) For an investment company that is required to implement swing pricing underparagraph (b) of this section:(i) A direction to purchase or redeem the investment company’s redeemable securities iseligible to receive the price established for a pricing time solely if the investment company, its
designated transfer agent, or a registered clearing agency receives an eligible order before thatpricing time; and390

(ii) The price an eligible order receives is based on the current net asset value as of thepricing time and includes any adjustment to the current net asset value required by paragraph (b)of this section.
(b) Swing pricing requirement. A registered open-end management investment company(but not a registered open-end management investment company that is regulated as a money
market fund under § 270.2a-7 or an exchange-traded fund as defined in paragraph (d) of thissection) (a “fund”) must establish and implement swing pricing policies and procedures as
described in paragraphs (b)(1) through (5) of this section in order to adjust its current net asset
value per share to mitigate dilution of the value of its outstanding redeemable securities as aresult of shareholder purchase or redemption activity.
(1) The fund’s swing pricing policies and procedures must:(i) Provide that the fund must adjust its net asset value per share by a swing factor if thefund has net redemptions or if the fund has net purchases exceeding its inflow swing threshold.
The swing pricing administrator must review investor flow information to determine if the fundhas net purchases or net redemptions and the amount of net purchases or net redemptions. The
swing pricing administrator is permitted to make such determination based on reasonable, highconfidence estimates; and(ii) Specify the process for determining the swing factor, in accordance with paragraph(b)(2) of this section.
(2) In determining the swing factor, the swing pricing administrator must make good faithestimates, supported by data, of the costs the fund would incur if it purchased or sold a pro rata
amount of each investment in its portfolio equal to the amount of net purchases or net
redemptions.

391

(i) If the fund has net redemptions, the good faith estimates must include, for selling the
pro rata amount of each investment in the fund’s portfolio:(A) Spread costs;(B) Brokerage commissions, custody fees, and any other charges, fees, and taxes
associated with portfolio investment sales; and(C) If the amount of the fund’s net redemptions exceeds the market impact threshold, themarket impact, as described in paragraph (b)(2)(iii) of this section.
(ii) If the amount of the fund’s net purchases exceeds the inflow swing threshold, thegood faith estimates must include, for purchasing the pro rata amount of each investment in thefund’s portfolio:(A) Spread costs;(B) Brokerage commissions, custody fees, and any other charges, fees, and taxes
associated with portfolio investment purchases; and(C) The market impact, as described in paragraph (b)(2)(iii) of this section.
(iii) A fund must determine market impact by:(A) Establishing a market impact factor for each investment, which is an estimate of thepercentage change in the value of the investment if it were purchased or sold, per dollar of theamount of the investment that would be purchased or sold; and(B) Multiplying the market impact factor for each investment by the dollar amount of theinvestment that would be purchased or sold if the fund purchased or sold a pro rata amount ofeach investment in its portfolio to invest the net purchases or meet the net redemptions.

392

(iv) The swing pricing administrator may estimate costs and market impact factors foreach type of investment with the same or substantially similar characteristics and apply thoseestimates to all investments of that type rather than analyze each investment separately.
(3) The fund’s board of directors, including a majority of directors who are not interested
persons of the fund, must:(i) Approve the fund’s swing pricing policies and procedures;(ii) Designate the fund’s swing pricing administrator. The administration of swing pricing
must be reasonably segregated from portfolio management of the fund and may not include
portfolio managers; and(iii) Review, no less frequently than annually, a written report prepared by the swing
pricing administrator that describes:(A) The swing pricing administrator’s review of the adequacy of the fund’s swing pricing
policies and procedures and the effectiveness of their implementation, including theireffectiveness at mitigating dilution;(B) Any material changes to the fund’s swing pricing policies and procedures since thedate of the last report; and(C) The swing pricing administrator’s review and assessment of the fund’s swing factors,
considering the requirements of paragraph (b)(2) of this section, including the information anddata supporting the determination of the swing factors and, if the swing pricing administrator
implements either an inflow swing threshold lower than 2 percent of the fund’s net assets or amarket impact threshold lower than 1 percent of the fund’s net assets, the information and data
supporting the determination of such threshold.

393

(4) The fund must maintain the policies and procedures adopted by the fund under thisparagraph (b) that are in effect, or at any time within the past six years were in effect, in an easily
accessible place, and must maintain a written copy of the report provided to the board underparagraph (b)(3)(iii) of this section for six years, the first two in an easily accessible place.
(5) Any fund (a “feeder fund”) that invests, pursuant to section 12(d)(1)(E) of the Act (15U.S.C. 80a-12(d)(1)(E)), in another fund (a “master fund”) may not use swing pricing to adjust
the feeder fund’s net asset value per share; however, a master fund must use swing pricing toadjust the master fund’s net asset value per share, pursuant to the requirements set forth in thisparagraph (b).
(6) Notwithstanding section 18(f)(1) of the Act (15 U.S.C. 80a-18(f)(1)), a fund with ashare class that is an exchange-traded fund is subject to the swing pricing requirement only withrespect to any share classes that are not exchange-traded funds.
(c) Exceptions permitted. Notwithstanding paragraph (a) of this section:(1) Secondary market transactions. A sponsor of a unit investment trust (“trust”) engaged
exclusively in the business of investing in eligible trust securities (as defined in § 270.14a-3(b))
may sell or repurchase trust units in a secondary market at a price based on the offering side
evaluation of the eligible trust securities in the trust’s portfolio, determined at any time on thelast business day of each week, effective for all sales made during the following week, if on thedays that such sales or repurchases are made the sponsor receives a letter from a qualified
evaluator stating, in its opinion, that:(i) In the case of repurchases, the current bid price is not higher than the offering side
evaluation, computed on the last business day of the previous week; and394

(ii) In the case of resales, the offering side evaluation, computed as of the last business
day of the previous week, is not more than one-half of one percent ($5.00 on a unit representing$1,000 principal amount of eligible trust securities) greater than the current offering price.
(2) Notwithstanding the provisions above, any registered separate account offering
variable annuity contracts, any person designated in such account's prospectus as authorized toconsummate transactions in such contracts, and any principal underwriter of or dealer in suchcontracts must be permitted to apply the initial purchase payment for any such contract at a pricebased on the current net asset value of such contract which is next computed:(i) Not later than two business days after receipt of the direction to purchase by the
insurance company sponsoring the separate account (“insurer”), if the contract application andother information necessary for processing the direction to purchase (collectively, “application”)
are complete upon receipt; or(ii) Not later than two business days after an application which is incomplete upon receipt
by the insurer is made complete, provided that, if an incomplete application is not madecomplete within five business days after receipt,(A) The prospective purchaser is informed of the reasons for the delay; and(B) The initial purchase payment is returned immediately and in full, unless theprospective purchaser specifically consents to the insurer retaining the purchase payment until
the application is made complete.
(3) This paragraph does not prevent any registered investment company from adjusting
the price of its redeemable securities sold pursuant to a merger, consolidation or purchase of
substantially all of the assets of a company that meets the conditions specified in § 270.17a-8.
(d) Definitions. For the purposes of this section:

395

Designated transfer agent means a registered transfer agent (as defined in section 3(a)(25) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(25))) that is designated in thefund’s registration statement filed with the Commission.
Eligible order means a direction, which is irrevocable as of the next pricing time after
receipt, to:(i) Purchase or redeem a specific number of fund shares or an indeterminate number offund shares of a specific value; or(ii) Purchase the fund’s shares using the proceeds of a contemporaneous order to redeem
a specific number of shares of another registered investment company (an exchange).
Exchange-traded fund means an open-end management investment company (or series orclass thereof), the shares of which are listed and traded on a national securities exchange, andthat has formed and operates under an exemptive order under the Act granted by the Commission
or in reliance on § 270.6c-11.
Inflow swing threshold means an amount of net purchases equal to 2 percent of a fund’s
net assets, or such smaller amount of net purchases as the swing pricing administrator determines
is appropriate to mitigate dilution.
Initial purchase payment means the first purchase payment submitted to the insurer by, oron behalf of, a prospective purchaser.
Investor flow information means information about the fund investors’ daily purchase andredemption activity, which may consist of individual, aggregated, or netted eligible orders, andwhich excludes any purchases or redemptions that are made in kind and not in cash.

396

Market impact threshold means an amount of net redemptions equal to 1 percent of afund’s net assets, or such smaller amount of net redemptions as the swing pricing administrator
determines is appropriate to mitigate dilution.
Pricing time means the time or times of day as of which the investment company
calculates the current net asset value of its redeemable securities pursuant to paragraph (a) of thissection.
Prospective purchaser means either an individual contract owner or an individual
participant in a group contract.
Qualified evaluator means any evaluator that represents it is in a position to determine,on the basis of an informal evaluation of the eligible trust securities held in a unit investment
trust’s portfolio, whether:(i) The current bid price is higher than the offering side evaluation, computed on the lastbusiness day of the previous week; and(ii) The offering side evaluation, computed as of the last business day of the previous
week, is more than one-half of one percent ($5.00 on a unit representing $1,000 principal amountof eligible trust securities) greater than the current offering price.
Swing factor means the amount, expressed as a percentage of the fund’s net asset value
and determined pursuant to the fund’s swing pricing policies and procedures, by which a fundadjusts its net asset value per share.
Swing pricing means the process of adjusting a fund's current net asset value per share to
mitigate dilution of the value of its outstanding redeemable securities as a result of shareholder
purchase and redemption activity, pursuant to the requirements set forth in paragraph (b) of thissection.

397

Swing pricing administrator means the fund’s investment adviser, officer, or officers
responsible for administering the swing pricing policies and procedures. The swing pricing
administrator may consist of a group of persons.
3. Amend § 270.22e-4 by:a. Removing paragraphs (a)(3) and (10);b. Removing the designations for paragraphs (a)(1) and (2) and (a)(4) through (14) andplacing in alphabetical order;c. Adding, in alphabetical order, a definition for “Convertible to U.S. dollars”;
d. Revising the definitions for “Exchange-traded fund”, “Highly liquid investment”,“Illiquid investment”, “In-Kind Exchange Traded Fund or In-Kind ETF”, “Liquidity risk”,“Moderately liquid investment”, and “Person(s) designated to administer the program”;
e. Adding, in alphabetical order, a definition for “Significantly changing the market valueof an investment”; andf. Revising paragraphs (b)(1)(i)(C), (b)(1)(ii) and (iii), (b)(1)(iv) introductory text, and (b)(3)(iii).
The revisions read as follows:§ 270.22e-4 Liquidity risk management programs.
(a) * * *Convertible to U.S. dollars means the ability to be sold or disposed of, with the sale ordisposition settled in U.S. dollars.
Exchange-traded fund or ETF means an open-end management investment company (orseries or class thereof), the shares of which are listed and traded on a national securities

398

exchange, and that has formed and operates under an exemptive order under the Act granted by
the Commission or in reliance on § 270.6c-11.
*****
Highly liquid investment means any U.S. dollars held by a fund and any investment thatthe fund reasonably expects to be convertible to U.S. dollars in current market conditions in threebusiness days or less without significantly changing the market value of the investment, as
determined pursuant to the provisions of paragraph (b)(1)(ii) of this section.
*****
Illiquid investment means any investment that the fund reasonably expects not to beconvertible to U.S. dollars in current market conditions in seven calendar days or less without
significantly changing the market value of the investment, as determined pursuant to theprovisions of paragraph (b)(1)(ii) of this section. Any investment whose fair value is measured
using an unobservable input that is significant to the overall measurement is an illiquid
investment.
In-Kind Exchange Traded Fund or In-Kind ETF means an ETF that meets redemptions
through in-kind transfers of securities, positions, and assets other than a de minimis amount of
U.S. dollars and that publishes its portfolio holdings daily.
Liquidity risk means the risk that the fund could not meet requests to redeem sharesissued by the fund without significant dilution of remaining investors' interests in the fund.
Moderately liquid investment means any investment that is neither a highly liquid
investment nor an illiquid investment.
Person(s) designated to administer the program means the fund or In-Kind ETF's
investment adviser, officer, or officers (which may not be solely portfolio managers of the fund399

or In-Kind ETF) responsible for administering the program and its policies and procedures
pursuant to paragraph (b)(2)(ii) of this section.
Significantly changing the market value of an investment means:(i) For shares listed on a national securities exchange or a foreign exchange, any sale ordisposition of more than 20% of the average daily trading volume of those shares, as measured
over the preceding 20 business days.
(ii) For any other investment, any sale or disposition that the fund reasonably expects
would result in a decrease in sale price of more than 1%.
*****(b) * * *(1) * * *(i) * * *(C) Holdings of U.S. dollars and cash equivalents, as well as borrowing arrangements andother funding sources; and*****(ii) Classification. Each fund must, using information obtained after reasonable inquiry
and taking into account relevant market, trading, and investment-specific considerations, classify
daily each of the fund’s portfolio investments (including each of the fund’s derivatives
transactions) as a highly liquid investment, moderately liquid investment, or illiquid investment.
To determine the liquidity classification of each investment, the fund must:(A) Measure the number of days in which the investment is reasonably expected to beconvertible to U.S. dollars without significantly changing the market value of the investment,
and include the day on which the liquidity classification is made in that measurement; and400

(B) Assume the sale of 10% of the fund’s net assets by reducing each investment by 10%.
(iii) Highly liquid investment minimum. A fund must determine and maintain a highly
liquid investment minimum that is equal to or higher than 10% of the fund’s net assets.
(A) When determining a highly liquid investment minimum, a fund must consider thefactors specified in paragraphs (b)(1)(i)(A) through (D) of this section, as applicable (butconsidering those factors specified in paragraphs (b)(1)(i)(A) and (B) only as they apply during
normal conditions, and during stressed conditions only to the extent they are reasonably
foreseeable during the period until the next review of the highly liquid investment minimum).
(B) For purposes of determining compliance with its highly liquid investment minimum,
the fund must reduce the value of its highly liquid investments that are assets otherwise eligible
to meet the fund’s highly liquid investment minimum by an amount equal to:(1) The value of any highly liquid investments that are assets posted as margin orcollateral in connection with any derivatives transaction that the fund has classified as amoderately liquid investment or illiquid investment; andNote 1 to paragraph (b)(1)(iii)(B)(1): A fund that has posted highly liquid investments
and non-highly liquid investments as margin or collateral in connection with derivatives
transactions classified as moderately liquid or illiquid investments first should apply posted
assets that are highly liquid investments in connection with these transactions, unless it has
specifically identified non-highly liquid investments as margin or collateral in connection withsuch derivatives transactions.
(2) Any fund liabilities.
(C) The highly liquid investment minimum determined pursuant to paragraph (b)(1)(iii)of this section may not be changed during any period of time that a fund's assets that are highly401liquid investments are below the determined minimum without approval from the fund's board of
directors, including a majority of directors who are not interested persons of the fund;(D) A fund must periodically review, no less frequently than annually, the highly liquid
investment minimum; and(E) A fund must adopt and implement policies and procedures for responding to ashortfall of the fund’s highly liquid investments below its highly liquid investment minimum,
which must include requiring the person(s) designated to administer the program to report to thefund’s board of directors no later than its next regularly scheduled meeting with a brief
explanation of the causes of the shortfall, the extent of the shortfall, and any actions taken in
response, and if the shortfall lasts more than 7 consecutive calendar days, must include requiring
the person(s) designated to administer the program to report to the board within one business day
thereafter with an explanation of how the fund plans to restore its minimum within a reasonable
period of time.
(iv) Illiquid investments. No fund or In-Kind ETF may acquire any illiquid investment if,
immediately after the acquisition, the fund or In-Kind ETF would have invested more than 15%
of its net assets in illiquid investments that are assets. In determining its compliance with thisparagraph, in addition to the value of a fund’s illiquid investments that are assets, where a fundhas posted margin or collateral in connection with a derivatives transaction that is classified as anilliquid investment, the fund also must include as illiquid investments that are assets the value ofmargin or collateral posted in connection with the derivatives transaction that the fund would
receive if it exited the transaction. If a fund or In-Kind ETF holds more than 15% of its net assets
in illiquid investments that are assets:
*****

402

(3) * * *(iii) If applicable, a written record of the policies and procedures related to how thehighly liquid investment minimum, and any adjustments thereto, were determined, including
assessment of the factors incorporated in paragraph (b)(1)(iii)(A) of this section and any
materials provided to the board pursuant to paragraph (b)(1)(iii)(E) of this section, for a period of
not less than five years (the first two years in an easily accessible place) following thedetermination of, and each change to, the highly liquid investment minimum.
*****
4. Amend § 270.30b1-9 by revising it to read as follows:§ 270.30b1-9 Monthly report.
Each registered management investment company or exchange-traded fund organized asa unit investment trust, or series thereof, other than a registered open-end management
investment company that is regulated as a money market fund under §270.2a-7 or a small
business investment company registered on Form N-5 (§§239.24 and 274.5 of this chapter), mustfile a monthly report of portfolio holdings on Form N-PORT (§274.150 of this chapter), current
as of the last business day, or last calendar day, of the month. A registered investment company
that has filed a registration statement with the Commission registering an offering of its
securities for the first time under the Securities Act of 1933 is relieved of this reporting
obligation with respect to any reporting period or portion thereof prior to the date on which that
registration statement becomes effective or is withdrawn. Reports on Form N-PORT must be
filed with the Commission no later than 30 days after the end of each month.
5. Amend § 270.31a-2 by revising paragraph (a)(2) to read as follows:403

§ 270.31a-2 Records to be preserved by registered investment companies, certain majorityowned subsidiaries thereof, and other persons having transactions with registeredinvestment companies.
(a) * * *(2) Preserve for a period not less than six years from the end of the fiscal year in which
any transactions occurred, the first two years in an easily accessible place, all books and records
required to be made pursuant to paragraphs (b)(5) through (12) of §270.31a-1 and all vouchers,
memoranda, correspondence, checkbooks, bank statements, cancelled checks, cash
reconciliations, cancelled stock certificates, and all schedules evidencing and supporting eachcomputation of net asset value of the investment company shares, including schedules
evidencing and supporting each computation of an adjustment to net asset value of theinvestment company shares based on swing pricing policies and procedures established andimplemented pursuant to §270.22c-1(b), and other documents required to be maintained by§270.31a-1(a) and not enumerated in §270.31a-1(b).
*****PART 274 — FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF
1940
6. The general authority citation for part 274 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a-8, 80a24, 80a-26, 80a-29, and 80a-37, unless otherwise noted.
*****
7. Amend Form N-1A (referenced in §§ 239.15A and 274.11A) by revising Item 6(d) and
Item 11(a)(2). The revisions read as follows:404

Note: The text of Form N-1A does not, and these amendments will not, appear in the Codeof Federal Regulations.
FORM N-1A*****
Item 6. Purchase and Sale of Fund Shares*****(d) If the Fund uses swing pricing, explain the Fund’s use of swing pricing; including whatswing pricing is, the circumstances under which the Fund will use it, and the effects of swing
pricing on the Fund and investors. With respect to any portion of a Fund’s assets that is invested in
one or more open-end management investment companies that are registered under the Investment
Company Act, the Fund shall include a statement that the Fund’s net asset value is calculated based
upon the net asset values of the registered open-end management companies in which the Fundinvests, and, if applicable, state that the prospectuses for those companies explain thecircumstances under which they will use swing pricing and the effects of using swing pricing.
*****
Item 11. Shareholder Information(a) * * *(2) A statement as to when calculations of net asset value are made and that the price atwhich a purchase or redemption is effected is based on the next calculation of net asset value after
the order is placed. If applicable, explain that if an investor places an order with a financial
intermediary, the financial intermediary may require the investor to submit its order earlier toreceive the next calculated net asset value.
*****

405

8. Amend § 274.150(a) by revising it to read as follows:§ 274.150 Form N-PORT, Monthly portfolios holdings report.
(a) Except as provided in paragraph (b) of this section, this form shall be used byregistered management investment companies or exchange-traded funds organized as unit
investment trusts, or series thereof, to file reports pursuant to §270.30b1-9 of this chapter notlater than 30 days after the end of each month.
******
9. Amend Form N-PORT (referenced in § 274.150) by:a. Revising General Instructions A, E, and F and Items B.4, B.5, B.6, B.7, B.8, C.1, C.7,
C.10, C.11, Part D, and Part F; andb. Adding Items B.11 and B.12.
The revisions and addition read as follows:
Note: The text of Form N-PORT does not, and these amendments will not, appear in the
Code of Federal Regulations.
FORM N-PORT*****
GENERAL INSTRUCTIONSA.

Rule as to Use of Form N-PORT
Form N-PORT is the reporting form that is to be used for monthly reports of Funds otherthan money market funds and SBICs under section 30(b) of the Act, as required by rule 30b1-9
under the Act (17 CFR 270.30b1-9). Funds must report information about their portfolios andeach of their portfolio holdings as of the last business day, or last calendar day, of each month. A
registered investment company that has filed a registration statement with the Commission

406

registering its securities for the first time under the Securities Act of 1933 is relieved of thisreporting obligation with respect to any reporting period or portion thereof prior to the date on
which that registration statement becomes effective or is withdrawn.
Reports on Form N-PORT must disclose portfolio information as calculated by the fund
for the reporting period’s ending net asset value (commonly, and as permitted by rule 2a-4, thefirst business day following the trade date). Reports on Form N-PORT for each month must be
filed with the Commission no later than 30 days after the end of such month. If the due date falls
on a weekend or holiday, the filing deadline will be the next business day.
A Fund may file an amendment to a previously filed report at any time, including anamendment to correct a mistake or error in a previously filed report. A Fund that files anamendment to a previously filed report must provide information in response to all items ofForm N-PORT, regardless of why the amendment is filed.
*****
E.

Definitions
References to sections and rules in this Form N-PORT are to the Act, unless otherwise

indicated. Terms used in this Form N-PORT have the same meanings as in the Act or related
rules (including rule 18f-4 solely for Items B.9 and 10 of the Form), unless otherwise indicated.
As used in this Form N-PORT, the terms set out below have the following meanings:“Absolute VaR Test” has the meaning defined in rule 18f-4(a) [17 CFR 270.18f-4(a)].
“Class” means a class of shares issued by a Fund that has more than one class that representsinterests in the same portfolio of securities under rule 18f-3 [17 CFR 270.18f-3] or under anorder exempting the Fund from provisions of section 18 of the Act [15 U.S.C. 80a-18].

407

“Controlled Foreign Corporation” has the meaning provided in section 957 of the Internal
Revenue Code [26 U.S.C. 957].
“Derivatives Exposure” has the meaning defined in rule 18f-4(a) [17 CFR 270.18f-4(a)].
“Designated Index” has the meaning defined in rule 18f-4(a) [17 CFR 270.18f-4(a)].
“Designated Reference Portfolio” has the meaning defined in rule 18f-4(a) [17 CFR 270.18f4(a)]“Exchange-Traded Fund” means an open-end management investment company (or Series orClass thereof) or unit investment trust (or series thereof), the shares of which are listed andtraded on a national securities exchange at market prices, and that has formed and operates underan exemptive order under the Act granted by the Commission or in reliance on rule 6c-11 [17
CFR 270.6c-11].
“Fund” means the Registrant or a separate Series of the Registrant. When an item of Form
N-PORT specifically applies to a Registrant or a Series, those terms will be used.
“Highly Liquid Investment Minimum” has the meaning defined in rule 22e-4 [17 CFR
270.22e-4].
“Illiquid Investment” has the meaning defined in rule 22e-4 [17 CFR 270.22e-4].
“ISIN” means, with respect to any security, the “international securities identification
number” assigned by a national numbering agency, partner, or substitute agency that iscoordinated by the Association of National Numbering Agencies.
“LEI” means, with respect to any company, the “legal entity identifier” as assigned by autility endorsed by the Global LEI Regulatory Oversight Committee or accredited by the Global
LEI Foundation.
“Multiple Class Fund” means a Fund that has more than one Class.

408

“Registrant” means a management investment company, or an Exchange-Traded Fundorganized as a unit investment trust, registered under the Act.
“Relative VaR Test” has the meaning defined in rule 18f-4(a) [17 CFR 270.18f-4(a)].
“Restricted Security” has the meaning defined in rule 144(a)(3) under the Securities Act of1933 [17 CFR 230.144(a)(3)].
“RSSD ID” means the identifier assigned by the National Information Center of the Board ofGovernors of the Federal Reserve System.
“Securities Portfolio” has the meaning defined in rule 18f-4(a) [17 CFR 270.18f-4(a)].
“Series” means shares offered by a Registrant that represent undivided interests in a portfolio
of investments and that are preferred over all other series of shares for assets specificallyallocated to that series in accordance with rule 18f-2(a) [17 CFR 270.18f-2(a)].
“Swap” means either a “security-based swap” or a “swap” as defined in sections 3(a)(68) and(69) of the Securities Exchange Act of 1934 [15 U.S.C. 78c(a)(68) and (69)] and any rules,
regulations, or interpretations of the Commission with respect to such instruments.
“Swing Factor” has the meaning defined in rule 22c-1 [17 CFR 270.22c-1].
“Value-at-Risk” or VaR has the meaning defined in rule 18f-4(a) [17 CFR 270.18f-4(a)].
“VaR Ratio” means the value of the Fund’s portfolio VaR divided by the VaR of the
Designated Reference Portfolio.
F.

Public Availability
Information reported on Form N-PORT will be made publicly available 60 days after the endof the reporting period.
The SEC does not intend to make public the information reported on Form N-PORT withrespect to a Fund’s Highly Liquid Investment Minimum (Item B.7), derivatives transactions409

(Item B.8), Derivatives Exposure for limited derivatives users (Item B.9), median daily VaR(Item B.10.a), median VaR Ratio (Item B.10.b.iii), VaR backtesting results (Item B.10.c),
country of risk and economic exposure (Item C.5.b), delta (Items C.9.f.v, C.11.c.vii, or
C.11.g.iv), liquidity classification for individual portfolio investments (Item C.7), or
miscellaneous securities (Part D), or explanatory notes related to any of those topics (Part E) that
is identifiable to any particular fund or adviser. However, the SEC may use information reported
on this Form in its regulatory programs, including examinations, investigations, and enforcement
actions.
*****
Item B.4.

Securities Lendinga. * * *iii. If the borrower does not have an LEI, provide the borrower’s RSSD ID, if any.
iv. Aggregate value of all securities on loan to the borrower.
*****
Item B.5.

Return Informationa. Total return of the Fund during the reporting period. If the Fund is a Multiple Class
Fund, report the return for each Class. Such return(s) shall be calculated in accordancewith the methodologies outlined in Item 26(b)(1) of Form N-1A, Instruction 13 to subItem 1 of Item 4 of Form N-2, or Item 26(b)(i) of Form N-3, as applicable.
*****
c. Net realized gain (loss) and net change in unrealized appreciation (or depreciation)
attributable to derivatives for each of the following asset categories during the reporting
period: commodity contracts, credit contracts, equity contracts, foreign exchange

410

contracts, interest rate contracts, and other contracts. Within each such asset category,further report the same information for each of the following types of derivatives
instrument: forward, future, option, swaption, swap, warrant, and other. Report in U.S.
dollars. Losses and depreciation shall be reported as negative numbers.
d. Net realized gain (loss) and net change in unrealized appreciation (or depreciation)
attributable to investments other than derivatives during the reporting period. Report in
U.S. dollars. Losses and depreciation shall be reported as negative numbers.
Item B.6.

Flow information. Provide the aggregate dollar amounts for sales andredemptions/repurchases of Fund shares during the reporting period. If shares of the Fund areheld in omnibus accounts, for purposes of calculating the Fund’s sales, redemptions, andrepurchases, use net sales or redemptions/repurchases from such omnibus accounts. The
amounts to be reported under this Item should be after any front-end sales load has been
deducted and before any deferred or contingent deferred sales load or charge has been deducted.
Shares sold shall include shares sold by the Fund to a registered unit investment trust. For
mergers and other acquisitions, include in the value of shares sold any transaction in which theFund acquired the assets of another investment company or of a personal holding company inexchange for its own shares. For liquidations, include in the value of shares redeemed any
transaction in which the Fund liquidated all or part of its assets. Exchanges are defined as theredemption or repurchase of shares of one Fund or series and the investment of all or part of theproceeds in shares of another Fund or series in the same family of investment companies.
*****
Item B.7.

Highly Liquid Investment Minimum information.

*****

411

b. If applicable, provide the number of days that the eligible value of the Fund’s holdings inhighly liquid investments fell below the Fund’s Highly Liquid Investment Minimum
during the reporting period.
*****
Item B.8.

Derivatives Transactions. For portfolio investments of open-end management
investment companies, provide:a. The value of the Fund’s highly liquid investments that are assets that it has posted as
margin or collateral in connection with derivatives transactions that are classified asmoderately liquid investments or illiquid investments under rule 22e-4 [17 CFR 270.22e4].
b. The value of any margin or collateral posted in connection with any derivatives
transaction that is classified as an illiquid investment under rule 22e-4 [17 CFR 270.22e4] where the fund would receive the value of the margin or collateral if it exited thederivatives transaction.
*****
Item B.11.

Swing Factor

a. Provide the number of times the Fund applied a Swing Factor during the reporting period.
b. For each business day during the reporting period, provide the amount of any Swing
Factor applied by the Fund. Indicate whether each Swing Factor applied is positive(reflecting net purchases) or negative (reflecting net redemptions) with the appropriate
sign (+ or –). Report N/A for any business day on which the fund did not apply a Swing
Factor.

412

Item B.12.

Liquidity aggregate classification information. For portfolio investments of open-

end management investment companies:
a. Provide the aggregate percentage of investments that are assets (excluding any
investments that are reflected as liabilities on the Fund’s balance sheet) compared to total
investments that are assets of the Fund for each of the following categories as specified inrule 22e-4:
1. Highly Liquid Investments.
2. Moderately Liquid Investments.
3. Illiquid Investments.
b. To calculate the aggregate percentages under Item B.12.a, reduce the amount of theFund’s assets that are classified as highly liquid investments by the amount reported
under Item B.8.a and by the amount of the fund’s liabilities. Increase the amount of theFund’s assets that are classified as illiquid investments by the amount reported under
Item B.8.b. To the extent these adjustments result in the sum of the Fund’s investments ineach category not equaling 100% of the Fund’s total investments that are assets, the Fund
may adjust the percentage of investments attributed to the moderately liquid investment
category so that the sum of the Fund’s investments in each category equals 100% of theFund’s total investments that are assets.
Item C.1.

Identification of investment.

*****c. If the issuer does not have an LEI, provide the issuer’s RSSD ID, if any.
d. Title of the issue or description of the investment.
e. CUSIP (if any).

413

f. At least one of the following other identifiers:i. ISIN.
ii. Ticker (if ISIN is not available).
iii. Other unique identifier (if ticker and ISIN are not available). Indicate the type ofidentifier used.
*****
Item C.7.

Liquidity classification information.

a. For portfolio investments of open-end management investment companies, provide theliquidity classification(s) for each portfolio investment among the following categories as
specified in rule 22e-4 [17 CFR 270.22e-4]. For portfolio investments with multiple
liquidity classifications, indicate the percentage amount attributable to each classification.
i.

Highly Liquid Investmentsii.

Moderately Liquid Investmentsiii.

Illiquid Investments*****
Instructions to Item C.7. Funds may choose to indicate the percentage amount of aholding attributable to multiple classification categories only in the following circumstances: (1)if portions of the position have differing liquidity features that justify treating the portions
separately; (2) if a fund has multiple sub-advisers with differing liquidity views; or (3) if the fundchooses to classify the position through evaluation of how long it would take to liquidate theentire position. In (1) and (2), a fund would classify by treating each portion of the position as aseparate investment to arrive at an assumed sale size that is equal to 10% of the fund’s net assets
by reducing each investment by 10%.

414

*****
Item C.10.

For repurchase and reverse repurchase agreements, also provide:*****b. * * *iii. If the counterparty does not have an LEI, provide the counterparty’s RSSD ID, if any.
*****
Item C.11.

For derivatives, also provide:*****b. * * *ii. If the counterparty does not have an LEI, provide the counterparty’s RSSD ID, if any.
*****
Part D: Miscellaneous Securities
Report miscellaneous securities, if any, using the same Item numbers and reporting the same
information that would be reported for each investment in Part C if it were not a miscellaneoussecurity. Information reported in this Item will be nonpublic.
*****
Part F: Exhibits
Attach no later than 60 days after the end of the reporting period the Fund’s complete portfolio
holdings as of the close of the period covered by the report, except for reports covering the lastmonth of the Fund’s second and fourth fiscal quarters. These portfolio holdings must bepresented in accordance with the schedules set forth in §§210.12-12 – 210.12-14 of Regulation
S-X [17 CFR 210.12-12 – 210.12-14].
*****

415

10. Amend Form N-CEN (referenced in § 274.101) by revising General Instruction E and
Items B.16, B.17, C.5, C.6, C.9, C.10, C.11, C.12, C.13, C.14, C.15, C.16, C.17, C.21, D.12,
D.13, D.14, E.2, F.1, F.2, F.4, and Instructions to Item G.1 to read as follows:
Note: The text of Form N-CEN does not, and these amendments will not, appear in the
Code of Federal Regulations.
FORM N-CEN*****
GENERAL INSTRUCTIONS
*****
E.

Definitions
Except as defined below or where the context clearly indicates the contrary, terms used inForm N-CEN have meanings as defined in the Act and the rules and regulations thereunder.
Unless otherwise indicated, all references in the form or its instructions to statutory sections or torules are sections of the Act and the rules and regulations thereunder.
In addition, the following definitions apply:“Class” means a class of shares issued by a Fund that has more than one class that
represents interest in the same portfolio of securities under rule 18f-3 under the Act (17 CFR
270.18f-3) or under an order exempting the Fund from provisions of section 18 of the Act (15U.S.C. 80a-18).
“CRD number” means a central licensing and registration system number issued by the
Financial Industry Regulatory Authority.
“Exchange-Traded Fund” means an open-end management investment company (orSeries or Class thereof) or unit investment trust (or series thereof), the shares of which are listed

416

and traded on a national securities exchange at market prices, and that has formed and operates
under an exemptive order under the Act granted by the Commission or in reliance on rule 6c-11
under the Act (17 CFR 270.6c-11).
“Exchange-Traded Managed Fund” means an open-end management investmentcompany (or Series or Class thereof) or unit investment trust (or series thereof), the shares ofwhich are listed and traded on a national securities exchange at net asset value-based prices, andthat has formed and operates under an exemptive order under the Act granted by the Commission
or in reliance on an exemptive rule under the Act adopted by the Commission.
“Fund” means the Registrant or a separate Series of the Registrant. When an item ofForm N-CEN specifically applies to a Registrant or Series, those terms will be used.
“LEI” means, with respect to any company, the “legal entity identifier” as assigned by autility endorsed by the Global LEI Regulatory Oversight Committee or accredited by the Global
LEI Foundation.
“Money Market Fund” means an open-end management investment company
registered under the Act, or Series thereof, that is regulated as a money market fund pursuant torule 2a-7 under the Act (17 CFR 270.2a-7).
“PCAOB number” means the registration number issued to an independent public
accountant registered with the Public Company Accounting Oversight Board.
“Registrant” means the investment company filing this report or on whose behalf thereport is filed.
“RSSD ID” means the identifier assigned by the National Information Center of theBoard of Governors of the Federal Reserve System.

417

“SEC File number” means the number assigned to an entity by the Commission whenthat entity registered with the Commission in the capacity in which it is named in Form N-CEN.
“Series” means shares offered by a Registrant that represent undivided interests in a
portfolio of investments and that are preferred over all other Series of shares for assets
specifically allocated to that Series in accordance with rule 18f-2(a) (17 CFR 270.18f-2(a)).
*****
Item B.16.

Principal underwriters.

a.

***

v.

If no LEI is provided, RSSD ID, if any: ___vi.

State, if applicable: ____

vii.

Foreign country, if applicable: ____

viii.

Is the principal underwriter an affiliated person of the Registrant, or its investment

adviser(s) or depositor? [Y/N]*****
Item B.17.

Independent public accountant. Provide the following information about eachindependent public accountant:
*****
d.

If no LEI is provided, RSSD ID, if any: ___e.

State, if applicable: ____

f.

Foreign country, if applicable: ____g.

Has the independent public accountant changed since the last filing? [Y/N]*****
Item C.5.

Investments in certain foreign corporations.

418

*****
b.

***

iii.

If no LEI is provided, RSSD ID, if any: ___*****Item C.6.

Securities lending.

*****
c.

***

iii.

If no LEI is provided, RSSD ID, if any: ___iv.

Is the securities lending agent an affiliated person, or an affiliated person of an affiliatedperson, of the Fund? [Y/N]v.

Does the securities lending agent or any other entity indemnify the fund against borrower

default on loans administered by this agent? [Y/N]vi.

If the entity providing the indemnification is not the securities lending agent, provide thefollowing information:
1.

Name of person providing indemnification: ____

2.

LEI, if any, of person providing indemnification: ____

3.

If no LEI is provided, RSSD ID, if any: ___vii.

Did the Fund exercise its indemnification rights during the reporting period? [Y/N]

d.

***

iii.

If no LEI is provided, RSSD ID, if any: ___iv.

Is the cash collateral manager an affiliated person, or an affiliated person of an affiliatedperson, of a securities lending agent retained by the Fund? [Y/N]

419

v.

Is the cash collateral manager an affiliated person, or an affiliated person of an affiliatedperson, of the Fund? [Y/N]*****
Item C.9.

Investment advisers.

a.

***

v.

If no LEI is provided, RSSD ID, if any: ___vi.

State, if applicable: ____

vii.

Foreign country, if applicable: ____

viii.

Was the investment adviser hired during the reporting period? [Y/N]1.

If the investment adviser was hired during the reporting period, indicate the investment

adviser’s start date: ____
b.

***

v.

If no LEI is provided, RSSD ID, if any: ___vi.

State, if applicable: ____

vii.

Foreign country, if applicable: ____

viii.

Termination date: ____

c.

***

v.

If no LEI is provided, RSSD ID, if any: ___vi.

State, if applicable: ____

vii.

Foreign country, if applicable: ____

viii.

Is the sub-adviser an affiliated person of the Fund’s investment adviser(s)? [Y/N]ix.

Was the sub-adviser hired during the reporting period? [Y/N]

420

1.

If the sub-adviser was hired during the reporting period, indicate the sub-adviser’s start

date: ____
d.

***

v.

If no LEI is provided, RSSD ID, if any: ___vi.

State, if applicable: ____

vii.

Foreign country, if applicable: ____

viii.

Termination date: ____

Item C.10.

Transfer agents.

a.

***

iv.

If no LEI is provided, RSSD ID, if any: ___v.

State, if applicable: ____

vi.

Foreign country, if applicable: ____

vii.

Is the transfer agent an affiliated person of the Fund or its investment adviser(s)? [Y/N]viii.

Is the transfer agent a sub-transfer agent? [Y/N]*****
Item C.11.

Pricing services

a. * * *ii. LEI, if any, or RSSD ID, if any, or provide and describe other identifying number:
____
*****
Item C.12.

Custodians

a.

***

iii.

If no LEI is provided, RSSD ID, if any: ___

421

iv.

State, if applicable: ____

v.

Foreign country, if applicable: ____

vi.

Is the custodian an affiliated person of the Fund or its investment adviser(s)? [Y/N]vii.

Is the custodian a sub-custodian? [Y/N]viii.

With respect to the custodian, check below to indicate the type of custody:

1.

Bank — section 17(f)(1) (15 U.S.C. 80a-17(f)(1)): ____

2.

Member national securities exchange — rule 17f-1 (17 CFR 270.17f-1): ____

3.

Self — rule 17f-2 (17 CFR 270.17f-2): ____

4.

Securities depository — rule 17f-4 (17 CFR 270.17f-4): ____

5.

Foreign custodian — rule 17f-5 (17 CFR 270.17f-5): ____

6.

Futures commission merchants and commodity clearing organizations — rule 17f-6 (17CFR 270.17f-6): ____
7.

Foreign securities depository — rule 17f-7 (17 CFR 270.17f-7): ____

8.

Insurance company sponsor — rule 26a-2 (17 CFR 270.26a-2): ____

9.

Other: ____. If other, describe: ______.

*****
Item C.13.
a.

Shareholder servicing agents.

***

ii.

LEI, if any, or RSSD ID, if any, or provide and describe other identifying number:

____
*****
Item C.14.
a.

Administrators

***

422

ii.

LEI, if any, or RSSD ID, if any, or provide and describe other identifying number:

____
*****
Item C.15.

Affiliated broker-dealers. Provide the following information about each affiliatedbroker-dealer:
*****
e.

If no LEI is provided, RSSD ID, if any: ___f.

State, if applicable: _____

g.

Foreign country, if applicable: ____

h.

Total commissions paid to the affiliated broker-dealer for the reporting period: ____

Item C.16.

Brokers.

a.

***

v.

If no LEI is provided, RSSD ID, if any: ___vi.

State, if applicable: _____

vii.

Foreign country, if applicable: ____

viii.

Gross commissions paid by the Fund for the reporting period: ____*****
Item C.17.

Principal transactions.

a.

***

v.

If no LEI is provided, RSSD ID, if any: ___vi.

State, if applicable: _____

vii.

Foreign country, if applicable: ____

viii.

Total value of purchases and sales (excluding maturing securities) with Fund: ____

423

*****
Item C.21.

Liquidity classification services. For open-end management investmentcompanies subject to rule 22e-4 (17 CFR 270.22e-4), respond to the following:a. Provide the following information about each person that provided liquidity classification
services to the Fund during the reporting period:i. Full name: ____
ii. LEI, if any, or RSSD ID, if any, or provide and describe other identifying number:____iii. State, if applicable: _____
iv. Foreign country, if applicable: ____
v. Is the liquidity classification service an affiliated person of the Fund or its investment
adviser(s)? [Y/N]vi. Asset class(es) for which liquidity classification services were provided to the Fund:_____b. Was a liquidity classification service hired or terminated during the reporting period?
[Y/N]
*****
Item D.12.

Investment advisers (small business investment companies only).

a. * * *v. If no LEI is provided, RSSD ID, if any: ___vi. State, if applicable: _____
vii. Foreign country, if applicable: ____
viii. Was the investment adviser hired during the reporting period? [Y/N]4241. If the investment adviser was hired during the reporting period, indicate theinvestment adviser’s start date: ____
b. * * *v. If no LEI is provided, RSSD ID, if any: ___vi. State, if applicable: _____
vii. Foreign country, if applicable: ____
viii. Termination date: ____
c. * * *v. If no LEI is provided, RSSD ID, if any: ___vi. State, if applicable: _____
vii. Foreign country, if applicable: ____
viii. Is the sub-adviser an affiliated person of the Fund’s investment adviser(s)? [Y/N]ix. Was the sub-adviser hired during the reporting period? [Y/N]
1. If the sub-adviser was hired during the reporting period, indicate the sub-adviser’s
start date: ____
d. * * *v. If no LEI is provided, RSSD ID, if any: ___vi. State, if applicable: _____
vii. Foreign country, if applicable: ____
viii. Termination date: ____
Item D.13.

Transfer agents (small business investment companies only).

a. * * *iv. If no LEI is provided, RSSD ID, if any: ___425

v. State, if applicable: ____
vi. Foreign country, if applicable: ____
vii. Is the transfer agent an affiliated person of the Fund or its investment adviser(s)?
[Y/N]viii. Is the transfer agent a sub-transfer agent? [Y/N]*****
Item D.14.

Custodians (small business investment companies only).

a. * * *iii. If no LEI is provided, RSSD ID, if any: ___iv. State, if applicable: ____
v. Foreign country, if applicable: ____
vi. Is the custodian an affiliated person of the Fund or its investment adviser(s)? [Y/N]vii. Is the custodian a sub-custodian? [Y/N]viii. With respect to the custodian, check below to indicate the type of custody:
1. Bank — section 17(f)(1) (15 U.S.C. 80a-17(f)(1)): ____
2. Member national securities exchange — rule 17f-1 (17 CFR 270.17f-1): ____
3. Self — rule 17f-2 (17 CFR 270.17f-2): ____
4. Securities depository — rule 17f-4 (17 CFR 270.17f-4): ____
5. Foreign custodian — rule 17f-5 (17 CFR 270.17f-5): ____
6. Futures commission merchants and commodity clearing organizations — rule
17f-6 (17 CFR 270.17f-6): ____
7. Foreign securities depository — rule 17f-7 (17 CFR 270.17f-7): ____
8. Insurance company sponsor — rule 26a-2 (17 CFR 270.26a-2): ____

426

9. Other: ____. If other, describe: ______.
*****
Item E.2.

Authorized participants. For each authorized participant of the Fund, provide thefollowing information:*****b. SEC file number: ____
c. CRD number: ____
d. LEI, if any: ____
e. If no LEI is provided, RSSD ID, if any: ___f. The dollar value of the Fund shares the authorized participant purchased from the Fundduring the reporting period: ____
g. The dollar value of the Fund shares the authorized participant redeemed during thereporting period: ____
h. Did the Fund require that an authorized participant post collateral to the Fund or any of
its designated service providers in connection with the purchase or redemption of Fund
shares during the reporting period? [Y/N]
Instruction. The term “authorized participant” means a member or participant of a clearing
agency registered with the Commission, which has a written agreement with the ExchangeTraded Fund or Exchange-Traded Managed Fund or one of its service providers that allows theauthorized participant to place orders for the purchase and redemption of creation units.
*****
Item F.1.

Depositor. Provide the following information about each depositor:

*****

427

d.

If no LEI is provided, RSSD ID, if any: ___e.

State, if applicable: ____

f.

Foreign country, if applicable: ____g.

Full name of ultimate parent of depositor: ____

Item F.2.
a.

Administrators.

***

ii.

LEI, if any, or RSSD ID, if any, or provide and describe other identifying number:

____
*****
Item F.4.

Sponsor. Provide the following information about each sponsor:

*****
d.

If no LEI is provided, RSSD ID, if any: ___e.

State, if applicable: ____

f.

Foreign country, if applicable: ____*****
Item G.1.

Attachments.

*****
Instructions.
*****
2. * * *428

(f) Security supported (if applicable). Disclose the full name of the issuer, the title of the issue(including coupon or yield, if applicable) and at least two identifiers, if available (e.g., CIK,CUSIP, ISIN, LEI, RSSD ID).
*****
By the Commission.
Dated: November 2, 2022.

Vanessa A. Countryman,
Secretary.

429