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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 270, 274

Release Nos. 33- 10233; IC- 32315; File No. S7-16-15

RIN 3235-AL61

Investment Company Liquidity Risk Management Programs

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission is adopting new rules, a new form and 

amendments to a rule and forms designed to promote effective liquidity risk management 

throughout the open-end investment company industry, thereby reducing the risk that funds will 

be unable to meet their redemption obligations and mitigating dilution of the interests of fund 

shareholders. The amendments also seek to enhance disclosure regarding fund liquidity and 

redemption practices. The Commission is adopting new rule 22e-4, which requires each 

registered open-end management investment company, including open-end exchange-traded 

funds (“ETFs”) but not including money market funds, to establish a liquidity risk management 

program. Rule 22e-4 also requires principal underwriters and depositors of unit investment trusts 

(“UITs”) to engage in a limited liquidity review. The Commission is also adopting amendments 

to Form N-1A regarding the disclosure of fund policies concerning the redemption of fund 

shares. The Commission also is adopting new rule 30b1-10 and Form N-LIQUID that generally 

will require a fund to confidentially notify the Commission when the fund’s level of illiquid 

investments that are assets exceeds 15% of its net assets or when its highly liquid investments 

that are assets fall below its minimum for more than a specified period of time. The Commission 

also is adopting certain sections of Forms N-PORT and N-CEN that will require disclosure of 
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certain information regarding the liquidity of a fund’s holdings and the fund’s liquidity risk 

management practices. 

DATES: Effective Dates: This rule is effective January 17, 2017 except for the amendments 

to Form N-CEN (referenced in 17 CFR 274.101) which are effective June 1, 2018. 

Compliance Dates: The applicable compliance dates are discussed in section III.M. of this final 

rule. 

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, John Foley, Andrea 

Ottomanelli Magovern, Naseem Nixon, Amanda Hollander Wagner, Senior Counsels; Thoreau 

Bartmann, Melissa Gainor, Senior Special Counsels; or Kathleen Joaquin, Senior Financial 

Analyst, Investment Company Rulemaking Office, at (202) 551-6792, Ryan Moore, Assistant 

Chief Accountant, or Matt Giordano, Chief Accountant at (202) 551-6918, Office of the Chief 

Accountant, Division of Investment Management, Securities and Exchange Commission, 100 F 

Street, NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the 

“Commission”) is adopting new rules 22e-4 [17 CFR 270.22e-4] and 30b1-10 [17 CFR 

270.30b1-10], under the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] 

(“Investment Company Act” or “Act”); new Form N-LIQUID [referenced in 17 CFR 274.30b1-

10] under the Investment Company Act; amendments to Form N-1A [referenced in

17 CFR 274.11A] under the Investment Company Act and the Securities Act of 1933 

(“Securities Act”) [15 U.S.C. 77a et seq.]; and adopting sections to Form N-PORT [referenced in 
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17 CFR 274.150] and Form N-CEN [referenced in 17 CFR 274.101] under the Investment 

Company Act.1

TABLE OF CONTENTS:

I. INTRODUCTION................................................................................................................. 5

II. BACKGROUND ................................................................................................................. 11

A. OPEN-END FUNDS................................................................................................................ 11

B. THE ROLE OF LIQUIDITY IN OPEN-END FUNDS .................................................................... 14

C. RECENT DEVELOPMENTS IN THE OPEN-END FUND INDUSTRY ............................................. 34

D. OVERVIEW OF CURRENT PRACTICES.................................................................................... 39

E. RULEMAKING ADOPTION OVERVIEW................................................................................... 41

III. DISCUSSION...................................................................................................................... 46

A. PROGRAM REQUIREMENT AND SCOPE OF RULE 22E-4......................................................... 46

B. ASSESSMENT, MANAGEMENT, AND REVIEW OF LIQUIDITY RISK ......................................... 54

C. CLASSIFYING THE LIQUIDITY OF A FUND’S PORTFOLIO INVESTMENTS, AND DISCLOSURE AND 

REPORTING REQUIREMENTS REGARDING PORTFOLIO INVESTMENTS’ LIQUIDITY 

CLASSIFICATIONS ................................................................................................................ 89

D. HIGHLY LIQUID INVESTMENT MINIMUM............................................................................ 195

E. LIMITATION ON FUNDS’ ILLIQUID INVESTMENTS............................................................... 230

F. POLICIES AND PROCEDURES REGARDING REDEMPTIONS IN KIND...................................... 239

G. CROSS-TRADES.................................................................................................................. 243

H. BOARD APPROVAL AND DESIGNATION OF PROGRAM ADMINISTRATIVE RESPONSIBILITIES249

I. RECORDKEEPING REQUIREMENTS...................................................................................... 259

 1 Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all 

references to rules under the Investment Company Act are to Title 17, Part 270 of the Code of Federal 

Regulations [17 CFR 270]. 
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J. ETFS.................................................................................................................................. 260

K. LIMITATION ON UNIT INVESTMENT TRUSTS’ INVESTMENTS IN ILLIQUID INVESTMENTS .... 279

L. DISCLOSURE AND REPORTING REQUIREMENTS REGARDING LIQUIDITY RISK AND LIQUIDITY 

RISK MANAGEMENT .......................................................................................................... 282

M. EFFECTIVE AND COMPLIANCE DATES ................................................................................ 307

IV. ECONOMIC ANALYSIS ................................................................................................ 310

A. INTRODUCTION AND PRIMARY GOALS OF REGULATION .................................................... 310

B. ECONOMIC BASELINE ........................................................................................................ 315

C. BENEFITS AND COSTS, AND EFFECTS ON EFFICIENCY, COMPETITION, AND CAPITAL 

FORMATION ....................................................................................................................... 328

V. PAPERWORK REDUCTION ACT ANALYSIS.......................................................... 396

A. INTRODUCTION .................................................................................................................. 396

B. RULE 22E-4........................................................................................................................ 397

C. FORM N-PORT.................................................................................................................. 409

D. FORM N-LIQUID AND RULE 30B1-10............................................................................... 418

E. FORM N-CEN.................................................................................................................... 421

F. FORM N-1A ....................................................................................................................... 423

VI. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS ........................................ 428

A. NEED FOR THE RULE.......................................................................................................... 429

B. SIGNIFICANT ISSUES RAISED BY PUBLIC COMMENT .......................................................... 430

C. SMALL ENTITIES SUBJECT TO THE RULE............................................................................ 431

D. PROJECTED REPORTING, RECORDKEEPING, AND OTHER COMPLIANCE REQUIREMENTS .... 431

E. AGENCY ACTION TO MINIMIZE EFFECT ON SMALL ENTITIES ............................................ 435

VII. STATUTORY AUTHORITY AND TEXT OF AMENDMENTS................................ 436

TEXT OF RULES AND FORMS............................................................................................ 437
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I. INTRODUCTION

Redeemability is a defining feature of open-end investment companies.

2 At the time the 

Act was adopted, this feature was recognized as unique to open-end investment companies,

3 and 

the Act’s classification of management investment companies as either open-end (“open-end 

funds” or “funds”) 4 or closed-end, upon which several of the Act’s other provisions depend,

turns on whether the investment company’s shareholders have the right to redeem their shares on 

demand. When the Investment Company Act was enacted, it was understood that redeemability

meant that an open-end fund had to have a liquid portfolio.5

 Since the 1940s, the Commission 

has stated that open-end funds should maintain highly liquid portfolios and recognized that this 

 2 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 and Investment 

Companies (1939), at n.206 (“[T]he salient characteristic of the open-end investment company...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 by law 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.

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) (“1940 Senate Hearings Transcript”), at 453 

(Statement of Mahlon E. Traylor) (“Open-end companies are unlike any other type of investment company, 

principally because of the highly important distinguishing feature that their shareholders can, by contract 

right, withdraw their proportionate interest at will simply by surrendering their shares to the company for 

redemption at liquidating value.”).

4 In-Kind ETFs (as defined below) are included when we refer to “funds” or “open-end funds” throughout 

this Release, except in the sections discussing classifying the liquidity of a fund’s portfolio positions and 

the highly liquid investment minimum requirement, from which In-Kind ETFs are excepted. We have done 

this for conciseness and we recognize that these naming conventions differ from the text of rule 22e-4. 

Additionally, while a money market fund is an open-end management investment company, money market 

funds are not subject to the rules and amendments we are adopting (except certain amendments to Form NCEN and Form N-1A) and thus are not included when we refer to “funds” or “open-end funds” in this 

Release except where specified. 

5 See Investment Trusts and Investment Companies: Hearings on H.R. 10065 before a Subcomm. of the 

House Comm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 112 (1940), at 57 (Statement of 

Robert E. Healy) (“due to the right of the stockholder to come in and demand a redemption, the [open-end 

fund] has to keep itself in a very liquid position. That is, it has to be able to turn its securities into money 

on very short notice.”). 
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may limit their ability to participate in certain transactions in the capital markets.6 Section 22(e) 

of the Act enforces the shareholder’s right of prompt redemption in open-end funds by

compelling such funds to make payment on shareholder redemption requests within seven days 

of receiving the request. Potential dilution of shareholders’ interests in open-end funds also was 

a significant concern of Congress when drafting the Act and was among the noted abuses that led 

to the enactment of the Act, as reflected in sections 22(a) and (c).

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Although the Investment Company Act provides funds with a seven-day window to pay 

proceeds upon an investor’s redemption, the settlement period for open-end fund redemptions 

has shortened considerably over the years. There are several reasons for shorter settlement 

periods, including broker-dealer settlement cycle requirements,

8 evolving industry standards, and 

technological advances in the settlement infrastructure.

9 In addition, many funds state in their 

prospectuses that investors can ordinarily expect to receive redemption proceeds in shorter 

 6 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 invest their funds predominantly 

in readily marketable securities. Individual open-end investment companies, therefore, as presently 

constituted, could participate in the financing of small enterprises and new ventures only to a very limited 

extent.”).

7 See 1940 Senate Hearings Transcript, supra footnote 3, at 37, 137-145 (stating that, among the abuses that 

served as a backdrop for the Act, were “practices which 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).

8 Open-end funds that are redeemed through broker-dealers must meet redemption requests within three 

business days because broker-dealers are subject to rule 15c6-1 under the Securities Exchange Act of 1934 

(the “Exchange Act”), which establishes a three-day (T+3) settlement period for security trades effected by 

a broker or a dealer. 

9 Generally, settlement time frames for mutual fund shares have been shortening for decades. See Open-End 

Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for 

Investment Company Reporting Modernization Release, Investment Company Act Release No. 31835 

(Sept. 22, 2015) [80 FR 62274 (Oct. 15, 2015)] (“Proposing Release”), at section II.C.2. See also, e.g.,

T+2 Industry Steering Committee, Shortening the Settlement Cycle: The Move to T+2 (2015), at n.18, 

available at http://www.ust2.com/pdfs/ssc.pdf (“In today’s environment ... open-end mutual funds settle 

through NSCC generally on a T+1 basis (excluding certain retail trades which typically settle on T+3).”). 

See also Amendment to Securities Transaction Settlement Cycle, Securities Exchange Act Release No. 34-

78962 (September 29, 2016) [81 FR 69240 (October 05, 2016)]. 
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periods than seven days.

10 At the same time, open-end funds have experienced significant 

growth,11markets have grown more complex, and funds pursue more complex investment 

strategies, including fixed income and alternative investment strategies focused on less liquid 

asset classes. These trends have made the role of fund liquidity and liquidity management more 

important than ever in reducing the risk that a fund will be unable to meet its obligations to 

redeeming shareholders or other obligations under applicable law, while also minimizing the 

impact of those redemptions on the fund (i.e., mitigating investor dilution). Furthermore, recent 

events have demonstrated the significant adverse consequences to remaining investors in a fund 

when it fails to adequately manage liquidity.12 

We remain committed, as the primary regulator of open-end funds, to designing 

regulatory programs that respond to the risks associated with the increasingly complex portfolio 

 10 See, e.g., Fidelity Commonwealth Trust rule 485(b) Registration Statement (June 29, 2016), available at

https://www.sec.gov/Archives/edgar/data/205323/000137949116004602/filing776.htm (“Normally, 

redemptions will be processed by the next business day, but it may take up to seven days to pay the 

redemption proceeds if making immediate payment would adversely affect the fund.”); PIMCO Funds rule 

485(b) Registration Statement (Feb. 26, 2016), available at

https://www.sec.gov/Archives/edgar/data/810893/000119312516481663/d149399d485bpos.htm#chapter_7

_3686 (“Redemption proceeds will normally be mailed to the redeeming shareholder within three calendar 

days . . . [but] may take up to seven days.”).

11 As of the end of 2015, there were 10,633 open-end funds (excluding money market funds, but including 

ETFs), as compared to 5,279 at the end of 1996. See Investment Company Institute, 2016 Investment 

Company Fact Book (2016) (“2016 ICI Fact Book”), available at

https://www.ici.org/pdf/2016_factbook.pdf. 

12 For example, during the pendency of our proposal, the Third Avenue Focused Credit Fund, a nondiversified open-end fund, adopted a plan of liquidation, and requested and obtained exemptive relief to 

suspend shareholder redemptions, following a period of heavy redemption requests that the fund stated

reduced the fund’s portfolio liquidity. The Third Avenue Focused Credit Fund has yet to complete the 

liquidation of fund assets. Additionally, the fund reported that, as a result of the continuous liquidation of 

securities without reinvestment, the fund became increasingly more concentrated, which negatively 

impacted performance. See Third Avenue Trust and Third Avenue Management LLC, Investment 

Company Act Release No. 31943 (Dec. 16, 2015) (“Third Avenue Temporary Order”); Third Avenue 

Focused Credit Fund Semi-Annual Report to Shareholders (April 30, 2016), available at: 

http://thirdave.com/wp-content/uploads/2016/06/Q2-2016-TFCIX-Semi-Annual-Report.pdf (“The Fund is 

considerably more concentrated than it has ever been. As we have been liquidating securities and not 

recycling the cash, the top 10 holdings have increased from 32.6% at March 31, 2015 to approximately 

67% of the Fund. We are increasingly dependent on the top 10 names to drive performance.”). See also

infra footnotes 81-84 and accompanying text.
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composition and operations of the asset management industry. In developing the proposed rules, 

Commission staff engaged with large and small fund complexes to better understand funds’ 

management of liquidity risk. Through these outreach efforts our staff has learned that, while 

some funds and their managers have developed extensive liquidity risk management programs, 

others have dedicated significantly fewer resources, attention and focus to managing liquidity 

risk in a formalized way. We believe that it is in the interest of funds and fund investors to 

create a regulatory framework that would reduce the risk that a fund will be unable to meet its 

redemption obligations and minimize dilution of shareholder interests by promoting stronger and 

more effective liquidity risk management across open-end funds.

We sought to address these goals with the proposal on fund liquidity risk management 

that we published in late 2015.13 This proposal would have required funds to: establish liquidity 

risk management programs, including classifying and monitoring each portfolio asset’s level of 

liquidity and designating a minimum amount of highly liquid investments; provide additional 

reporting to us; and enhance disclosure to investors regarding the liquidity of fund portfolios and 

how funds manage liquidity risk and redemption obligations. In order to provide funds with an 

additional tool to mitigate potential dilution and to manage fund liquidity, the proposal included 

amendments to rule 22c-1 under the Act to permit funds (except money market funds and ETFs) 

to use “swing pricing,” a process of adjusting the NAV of a fund’s shares to pass on to 

purchasing or redeeming shareholders more of the costs associated with their trading activity.

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 13 See Proposing Release, supra footnote 9.

14 We note that we are adopting swing pricing, and associated changes to Form N-PORT and N-CEN in a 

companion release. See Investment Company Swing Pricing, Investment Company Act Release No. 32316 

(Oct. 13, 2016) (“Swing Pricing Adopting Release”). All comments on the proposed swing pricing rules 

and associated issues are discussed in that release.
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We received more than 70 comment letters on the proposal.15 The majority of 

commenters generally supported a requirement that funds adopt a formal, written liquidity risk 

management program that is risk oriented and principles based, although many provided 

suggestions and alternatives for us to consider.

16 Many commenters objected to certain aspects 

of the proposal, particularly the liquidity classification requirement, the three-day liquid asset

minimum, and the requirement that funds publicly disclose the liquidity of each portfolio 

position.17 Several commenters specifically supported applying the liquidity risk management 

requirements to all open-end funds, with the exception of money market funds.18 Others 

expressed concerns with regard to ETFs, and recommended that the Commission exclude ETFs 

that primarily satisfy purchase and redemption orders in kind from the liquidity risk management 

requirements or develop a more tailored liquidity risk management program applicable to 

ETFs.

19 

Today, after consideration of the many comments we received, we are adopting the 

 15 The comment letters on the Proposing Release (File No. S7-16-15) are available at

http://www.sec.gov/comments/s7-16-15/s71615.shtml.

16 See, e.g., Comment Letter of Investment Company Institute (Jan. 13, 2016) (“ICI Comment Letter I”); 

Comment Letter of BlackRock Inc. (Jan. 13, 2016) (“BlackRock Comment Letter”); Comment Letter of 

Charles Schwab Investment Management (Jan. 13, 2016) (“Charles Schwab Comment Letter”).

17 See, e.g., ICI Comment Letter I (arguing that the six-category asset classification scheme and three-day 

liquid asset minimum are problematic and encourage a “one-size-fits-all” approach rather than a risk-based 

approach to liquidity management); Charles Schwab Comment Letter (arguing that public disclosure of the 

liquidity of each portfolio position may confuse and mislead investors).

18 See, e.g., Comment Letter of HSBC Global Asset Management (Jan. 13, 2016) (“HSBC Comment Letter”) 

(supporting the exclusion of closed-end funds and money market funds from the liquidity risk management 

requirements); Charles Schwab Comment Letter (supporting the application of the risk management 

requirements to ETFs).

19 See, e.g., ICI Comment Letter I; BlackRock Comment Letter (suggesting that the Commission should 

develop a separate and comprehensive rule addressing the different types of ETFs and their respective 

risks). The comments we received addressing exchange-traded managed funds (“ETMFs”) suggested that 

the Commission treat ETMFs in the same manner as ETFs and did not recommend any further unique 

treatment of ETMFs. See Comment Letter of the American Bar Association (Feb. 11, 2016); Comment 

Letter of Financial Services Roundtable (Jan. 13, 2016) (“FSR Comment Letter”).
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proposal with a number of modifications to enhance the effectiveness and workability of the 

rule’s liquidity risk management requirements. The Commission is adopting new rule 22e-4, 

which will require each fund to adopt and implement a written liquidity risk management 

program designed to assess and manage the fund’s liquidity risk, which will be overseen by the 

fund’s board. As discussed in more detail below, the Commission is modifying from the 

proposal some of the liquidity risk management program elements, including reducing the 

liquidity classification categories from six to four, providing tailored program requirements for 

ETFs, and revising the fund board oversight requirements. 

The new rule contains a highly liquid investment minimum requirement, which is similar 

to the proposed three-day liquid asset minimum. However, instead of barring a fund from 

purchasing securities other than highly liquid investments if the fund falls below its minimum as 

proposed for the three-day liquid asset minimum, under the adopted rules, if the fund falls below 

its highly liquid investment minimum, it would: (1) report that occurrence to the fund board at its 

next scheduled meeting; (2) if it is below the minimum for more than a brief period of time, 

report the occurrence to the board and, on Form N-LIQUID, to the Commission within one 

business day; and (3) develop and provide to the board a plan for restoring the minimum within a 

reasonable period of time.

We also are adopting a 15% limitation on funds’ purchases of illiquid investments,

largely as proposed, but the definition of investments considered illiquid and subject to this 15%

limit has been enhanced and substantially harmonized with the classification system we are 

adopting today. Additionally, the Commission is adopting new reporting Form N-LIQUID, 

which will require a fund to confidentially notify the Commission within one business day if the

fund’s illiquid investment holdings exceed 15% of its net assets or if its highly liquid 
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investments fall below its minimum for more than a brief period of time. Furthermore, much as 

proposed, the Commission is adopting reporting and disclosure requirements under Form NCEN, Form N-PORT, and Form N-1A regarding liquidity risk and liquidity risk management. In 

response to commenters’ concerns, a number of the additional reporting items on Form N-PORT 

will be non-public.

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Taken together, these reforms are designed to provide investors with increased protection

regarding how liquidity in their open-end funds is managed, thereby reducing the risk that funds 

will be unable to meet redemption or other legal obligations, and mitigating dilution of the 

interests of fund shareholders. These reforms also are intended to give investors better 

information to make investment decisions, and to give the Commission better information to 

conduct comprehensive monitoring and oversight of an ever-evolving fund industry. 

II. BACKGROUND

A. Open-End Funds

As we discussed in the Proposing Release, individual and institutional investors 

increasingly have come to rely on investments in open-end funds to meet their financial needs 

and access the capital markets. At the end of 2015, 54.9 million households, or 44.1 percent of 

all U.S. households owned funds.21 Funds allow investors to pool their investments with those 

of other investors so that they may together benefit from fund features such as professional 

investment management, diversification, and liquidity. Fund shareholders share the gains and 

 20 If any provision of these rules, or the application thereof to any person or circumstance, is held to be 

invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or 

circumstances that can be given effect without the invalid provision or application.

21 See 2016 ICI Fact Book, supra footnote 11, at 12.
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losses of the fund, and also share its costs.22

As noted above, investors in mutual funds can redeem their shares on each business day 

and, by law, must receive approximately their pro rata share of the fund’s net assets (or its cash 

value) within seven calendar days after receipt of a redemption request.

23 Under the Act’s 

definition of redeemable security, open-end funds have the right to redeem shareholders in cash 

or in kind (that is, by delivering certain assets from the fund’s portfolio, rather than cash, to a 

redeeming shareholder).24 However, while funds often reserve the right to redeem in kind for 

 22 There are currently four primary kinds of open-end funds: money market funds, mutual funds other than 

money market funds, ETFs, and ETMFs. Money market funds are a special kind of mutual fund that 

complies with the requirements of rule 2a-7 under the Act. ETFs registered with the Commission are 

organized either as open-end management investment companies or unit investment trusts. See section 4(2) 

of the Act (defining “unit investment trust” as an investment company which (A) is organized under a trust 

indenture, contract of custodianship or agency, or similar instrument, (B) does not have a board of 

directors, and (C) issues only redeemable securities, each of which represents an undivided interest in a unit 

of specified securities, but does not include a voting trust). Most ETFs are organized as open-end 

management investment companies and, except where specified, when we refer to ETFs in this Release, we 

are referring to ETFs that are organized as open-end management investment companies. 

23 See section 2(a)(32) of the Act (defining a “redeemable security” as any security, other than short-term 

paper, that entitles its holder to receive approximately his proportionate share of the issuer’s current net 

assets, or the cash equivalent thereof), and section 22(e) of the Act (providing, in part, that no registered 

investment company shall suspend the right of redemption, or postpone the date of payment upon 

redemption of any redeemable security in accordance with its terms for more than seven days after tender 

of the security absent specified unusual circumstances). See also rule 22c-1 (requiring that redeemable 

securities be transacted “at a price based on the current net asset value of such security which is next 

computed after receipt of a tender of such security for redemption or of an order to purchase or sell such 

security”).

24 Prior to the adoption of the Act, open-end funds largely redeemed fund shares in cash and, as such, a 

redeemable security was generally understood to mean a security that was redeemable for cash. See, e.g., 

Investment Trusts and Investment Companies: Senate Report 1775 on S. 4108, 76th Cong., 3d Sess. (1940), 

at 2 (“[a redeemable security] is, a security which provides that the holder may tender it to the company at 

any time and receive a sum of money approximating the current market value of his proportionate interest 

in the company’s assets.”[emphasis added]). However, section 2(a)(32) has traditionally been interpreted 

to give funds the option of redeeming their shares in cash or in kind. See, e.g., Investment Trusts and 

Investment Companies: Report of the Securities and Exchange Commission Part I (1939) at 21 (“A 

company is of the ‘open-end’ type if a shareholder has the right to require the company to purchase or 

redeem or cause the purchase or redemption of the shares representing his proportionate interest in the 

company’s properties, or the cash equivalent of such interest.”); see also Adoption of (1) Rule 18f-1 Under 

the Investment Company Act of 1940 to Permit Registered Open-End Investment Companies Which Have 

the Right to Redeem In Kind to Elect to Make Only Cash Redemptions and (2) Form N-18F-1, Investment 

Company Act Release No. 6561 (June 14, 1971) [36 FR 11919 (June 23, 1971)] (“Rule 18f-1 and Form N18F-1 Adopting Release”) (stating that the definition of “redeemable security” in section 2(a)(32) of the 

Investment Company Act “has traditionally been interpreted as giving the issuer the option of redeeming its 
13

certain redemption requests, the majority of mutual funds redeem only in cash for a variety of 

reasons, including the limited ability and/or unwillingness of fund shareholders to receive 

securities rather than cash.25

ETFs also offer investors an undivided interest in a pool of assets.26 ETF shares, similar 

to listed stocks, are bought and sold throughout the day by investors on an exchange through a 

broker-dealer.27 In addition, like mutual funds, ETFs provide redemption rights on a daily basis, 

but, pursuant to exemptive orders, such redemption rights may be exercised only by certain large 

market participants – typically broker-dealers – called “authorized participants.”28 When an 

authorized participant transacts with an ETF to purchase and sell ETF shares, these share 

transactions are structured in large blocks called “creation units.” Most ETFs are structured so 

that an authorized participant will purchase a creation unit with a “portfolio deposit,” which is a 

basket of assets (and sometimes cash) that generally reflects the composition of the ETF’s 

portfolio.29 After purchasing a creation unit, an authorized participant may hold the ETF shares 

 

securities in cash or in kind.”).

25 See Comment Letter of Invesco Advisers, Inc. (Jan. 13, 2016) (“Invesco Comment Letter”) (“The primary 

problem with using redemptions in kind to meet large redemptions is the willingness and ability of the 

redeeming entity to receive securities instead of cash.”). See also Money Market Fund Reform; 

Amendments to Form PF, Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834, 

(June 19, 2013)] (“2013 Money Market Fund Reform Proposing Release”), at n.473 and accompanying text 

(stating that “[m]any commenters believed that requiring in-kind redemptions would be technically 

unworkable due to complex valuation and operational issues that would be imposed on both the fund and 

on investors receiving portfolio securities.”).

26 Since 2003, the number of ETFs traded in U.S. markets has increased by more than 2,200 funds, and the 

assets held by ETFs have increased from $151 billion at the end of 2003 to $2.1 trillion at the end of 2015. 

See 2016 ICI Fact Book, supra footnote 11, at 60.

27 See Exchange-Traded Funds, Investment Company Act Release No. 28193 (Mar. 11, 2008) [73 FR 14618 

(Mar. 18, 2008)] (“ETF Proposing Release”).

28 Authorized participants may purchase and redeem ETF shares at the ETF’s NAV from the ETF. 

29 The ETF publicly declares the contents of the portfolio deposit before the beginning of the trading day. See 

Request for Comment on Exchange-Traded Products, Securities Exchange Act Release No. 75165 (June 

12, 2015) [80 FR 34729 (June 17, 2015)] (“2015 ETP Request for Comment”), at nn.19-20 and 

accompanying text.
14

or sell (or lend) some or all of them to investors in the secondary market. Similarly, for most 

ETFs, when an authorized participant wishes to redeem ETF shares, it presents a creation unit of 

ETF shares to the ETF for redemption and receives in return a “redemption basket,” the contents 

of which are publicly declared by the ETF before the beginning of the trading day.30 

ETMFs are a hybrid between a traditional mutual fund and an ETF.31 Like ETFs, ETMFs 

have shares listed and traded on a national securities exchange; directly issue and redeem shares 

in creation units only; impose fees on creation units issued and redeemed to authorized 

participants to offset the related costs to the ETMFs; and primarily utilize in-kind transfers of 

portfolio deposits in issuing and redeeming creation units. Like mutual funds, ETMFs are

bought and sold at prices linked to NAV and seek to maintain the confidentiality of their current 

portfolio positions.

B. The Role of Liquidity in Open-End Funds

1. Introduction

A hallmark of open-end funds is that they must be able to convert some portion of their 

portfolio holdings into cash on a frequent basis because they issue redeemable securities, and are 

required by section 22(e) of the Investment Company Act to make payment to shareholders for 

securities tendered for redemption within seven days of their tender (although some funds may 

reserve the right to make redemptions in kind for certain redemption requests). As a practical 

 30 See ETF Proposing Release, supra footnote 27, at n.24 and accompanying text. 

31 The Commission approved ETMFs in 2014 and the first ETMFs have since been launched. See Eaton 

Vance Management, et al., Investment Company Act Release No. 31333 (Nov. 6, 2014) (notice of 

application) (“ETMF Notice”) and In the Matter of Eaton Vance Management, et al., Investment Company 

Act Release No. 31361 (Dec. 2, 2014) (order) (“ETMF Order”). Given the similarities between ETFs and 

ETMFs and that the new requirements will apply to ETMFs as they do to ETFs, this Release generally 

includes ETMFs in the term “ETF” and separately mentions ETMFs only if appropriate. See supra

footnote 19.
15

matter, many investors expect to receive redemption proceeds in fewer than seven days as some 

mutual funds represent in their prospectuses that they will generally pay redemption proceeds on 

a next business day basis.32 Given the statutory and regulatory requirements for meeting 

redemption requests, as well as any potential liability for representations made to investors 

regarding payment of redemption proceeds, a mutual fund must adequately manage the liquidity 

of its portfolio so that redemption requests can be satisfied in a timely manner. 

Sufficient liquidity of ETF portfolio positions also is important. Many ETFs typically 

make in-kind redemptions of creation units, which can mitigate the need for ETFs to maintain 

cash compared to mutual funds, particularly if the in-kind redemptions are of a representative 

basket of the ETF’s portfolio assets that do not alter the ETF’s liquidity profile. However, 

transferring illiquid or less liquid instruments to the redeeming authorized participants could 

result in a liquidity cost to the authorized participants or other market participants, which could 

increase the cost of their participation and interfere with their role in the ETF arbitrage 

mechanism, resulting in the ETF trading at increased bid-ask spreads and/or a premium or 

discount to its NAV and ultimately impacting investors.

33 Declining liquidity in an ETF’s basket 

assets also could affect the ability of an authorized participant or other market participants to 

readily assemble the basket for purchases of creation units and to sell securities received upon 

redemption of creation units.

In addition, all ETFs reserve the right to satisfy redemption requests in cash rather than in 

 32 See supra footnote 10; see also supra footnote 8 (noting that open-end funds that are redeemed through 

broker-dealers must meet redemption requests within three business days due to the application of rule 

15c6-1 under the Exchange Act). 

33 A significant amount of illiquid securities in an ETF’s portfolio can make arbitrage opportunities more 

difficult to evaluate because it would be difficult for market makers to price, trade, and hedge their 

exposure to the ETF. See infra footnote 843 and accompanying text. Commenters noted that the effective 

functioning of this arbitrage mechanism has been pivotal to the operation of ETFs. See ICI Comment 

Letter I. 
16

kind, but the extent to which ETFs satisfy redemption requests in cash varies. While many ETFs 

redeem in cash only rarely, some ETFs ordinarily redeem authorized participants in cash. ETFs 

that elect to redeem authorized participants in cash in more than a de minimis amount, like 

mutual funds, would need to ensure that they have adequate portfolio liquidity (in conjunction 

with any other liquidity sources) to meet shareholder redemptions.

As noted above, ETMFs have features of both mutual funds and ETFs. As ETMFs would 

redeem their shares on a daily basis from authorized participants, ETMFs would need to hold 

sufficiently liquid assets to meet such redemptions to the extent that the ETMFs satisfy the 

redemption requests in cash. As with ETFs, however, the ETMFs’ practice of making in-kind 

redemptions could mitigate the need to maintain cash. Further, as ETMF market makers would 

not engage in the same kind of arbitrage as ETF market makers because the pricing of the ETMF 

shares is linked to the fund’s NAV (subject to execution costs), the liquidity of an ETMF’s 

portfolio is more relevant to an ETMF’s ability to meet redemptions and the amount of execution 

costs than to an arbitrage function.

2. Statutory and Regulatory Requirements

An open-end fund’s failure to maintain sufficiently liquid assets or otherwise manage 

liquidity implicates multiple provisions of the Act, as well as other federal securities laws and 

regulations. Section 2(a)(32) of the Act,

34 when read together with sections 4(2) and 5(a),

35

creates an obligation on open-end funds and UITs to provide shareholders with approximately 

their proportionate share of NAV upon the presentation of a redemption request. Section 22(e) 

 34 See supra footnote 23. 

35 Section 4(2) of the Act defines a “unit investment trust” as an investment company which, among other 

things, “issues only redeemable securities.” Section 5(a) of the Act defines an “open-end company” as a 

“management company which is offering for sale or has outstanding any redeemable security of which it is 

the issuer”.
17

of the Act provides in turn that the right of redemption may not be suspended and payment of 

redemption proceeds may not be postponed for more than seven days after tender of a 

redeemable security absent specified unusual circumstances.36

For decades, the Commission has recognized that because open-end funds hold 

themselves out at all times as being prepared to meet these statutory redemption requirements, 

they have a responsibility to manage the liquidity of their investment portfolios in a manner 

consistent with those obligations and any other related representations.37 Thus, long-standing 

Commission guidelines contain a liquidity standard that generally limits an open-end fund’s 

aggregate holdings of “illiquid assets” to no more than 15% of the fund’s net assets (the “15% 

guideline”).38 Under the 15% guideline, a portfolio security or other asset is considered illiquid 

 36 Section 22(e) of the Act permits open-end funds to suspend redemptions and postpone payment for 

redemptions already tendered for any period during which the New York Stock Exchange (“NYSE”) is 

closed (other than customary weekend and holiday closings) and in three additional situations if the 

Commission has made certain determinations. First, a fund may suspend redemptions for any period 

during which trading on the NYSE is restricted, as determined by the Commission. Second, a fund may 

suspend redemptions for any period during which an emergency exists, as determined by the Commission, 

as a result of which it is not reasonably practicable for the fund to: (i) liquidate its portfolio securities, or 

(ii) fairly determine the value of its net assets. Third, a fund may suspend redemptions for such other 

periods as the Commission may by order permit for the protection of fund shareholders. The Commission 

has rarely issued orders permitting the suspension of redemptions for periods of restricted trading or 

emergency circumstances but has issued orders “for such other periods” under section 22(e)(3) on a few 

occasions. See, e.g., In the Matter of The Reserve Fund, on behalf of two of its series, the Primary Fund 

and the U.S. Government Fund, Investment Company Act Release No. 28386 (Sept. 22, 2008) [73 FR 

55572 (Sept. 25, 2008)]; In the Matter of Municipal Lease Securities Fund, Inc., Investment Company Act 

Release No. 17245 (Nov. 29, 1989); Third Avenue Temporary Order, supra footnote 12. Money market 

funds are able to suspend redemptions in certain limited circumstances. See rule 22e-3 under the Act; see 

also the Proposing Release, supra footnote 9, at n.155.

37 See Statement Regarding “Restricted Securities”, Investment Company Act Release No. 5847 (Oct. 21, 

1969) [35 FR 19989 (Dec. 31, 1970)] (“Restricted Securities Release”) (“Because open-end companies 

hold themselves out at all times as being prepared to meet redemptions within seven days, it is essential that 

such companies maintain a portfolio of investments that enable them to fulfill that obligation. This requires 

a high degree of liquidity in the assets of open-end companies because the extent of redemption demands or 

other exigencies are not always predictable.”); see also Resale of Restricted Securities; Changes to Method 

of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Investment Company 

Act Release No. 17452 (Apr. 23, 1990) [55 FR 17933 (Apr. 30, 1990)] (“Rule 144A Release”) (adopting 

rule 144A under the Securities Act of 1933 (the “Securities Act”)).

38 Revisions of Guidelines to Form N-1A, Investment Company Act Release No. 18612 (Mar. 12, 1992) 

[57 FR 9828 (Mar. 20, 1992)] (“Guidelines Release”), at section III (“If an open-end company holds a 
18

if it cannot be sold or disposed of in the ordinary course of business within seven days at 

approximately the value at which the fund has valued the investment.39 The 15% guideline has 

generally caused funds to limit their exposures to particular types of securities that cannot be 

sold within seven days and that the Commission and staff have indicated may be illiquid, 

depending on the facts and circumstances, such as private equity securities and certain other 

privately placed or restricted securities40 as well as certain instruments or transactions not 

maturing in seven days or less, including term repurchase agreements.41

Relatedly, the Commission has recognized that the liquidity management practices of 

open-end funds implicate certain antifraud provisions of the securities laws.42 For example, 

 

material percentage of its assets in securities or other assets for which there is no established market, there 

may be a question concerning the ability of the fund to make payment within seven days of the date its 

shares are tendered for redemption. The usual limit on aggregate holdings by an open-end investment 

company of illiquid assets is 15% of its net assets.”). The Guidelines Release modified prior Commission

guidance that set a 10% limit on illiquid assets for open-end funds. See Restricted Securities Release, 

supra footnote 37.

39 Guidelines Release, supra footnote 38; see also ETF Proposing Release, supra footnote 27; Valuation of 

Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies 

(Money Market Funds), Investment Company Act Release No. 13380 (July 11, 1983) [48 FR 32555 (July 

18, 1983)] (“Money Market Funds Release”); see also Rule 144A Release, supra footnote 37.

40 See Restricted Securities Release, supra footnote 37. Securities offered pursuant to rule 144A under the 

Securities Act may be considered liquid under the 15% guideline depending on certain factors. See Rule 

144A Release, supra footnote 37.

41 See Periodic Repurchases by Closed-End Management Investment Companies; Redemptions by Open-End 

Management Investment Companies and Registered Separate Accounts at Periodic Intervals or with 

Extended Payment, Investment Company Act Release No. 18869 (July 28, 1992) [57 FR 34701 (Aug. 6, 

1992)] (“Interval Fund Proposing Release”). The Commission has not established a set of required factors 

that must be considered when assessing the liquidity of these or other types of securities under the 15% 

guideline. However, in the context of rule 144A securities, the Commission had provided “examples of 

factors that would be reasonable for a [fund’s] board of directors to take into account” but which would not 

necessarily be determinative. See Rule 144A Release, supra footnote 37. These factors include: the 

frequency of trades and quotations for the security; the number of dealers willing to purchase or sell the 

security and the number of other potential purchasers; dealer undertakings to make a market in the security; 

and the nature of the security and the nature of the marketplace in which it trades, including the time 

needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer.

42 See Restricted Securities Release, supra footnote 37 (“To the extent a material percentage of the assets of 

an open-end company consist of restricted securities which cannot publicly be sold without registration 

under the Securities Act, the ability of the company to comply with the provisions of the Investment 

Company Act relating to redemption, and to fulfill the implicit representations made in its prospectus with 
19

section 34(b) of the Act makes it unlawful for any person to make any untrue statement of a 

material fact in any document filed with the Commission or transmitted pursuant to the Act, or 

the keeping of which is required by section 31(a) of the Act, or to omit to state any fact necessary 

in order to prevent the statements made therein, in light of the circumstances under which they 

were made, from being materially misleading.43 

In addition, section 206(4)44 of the Investment Advisers Act of 1940 (“Advisers Act”) 

and rule 206(4)-8 thereunder make it unlawful for any adviser to an investment fund to engage in 

 

respect thereto, may be adversely affected. In any such situation, the investment company concerned and 

the persons responsible for the sale of its securities should give careful consideration to the possible 

application of the provisions of section 10(b) of the Exchange Act and Rule 10b-5 thereunder.”); see also

Money Market Funds Release, supra footnote 39 (explaining that because “most money market funds 

promise investors that they will receive proceeds much sooner” than seven days and “experience a greater 

and perhaps less predictable volume of redemption transactions than do other investment companies,” they 

“must have sufficient liquidity to meet redemption requests on a more immediate basis”). The Commission 

has considered the failure to take risk-limiting measures in other contexts to implicate antifraud provisions 

as well. See Adoption of Revisions to Rules Regulating Money Market Funds, Investment Company Act 

Release No. 18005 (Feb. 20, 1991) (“The Commission believes that there is a significant danger of 

misleading investors if an investment company holds itself out as a money market fund when it engages in 

investment strategies not consistent with the risk-limiting conditions of rule 2a-7. It is therefore necessary 

and appropriate in the public interest and for the protection of investors for the Commission to adopt a new 

paragraph (b) of rule 2a-7 prohibiting an investment company from holding itself out as a ‘money market 

fund’ unless it meets the risk-limited conditions of rule 2a-7.”).

43 Exercising authority under section 34(b) and sections 9(b), 38(a), and 42 of the Act, the Commission 

adopted paragraph (b) of rule 2a-7 in 1997, which provides that “it shall be an untrue statement of a 

material fact within the meaning of section 34(b) of the Act for a registered investment company . . . to 

hold itself out to investors as a money market fund or the equivalent of a money market fund” unless the 

fund complies with rule 2a-7. Under rule 2a-7, money market funds must maintain sufficient liquidity to 

meet reasonably foreseeable redemptions, generally must invest at least 10% of their portfolios in assets 

that can provide daily liquidity and at least 30% of their portfolios in assets that can provide weekly 

liquidity, and may not acquire any illiquid security if, immediately after the acquisition, the money market 

fund would have invested more than 5% of its total assets in illiquid securities. Rule 2a-7. Additionally, 

the Commission adopted amendments to rule 2a-7 in 2014 that, among other things: (i) give boards of 

directors of money market funds discretion to impose a liquidity fee or temporarily suspend the right of 

redemption if a fund’s weekly liquidity level falls below the required regulatory threshold; and (ii) require 

all non-government money market funds to impose a liquidity fee if the fund’s weekly liquidity level falls 

below a designated threshold of 10%, unless the fund’s board determines that imposing such a fee is not in 

the best interests of the fund. See Money Market Fund Reform; Amendments to Form PF, Investment 

Company Act Release No. 31166 (July 23, 2014) [79 FR 47736 (Aug. 14, 2014)] (“2014 Money Market 

Fund Reform Adopting Release”).

44 Section 206(4) of the Advisers Act grants the Commission authority, by rules and regulations, to define and 

prescribe means reasonably designed to prevent such acts, practices, and courses of business as are 

fraudulent, deceptive, or manipulative.
20

any act, practice, or course of business which is fraudulent, deceptive, or manipulative.45

Additionally, section 10(b) of the Exchange Act and rule 10b-5 thereunder make it unlawful, 

among other things, for any person, in connection with the purchase or sale of securities, to 

employ any device, scheme, or artifice to defraud or to make any untrue statement of a material 

fact or to omit to state a material fact necessary in order to make the statements made not 

misleading, or engage in any act, practice, or course of business which operates or would operate 

as a fraud or deceit upon any persons. Finally, section 17(a) of the Securities Act similarly 

makes it unlawful for any person in the offer or sale of any securities or any security-based swap 

agreement by the use of any means or instruments of transportation or communication in 

interstate commerce or by use of the mails, directly or indirectly, to employ any device, scheme, 

or artifice to defraud, to obtain money or property by means of any untrue statement of a material 

fact or any omission to state a material fact necessary in order to make the statements made, in 

light of the circumstances under which they were made, not misleading, or to engage in any 

transaction, practice, or course of business which operates or would operate as a fraud or deceit 

upon the purchaser.46 

As the Commission has previously noted, an open-end fund “represents to investors, in 

 45 Additionally, section 206(1) of the Advisers Act makes it unlawful for an adviser to employ any device, 

scheme or artifice to defraud any client or prospective client, and section 206(2) makes it unlawful for an 

adviser to engage in any transaction, practice or course of business which operates as a fraud or deceit upon 

any client or prospective client. See Prohibition of Fraud by Advisers to Certain Pooled Investment 

Vehicles, Investment Advisers Act Release No. 2628 (August 3, 2007) [72 FR 44756 (August 9, 2007)], at 

n.3 and accompanying text. 

46 See In the Matter of Evergreen Investment Management Company, LLC and Evergreen Investment 

Services, Inc., Investment Company Act Release No. 28759 (June 8, 2009) (settled order) (“Evergreen 

Order”) (settlement of allegations that a mutual fund and its underwriter violated, and its adviser aided and 

abetted violations of, section 22(c) of the Act and rule 22c-1(a) through purchases and redemptions at 

materially overstated NAV. The order found that the fund’s adviser materially misrepresented the fund’s 

performance and NAV in reviewing and approving the fund’s prospectus in violation of section 34(b) of 

the Act.). 
21

its prospectus, that it will, as required by section 22(e) of the Act, redeem its securities at 

approximate net asset value within seven days after tender.”47 Similarly, an open-end fund that is 

redeemed through broker-dealers generally represents to investors that it will redeem its 

securities within three days, as required by rule 15c6-1.48 Failure by a fund to maintain a 

sufficiently liquid portfolio or to otherwise manage liquidity risk calls into question the fund’s 

ability to fulfill the representations (explicit or implicit) made in its prospectus regarding its 

ability to meet its redemption obligations, as well as its status as an open-end fund. Such failure 

thus potentially exposes the fund, the investment adviser that manages the fund, and the persons 

responsible for the sale of the fund’s securities to the possible application of the antifraud 

provisions of the securities laws referenced above.49

In addition to the foregoing concerns, an insufficiently liquid portfolio implicates 

provisions of the Act and regulations thereunder concerning fund valuation.50 A fund’s ability to 

 47 Restricted Securities Release, supra footnote 37.

48 See also Proposing Release, supra footnote 9, at II.C.2 (“We also have observed that some open-end funds 

disclose in their prospectuses that they generally will satisfy redemption requests in even shorter periods of 

time than T+3, including on a next-business-day basis.”). As the Commission has previously noted, most 

money market funds disclose that they will pay redemptions even more quickly, often on the same day that 

the request is received by the fund, and thus “must have sufficient liquidity to meet redemption requests on 

a more immediate basis.” Money Market Funds Release, supra footnote 39.

49 See Restricted Securities Release, supra footnote 37; Proposing Release, supra footnote 9, at n.77 

(“Disclosures by open-end funds are subject to the antifraud provisions of the federal securities laws. 

Therefore there may be liability under these provisions if a fund fails to meet redemptions with seven days 

or any shorter time disclosed in the fund’s prospectus or advertising materials.”) (citing section 17(a) of the 

Securities Act, section 10(b) of the Exchange Act and rule 10b-5 under the Exchange Act, and section 

34(b) of the Exchange Act); id. at n.109 (“[F]unds’ redemption obligations are also governed by any 

disclosure to shareholders that a fund has made about the time within which it will meet redemption 

requests, as disclosures by open-end funds are subject to the antifraud provisions of the federal securities 

laws.”); id. at III.C (“We believe that assessing and managing liquidity risk in a comprehensive manner is 

critical to a fund’s ability to honor redemption requests within the seven-day period required under section 

22(e) . . . as well as within any shorter time period disclosed in the fund’s prospectus or advertising 

materials or required for purposes of rule 15c6-1.”); id. at III.C.3.d (requesting public comment on whether 

liquid asset minimum requirements tighter than three days may be warranted “given that there may be 

liability under the antifraud provisions of the federal securities laws if a fund fails to meet redemptions 

within any shorter time disclosed in the fund’s prospectus or advertising materials.”).

50 See Restricted Securities Release, supra footnote 37 (describing the “serious problems of valuation” arising 
22

properly value its portfolio securities is important, primarily because, under the Act, fund 

shareholders are entitled to their proportionate share of the fund’s NAV upon redemption. 

Section 2(a)(41) of the Act and rule 2a-4 thereunder provide that in determining NAV, funds 

must value “securities for which market quotations are readily available” at current market value, 

and must value all other securities and assets at “fair value as determined in good faith by the 

board of directors.” Illiquid or less liquid assets are less likely to have readily available market 

quotations, and thus are more likely to require a fair value determination. Determining the fair 

value of illiquid or less liquid assets consistent with section 2(a)(41) and rule 2a-4 can pose a 

number of challenges, some of which the Commission has previously described in the context of 

the acquisition of restricted securities,51 and improper valuation of such assets could result in 

liability under the antifraud provisions.52 The difficulties valuing illiquid or less liquid securities 

also implicate section 22(c) and rule 22c-1, which requires the use of the next-determined NAV

for pricing purchases and redemptions. Transactions in such securities are more likely to be 

effected at prices that differ from fair value and, therefore, may result in increasing risk of 

investor dilution.53

 

from fund acquisition of restricted securities); Guidelines Release, supra footnote 38 (noting that a fund 

“must maintain a high degree of portfolio liquidity” to meet the requirements under section 22(e), rule 22c1(a) and rule 2a-4).

51 See Restricted Securities Release, supra footnote 37 at n.1 and accompanying text for a discussion of the 

various valuation challenges facing purchasers and sellers of restricted securities.

52 See Restricted Securities Release, supra footnote 37. As the Commission explained there, “[t]he offering 

price of securities issued by a management investment company is premised upon the net asset value of 

such shares as determined pursuant to [section 2(a)(41)] of the Act and Rule 2a-4 thereunder and is so 

represented in its prospectus.” Consequently, “the improper valuation of restricted securities held by such a 

company would distort the net asset value of the shares being offered or, in the case of an open-end 

company, redeemed, and would therefore constitute a fraud and deceit within the meaning of section 10(b) 

and Rule 10b-5.” See also infra footnote 66.

53 See Restricted Securities Release, supra footnote 37, at n.1 (“the valuation of restricted securities by 

reference to the market price for unrestricted securities of the same class assumes that the market price for 

unrestricted securities of the same class is representative of the fair value of the securities. This may not be 
23

A separate and independent issue arising from the failure to maintain a sufficiently liquid 

portfolio is the risk of shareholder dilution associated with improper fund pricing. Thus, section 

22(a),54when read together with section 22(c),55 gives the Commission broad powers to regulate 

the pricing of redeemable securities for the purpose of eliminating or reducing so far as 

reasonably practicable any dilution of the value of the outstanding fund shares. In its 1969 

guidance on restricted securities, the Commission observed that a fund with significant holdings 

of restricted securities may have to engage in private sales on short notice to meet redemption 

obligations, which could result in the fund “receiving less than its carrying value of the restricted 

securities.”56 That, in turn, would “result in a preference in favor of the redeeming shareholders 

and a diminution of the NAV per share of shareholders who have not redeemed,” further 

highlighting the need for funds to maintain “a high degree of liquidity” given the unpredictability 

of redemption demands or other exigencies.57 Similarly, here, as a general matter, to the extent a 

fund’s portfolio is made up of a large amount of illiquid or less liquid securities, the fund may 

face difficulties meeting shareholder redemption requests while at the same time protecting the 

value of the shares of existing shareholders from dilution. Limited liquidity may hinder the 

 

the case when the market for the unrestricted securities is very thin, i.e., only a limited volume of shares are 

available for trading.”).

54 Section 22(a) authorizes securities associations registered under section 15A of the Exchange Act to 

prescribe rules related to the method of computing purchase and redemption prices of redeemable securities

and the minimum time period that must elapse after the sale or issue of such securities before any resale or 

redemption may occur, for the purpose of “eliminating or reducing so far as reasonably practicable any 

dilution of the value of other outstanding securities of such company or any other result of such purchase, 

redemption, or sale which is unfair to holders of such other outstanding securities.”

55 Section 22(c) authorizes the Commission to make rules and regulations applicable to registered investment 

companies and to principal underwriters of, and dealers in, the redeemable securities of any registered 

investment company, whether or not members of any securities association, to the same extent, covering 

the same subject matter, and for the accomplishment of the same ends as are prescribed in section 22(a) in 

respect of the rules which may be made by a registered securities association governing its members.

56 See Restricted Securities Release, supra footnote 37.

57 Id.
24

portfolio manager’s ability to defensively reposition the fund in anticipation of shifting or 

volatile markets because asset sales necessary to effectuate those shifts can be executed only 

with substantial liquidity costs. If limited liquidity in the fund’s portfolio limits which assets the 

fund can sell to meet redemptions, such limited liquidity also could even result in the fund 

straying from its investment objective. Accordingly, a fund that does not effectively manage its 

liquidity risk may become constrained in its portfolio management, to the detriment of its 

investors and contrary to the way the fund represents its investment strategy to the public.

58

Therefore, when constructing a fund’s portfolio of securities, it is essential for the fund to take 

into account the importance of maintaining a portfolio that is liquid enough to fulfill the fund’s 

obligations under these provisions.59 

As previously discussed, in addition to the seven-day redemption requirement in section 

22(e), rule 15c6-1 under the Exchange Act also affects the timing of open-end fund redemptions 

because the rule requires broker-dealers to settle securities transactions, including transactions in 

open-end fund shares, within three business days after the trade date. Furthermore, rule 22c-1 

under the Act, the “forward pricing” rule, requires funds, their principal underwriters, and 

dealers to sell and redeem fund shares at a price based on the current NAV next computed after 

receipt of an order to purchase or redeem fund shares, even though fund assets may be sold in 

subsequent days in order to meet redemption obligations.60 

 58 See Restricted Securities Release, supra footnote 37 (“It is desirable that an open-end company retain 

maximum flexibility in the choice of portfolio securities which, on the basis of their relative investment 

merits, could best be sold where necessary to meet redemptions.”).

59 Id.

60 See infra footnotes 73-76 and accompanying text for a discussion of why this calculation method is 

permitted under rule 22c-1 and rule 2a-4.
25

With the exception of money market funds subject to rule 2a-7 under the Act,61 the 

Commission has not promulgated rules requiring open-end funds to invest in a minimum level of 

liquid assets.62 As discussed above, the Commission has historically taken the position that, in 

order to comply with section 22(e) and other applicable legal provisions, open-end funds should 

maintain a high degree of portfolio liquidity to ensure that their portfolio securities and other 

assets can be sold and the proceeds used to satisfy redemptions in a timely manner.

63 In addition 

to a fund’s “general responsibility to maintain a level of portfolio liquidity that is appropriate 

under the circumstances,” the Commission has stated that open-end funds must engage in

ongoing portfolio liquidity monitoring to determine whether an adequate level of portfolio 

liquidity is being maintained in light of their redemption obligations.64 

Registered investment companies and their investment advisers are subject to rules under 

the Act and the Advisers Act requiring them to adopt and implement written compliance policies 

and procedures reasonably designed to prevent various violations of laws and regulations. Rule 

38a-1 under the Act requires registered investment companies to adopt and implement written 

policies and procedures reasonably designed to prevent violations of the federal securities laws 

by the fund, including policies and procedures that provide for the oversight of compliance by 

 61 See supra footnote 43.

62 However, the Commission has issued guidelines concerning funds’ portfolio liquidity. See supra footnote 

38 and accompanying text. 

63 See Restricted Securities Release, supra footnote 37; see also Rule 144A Release, supra footnote 37.

64 Guidelines Release, supra footnote 38, at n.11 (“[T]he Commission expects funds to monitor portfolio 

liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of 

liquidity is being maintained. For example, an equity fund that begins to experience a net outflow of assets 

because investors increasingly shift their money from equity to income funds should consider reducing its 

holdings of illiquid securities in an orderly fashion in order to maintain adequate liquidity.”). Therefore, 

under current SEC guidance, a fund experiencing net outflows may wish to consider managing its illiquid 

asset holdings to maintain adequate liquidity. Similarly, a fund may need to determine whether it is 

appropriate to take certain actions when the fund has determined that a previously liquid holding has 

become illiquid due to changed circumstances. See also Rule 144A Release, supra footnote 37, at n.61. 
26

certain of the fund’s service providers, including the fund’s investment adviser; the rule also 

requires board approval and review of the service providers’ compliance policies and procedures. 

Additionally, rule 206(4)-7 under the Advisers Act requires registered investment advisers to 

adopt and implement written compliance policies and procedures reasonably designed to prevent 

violations of the Advisers Act and the rules thereunder by the adviser or any of its supervised 

persons. Such compliance policies and procedures should be appropriately tailored to reflect 

each firm’s particular compliance risks.65 For example, an open-end fund holding a significant

portion of its assets in securities with long settlement periods or that trade infrequently may be

subject to relatively greater liquidity risks than other open-end funds, and should appropriately 

tailor its policies and procedures in light of its particular risks and circumstances. The 

Commission has brought enforcement actions under the compliance rules against funds and their 

advisers for failures to adopt and/or implement policies and procedures reasonably designed to 

prevent violations relating to, for example, disclosure, valuation, and pricing for assets with 

limited liquidity.66

 65 In the compliance rules adopting release, the Commission highlighted certain, non-exclusive examples of 

particular areas to be addressed in funds’ and advisers’ policies and procedures. For example, it stated that 

funds or advisers should adopt policies and procedures regarding valuation and the pricing of portfolio 

securities and fund shares, as well as the processing of fund shareholder transactions in accordance with 

rule 22c-1. See Compliance Programs of Investment Companies and Investment Advisers, Investment 

Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] (“Rule 38a-1 Adopting 

Release”) (“These pricing requirements are critical to ensuring fund shares are purchased and redeemed at 

fair prices and that shareholder interests are not diluted.”). The Commission also identified “portfolio 

management processes” as an issue that should be covered in the compliance policies and procedures of a 

fund or its adviser and indicated that each fund should tailor its policies and procedures to address the 

fund’s particular compliance risks. See id., at n.82 (noting that the chief compliance officer’s annual report 

should discuss the fund’s particular compliance risks and any changes that were made to the policies and 

procedures to address newly identified risks). The Commission further identified “the accuracy of 

disclosures made to investors, clients, and regulators” as an issue to be covered.

66 See In re Citigroup Alternative Investments LLC & Citigroup Glob. Markets Inc., Investment Advisers Act 

Release No. 4174 (Aug. 17, 2015) (settled order) (hedge fund adviser failed to adopt policies and 

procedures to prevent misrepresentations to private fund investors about fund performance and liquidity

and violated rule 206(4)-7); In re J. Kenneth Alderman, CPA, et al., Investment Company Act Release No.

30557 (Jun. 13, 2013) (settled order) (respondent directors failed to exercise their responsibilities with 
27

Thus, funds and their advisers already are required to adopt and implement written 

compliance policies and procedures reasonably designed to prevent violations of various 

provisions implicated by fund liquidity, including those provisions identified above. The 

liquidity risk management program requirements of rule 22e-4, which we are adopting here, in 

effect will provide more specific and enhanced requirements in certain areas already generally 

covered by the compliance program rules. 

In short, there are a number of statutory and regulatory provisions across the federal 

securities laws that bear on redemptions and the potential dilution of shareholders’ interests. 

New rule 22e-4 advances the purposes of the Act by enhancing the ability of funds to meet their 

redemption obligations, reducing the risk of shareholder dilution, and reducing the potential for 

antifraud violations.67

3. Liquidity Management by Open-End Funds

Portfolio managers consider a variety of factors in addition to liquidity when constructing 

 

respect to adoption and implementation of valuation policies and procedures by mutual funds holding 

securities with reduced liquidity and caused funds’ violations of rule 38a-1); In re UBS Glob. Asset Mgmt. 

(Americas) Inc., Investment Company Act Release No. 29920 (Jan. 17, 2012) (settled order) (mutual fund 

adviser failed to implement fair value pricing procedures with respect to subordinated fixed income 

securities without an active market and violated rule 38a-1); In re Morgan Asset Mgmt., Inc., et al., 

Investment Company Act Release No. 29704 (June 22, 2011) (settled order) (mutual fund adviser failed to 

implement valuation procedures in pricing fixed income securities backed by subprime mortgages and 

violated rule 38a-1).

67 One commenter argued that the Commission lacks the statutory authority to issue rule 22e-4. Comment 

Letter of Justin Banks (Jan. 13, 2016) (“Banks Comment Letter”) (considering the authority conferred by 

sections 22(c), 22(e), and 38 of the Act, although we note that in referring to our authority under section 38, 

the commenter actually quoted and addressed the text of section 39 of the Act.). We disagree. The 

Commission has ample authority under the Act, including sections 22(c), 22(e), and 38(a), as well as under 

the antifraud provisions of the federal securities laws, to require that open-end funds maintain adequate 

liquidity and adopt responsible liquidity risk management policies and procedures. See supra section 

II.B.2. Section 38(a), in particular, gives the Commission authority to issue rules, regulations, and orders 

“as are necessary or appropriate to the exercise of the powers conferred upon the Commission elsewhere in 

this title.” As discussed above, the liquidity risk management program required under rule 22e-4 is 

necessary and appropriate to reduce the risk that funds will be unable to meet their redemption obligations, 

to improve industry-wide liquidity risk management practices, to mitigate potential dilution of the interests 

of non-redeeming shareholders, and to increase the likelihood that funds are able to fulfill representations 

made in their prospectuses and advertising materials and implicit in their open-end status.
28

a fund’s portfolio, including but not limited to the fund’s investment strategies, economic and 

market trends, portfolio asset credit quality, and tax considerations. Nevertheless, meeting 

redemption obligations is fundamental for open-end funds, and funds must manage liquidity in 

order to meet these obligations.68 Several factors influence how liquidity management by openend funds affects the equitable treatment of investors in a fund, investor redemption behavior, 

and potentially the orderly operation of the markets when fulfilling redemption obligations. 

First, it is important to consider how a fund meets redemptions. When a fund receives 

redemption requests from shareholders, and the fund does not have cash on hand to meet those 

redemptions,69 the fund may sell portfolio assets to generate cash to meet the redemptions and 

generally has the discretion to determine which assets will be sold.70 It is possible that a fund 

would choose to sell its most liquid assets first. This method of selling is limited to some degree 

by the investment strategies of the fund, and a fund pursuing this method of meeting redemptions 

to any significant degree may need to adjust its portfolio so that the fund continues to follow its 

investment strategies. A fund that chooses to sell its most liquid assets to meet fund redemptions 

 68 See Comment Letter of Investment Company Institute on the Notice Seeking Comment on Asset 

Management Products and Activities, Docket No. FSOC-2014-0001(“FSOC Notice”) (Mar. 25, 2015) 

(“ICI FSOC Notice Comment Letter”) (“For mutual funds, the central importance of meeting redemptions 

means that liquidity management is a key element of regulatory compliance, investment risk management, 

and portfolio management—and a constant area of focus. Even before launching a mutual fund, the fund 

manager and fund board consider whether the fund’s proposed investments and strategies are suitable for 

the mutual fund structure, including whether it will be able to satisfy applicable regulatory requirements on 

an ongoing basis. If not, the manager may decide to offer that strategy through a different vehicle (e.g., a 

closed-end fund or a private fund).”). See also supra footnotes 2, 3, and 5-7.

69 A fund can have cash on hand to meet redemptions from cash held in the fund’s portfolio, cash received 

from investor purchases of fund shares, interest payments and dividends on portfolio securities, or maturing 

bonds. See, e.g., Comment Letter of Fidelity Investments on the Notice Seeking Comment on Asset 

Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015) (‘‘Fidelity FSOC 

Notice Comment Letter’’), at n.17 (“[S]ecurities do not need to be sold every time a redemption order is 

placed. Sale of fund assets is necessary only when gross redemptions significantly exceed net inflows.”).

70 A fund may also obtain cash by other available means such as bank lines of credit, but funds infrequently 

utilize this method to meet redemptions. See Proposing Release, supra footnote 9, at n.35 and 

accompanying text. See also infra footnote 262 and accompanying text for a discussion of the use of 

interfund lending as an alternative source of cash for funds. 
29

may minimize the effect of the redemptions on short-term fund performance for redeeming and 

remaining shareholders, but may leave remaining shareholders in a potentially less liquid and 

riskier fund until the fund adjusts the portfolio.

71 An ETF redeeming in kind with its most liquid 

assets first would similarly leave remaining shareholders in a potentially less liquid and riskier 

fund. In contrast to meeting redemptions by selling its most liquid assets first, a fund 

alternatively could choose to meet redemptions by selling, to the best of its ability, a “strip” of 

the fund’s portfolio (i.e., a cross-section or representative selection of the fund’s portfolio 

assets).72 Funds also could choose to meet redemptions by selling a range of assets in between its 

most liquid, on one end of the spectrum, and a perfect pro rata strip of assets, on the other end of 

the spectrum. Similarly, an ETF redeeming in kind could use a pro rata strip of assets. 

Additionally, funds could choose to opportunistically pare back or eliminate holdings in a 

particular asset or sector to meet redemptions. 

Second, the effect of redemptions on shareholders is determined by how and when those 

redemptions affect the price of the fund’s shares. Under rule 22c-1, all investors who redeem 

from an open-end fund on any particular day must receive the NAV next calculated by the fund 

after receipt of such redemption request.73 As most funds, with the exception of money market 

funds, calculate their NAV only once a day, this means that redemption requests received during 

the day receive the end of day NAV, typically calculated as of 4 p.m. Eastern time.74 When 

 71 See Proposing Release, supra footnote 9, at n.37 and accompanying text. 

72 There are practical limitations on a fund’s ability to sell a pro rata slice of its portfolio, such as minimum 

trade sizes, transfer restrictions, illiquid assets, tax complications from certain sales, and avoidance of odd 

lot positions.

73 The process of calculating or “striking” the NAV of the fund’s shares on 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. 

74 Commission rules do not require that a fund calculate its NAV at a specific time of day. Current NAV 
30

calculating a fund’s NAV, however, rule 2a-4 requires funds to reflect changes in holdings 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 the trade date.75 We 

allowed this calculation method to provide funds with additional time and flexibility to 

incorporate last-minute portfolio transactions into their NAV calculations on the business day 

following the trade date, rather than on the trade date.76 As a practical matter, this calculation 

method also gave broker-dealers, retirement plan administrators, and other intermediaries 

additional time to receive transactions submitted before the cut-off time on the trade date, which 

then may be reflected in the fund’s NAV on the business day following the trade date. 

Nevertheless, we recognize that trading activity and other changes in portfolio holdings 

associated with meeting redemptions may occur over multiple business days following the 

redemption request. If these activities occur (and their associated costs are reflected in NAV) in 

days following redemption requests, the costs of providing liquidity to redeeming investors could 

be borne by the remaining investors in the fund, thus potentially diluting the interests of 

non-redeeming shareholders.77 The less liquid the fund’s portfolio holdings, the greater these 

 

must be computed at least once daily, subject to limited exceptions, Monday through Friday, at the specific 

time or times set by the board of directors. See rule 22c-1(b)(1).

75 Rule 2a-4(a)(2)-(3). 

76 See Adoption of Rule 2a-4 Defining the Term “Current Net Asset Value” in Reference to Redeemable 

Securities Issued by a Registered Investment Company, Investment Company Act Release No. 4105 

(Dec. 22, 1964) [29 FR 19100 (Dec. 30, 1964)].

77 The transaction costs associated with redemptions can vary significantly, with some costs having a more 

immediate impact on shareholders than others. For example, during times of heightened market volatility 

and wider bid-ask spreads for the fund’s underlying holdings, selling the fund’s investments to meet 

redemptions will necessarily result in costs to the fund, which in turn may negatively impact investors who 

chose to redeem in the days immediately following the stress event. The impact of such costs on the 

remaining fund investors can vary depending on when a shareholder chooses to redeem. See, e.g.,

Comment Letter of Mutual Fund Directors Forum on the Notice Seeking Comment on Asset Management 

Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 6. 
31

liquidity costs can become.78 

There can be significant adverse consequences to remaining investors in a fund that does 

not adequately manage liquidity.79 As noted above, the proportion of illiquid assets held by a 

fund can increase if the fund sells its more liquid portfolio assets to meet redemptions. This in 

turn could adversely affect the fund’s risk profile and cause the fund to have difficulty meeting 

future shareholder redemptions.

80 For example, during the pendency of our proposal, the Third 

Avenue Focused Credit Fund, a non-diversified open-end fund, adopted a plan of liquidation,

and requested and obtained exemptive relief to suspend shareholder redemptions.

81 The 

Commission noted that the fund represented that, at the time the fund and its investment adviser 

requested exemptive relief, it had experienced a significant level of redemption requests over the 

prior six-month period that reduced the fund’s portfolio liquidity, as well as a significant decline 

 78 See, e.g. Comment Letter of Morningstar, Inc. (Jan. 13, 2016) (“Morningstar Comment Letter”). See also

Proposing Release, supra footnote 9, at n.45 and accompanying text. 

79 See, e.g., Jason Greene & Charles Hodges, The Dilution Impact of Daily Fund Flows on Open-end Mutual 

Funds, 65 J. OF FIN. ECON. 131 (2002) (“Greene & Hodges”) (“Active trading of open-end funds has a 

meaningful economic impact on the returns of passive, nontrading shareholders, particularly in U.S.-based 

international funds. The overall sample of domestic equity funds shows no dilution impact, but we find an 

annualized negative impact of 0.48% in international funds (and nearly 1% for a subsample of funds whose 

daily flows are particularly large).”).

80 See, e.g., In re Heartland Advisors, Inc., et al., Investment Company Act Release No. 28136 (Jan. 25, 2008) 

(“Heartland Release”) (settled order) (finding that certain high-yield bond funds experienced liquidity 

problems (caused in part by adviser’s unwillingness to sell bond holdings at prices below which the funds 

had valued them) and, as a result, the funds borrowed heavily against a line of credit to meet fund 

redemption requests, and investors redeemed fund shares at prices that benefited redeeming shareholders at 

the expense of remaining and new investors). 

81 See Third Avenue Temporary Order, supra footnote 12. But see infra footnote 209 and accompanying text. 

We note that there is no assurance that the Commission would grant similar relief in the future. See also 

ICI Comment Letter I (“Third Avenue Focused Credit Fund experienced a significant level of redemption 

requests and an ongoing reduction in the liquidity of its portfolio securities, which consisted largely of junk 

bonds...The SEC granted a temporary order under section 22(e)(3) after expressing concerns with a boardapproved plan of liquidation that provided for distribution to shareholders of the fund’s remaining net cash 

and a separate transfer of the fund’s other assets into a liquidating trust.”); BlackRock Comment Letter

(“[A]s recently demonstrated by the issues meeting redemption requests that were experienced by the Third 

Avenue Focused Credit Fund, a small and highly concentrated portfolio can present its own liquidity 

challenges.”); see also infra footnote 84. 
32

in its NAV.82 The fund’s board authorized the plan of liquidation after it determined that 

additional redemptions would have to be made at prices that would unfairly disadvantage the 

fund’s remaining shareholders.83 This event highlights the extent to which shareholders can be 

harmed when a fund holding portfolio assets that entail significant liquidity risk does not

adequately anticipate the effects of market deterioration and increased shareholder 

redemptions.84 Furthermore, if a fund finds that it can sell portfolio assets only at prices that 

incorporate a significant discount to the assets’ stated value, the discounted sale prices can 

materially affect the fund’s NAV. 

These factors in fund redemptions—either individually or in combination—can create 

incentives in times of liquidity stress in the markets for shareholders to redeem quickly to avoid 

further losses (or a “first-mover advantage”).85 If shareholder redemptions are motivated by this 

 82 Third Avenue Temporary Order, supra footnote 12. At the time that the fund adopted its plan of 

liquidation, the fund had experienced $1.1 billion in estimated net outflows for the year to date through 

December 9, 2015, which was more than 145% of the fund’s total net assets as of that date. Furthermore,

in November 2015, the fund experienced a total of $317 million in estimated net redemptions and the 

fund’s retail class NAV per share fell from $7.82 to $7.09. 

83 Id. See also Third Avenue Management, Press Release: Third Avenue Management Obtains Exemptive 

Relief for Focused Credit Fund (Dec. 16, 2015), available at: http://thirdave.com/news/press-release-thirdavenue-management-obtains-exemptive-relief-for-focused-credit-fund/ (“As a result of the [SEC] 

exemptive order, redemptions are suspended for all shareholders, and... the [fund’s adviser] will be able to 

conduct an orderly liquidation without having to resort to forced selling of securities at reduced or 

disadvantaged prices.”).

84 See Comment Letter of Americans for Financial Reform (Jan. 13, 2016) (“AFR Comment Letter”) (“By all 

accounts, Third Avenue was holding the great majority of its assets in illiquid distressed debt and had very 

limited cash reserves, a strategy that can increase returns but at the price of greatly increased risks for 

investors... While the Third Avenue fund may be an outlier in terms of the sheer volume of illiquid assets it 

holds, evidence also indicates that larger and more significant funds are also testing the bounds of previous 

SEC guidance on liquidity, and are holding a large fraction of potentially illiquid assets. If such funds 

come under selling pressure, the need to dispose of such assets could add to market stress in ways that have 

a negative impact on corporate credit and the real economy, as well as potentially harming investors.”); see 

also Heartland Release, supra footnote 80.

85 See infra footnotes 1086-1088 and accompanying text for a discussion of the first-mover advantage and its 

negative consequences. But see Comment Letter of Nuveen Investments on the Notice Seeking Comment 

on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015) (“Nuveen 

FSOC Notice Comment Letter”), at 10 (stating that there is no evidence that shareholders are actually 

motivated by a first-mover advantage); Comment Letter of BlackRock on the Notice Seeking Comment on 
33

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.

Additionally, a fund experiencing large outflows as a result of redemptions may be exposed to 

predatory trading activity in the securities it holds.86 Regardless of whether investor redemptions 

are motivated by a first-mover advantage or other factors, there can be significant adverse 

consequences to remaining investors in a fund when it fails to adequately manage liquidity.87 

This underlines the importance of fund liquidity management for advancing investor protection 

by reducing the risk that a fund would be unable to meet redemption obligations without 

significant dilution of remaining investors’ interests in the fund.

 

Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015) (“BlackRock 

FSOC Notice Comment Letter”), at 17 (stating that although incentives to redeem may exist, this does not 

necessarily imply that investors will in fact redeem en masse in times of market stress, but also noting that 

a well-structured fund “should seek to avoid features that could create a ‘first-mover advantage’ in which 

one investor has an incentive to leave” before others); Comment Letter of Association of Institutional 

Investors on the Notice Seeking Comment on Asset Management Products and Activities, Docket No. 

FSOC-2014-0001 (Mar. 25, 2015), at 10-11 (“The empirical evidence of historical redemption activity, 

even during times of market stress, supports the view that either (i) there are not ‘incentives to redeem’ that 

are sufficient to overcome the asset owner’s asset allocation decision or (ii) that there are disincentives, 

such as not triggering a taxable event, that outweigh the hypothesized ‘incentives to redeem.’”); Comment 

Letter of The Capital Group Companies on the Notice Seeking Comment on Asset Management Products 

and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 8 (“We also do not believe that the 

mutualization of fund trading costs creates any first mover advantage.”); ICI FSOC Notice Comment 

Letter, supra footnote 68, at 7 (“Investor behavior provides evidence that any mutualized trading costs must 

not be sufficiently large to drive investor flows. We consistently observe that investor outflows are modest

and investors continue to purchase shares in most funds even during periods of market stress.”). See also

discussion of the potential first-mover advantage in the Proposing Release, supra footnote 9, at n.49. 

86 See, e.g., Joshua Coval & Erik Stafford, Asset Fire Sales (and Purchases) in Equity Markets, 86 J. FIN.

ECON. 479 (2007) (“Coval & Stafford”) (“Funds experiencing large outflows tend to decrease existing 

positions, which creates price pressure in the securities held in common by distressed funds. Similarly, the 

tendency among funds experiencing large inflows to expand existing positions creates positive price 

pressure in overlapping holdings. Investors who trade against constrained mutual funds earn significant 

returns for providing liquidity. In addition, future flow-driven transactions are predictable, creating an 

incentive to front-run the anticipated forced trades by funds experiencing extreme capital flows.”); Teodor 

Dyakov & Marno Verbeek, Front-Running of Mutual Fund Fire-Sales, 37 J. OF BANK. AND FIN. 4931 

(2013) (“Dyakov & Verbeek”) (“We show that a real-time trading strategy which front-runs the anticipated 

forced sales by mutual funds experiencing extreme capital outflows generates an alpha of 0.5% per month 

during the 1990–2010 period . . . Our results suggest that publicly available information of fund flows and 

holdings exposes mutual funds in distress to predatory trading.”). See discussion of predatory trading 

concerns in the Proposing Release, supra footnote 9, at nn.805-809 and accompanying text.

87 See Proposing Release, supra footnote 9, at n.37. 
34

There also is a potential for adverse effects on the markets when open-end funds fail to 

adequately manage liquidity.88 For example, if liquid asset levels are insufficient to meet 

redemptions, funds may sell less-liquid portfolio assets at discounted or even fire sale prices. 

These sales can produce significant negative price pressure on those assets and correlated assets. 

Accordingly, redemptions and funds’ liquidity risk management can affect not just the remaining 

investors in the fund, but any other investors holding these assets. Depending on the asset and 

the level of stress, such liquidity stress on the assets held in the fund has the potential to transmit 

stress to other funds or portions of the market as well.89 

C. Recent Developments in the Open-End Fund Industry

Recent industry developments have underlined our focus on the importance of sufficient 

liquidity and liquidity risk management practices in open-end funds.90 These developments 

include significant growth in assets of, and shareholder inflows into, open-end funds with fixed 

income strategies and alternative strategies since 2008 and the evolution of settlement periods 

and redemption practices utilized by open-end funds. We will discuss each of these 

developments in turn.

1. Fixed Income Funds and Alternative Funds

We have observed significant growth in cash flows into, and assets of, fixed income 

 88 See, e.g., See Comment Letter of Americans for Financial Reform on the FSOC Notice (Mar. 27, 2015) 

(“AFR FSOC Notice Comment Letter”) ( citing evidence that “bond fire sales by mutual funds during the 

financial crisis created direct economic harm to real economy companies, reducing investment and 

profitability over a period of years.”); Fidelity FSOC Notice Comment Letter, supra footnote 69, at 18 

(“Managing liquidity levels to fulfill [a fund adviser’s] fiduciary obligations benefits [redeeming and 

remaining] shareholders as well as the broader financial markets.”).

89 See Proposing Release, supra footnote 9, at n.54.

90 We note that, up until 1970, open-end funds had limited investments in the bond market. See Protecting 

Investors: A Half Century of Investment Regulation (May 1992) for a discussion of the regulatory and 

market developments that occurred between 1940 and 1992.
35

mutual funds and fixed income ETFs (excluding ETMFs).

91 As growth in fixed income fund 

assets was occurring, we increased our focus on fixed income market structure, publishing a 

report on the municipal securities markets in 2012 and holding a roundtable focused on the fixed 

income markets in 2013.92 In addition, Commissioners and Commission staff have spoken about 

the need to focus on potential risks relating to the fixed income markets and their underlying 

liquidity.93 Commission staff also has focused on the nature of liquidity risk management in 

fixed income funds, including by selecting fixed income funds as an examination priority in 

2014, 2015, and 2016.94 

 91 Assets in these funds grew from $1.5 trillion at the end of 2008 to $3.6 trillion at the end of 2015, with net 

inflows exceeding $1.4 trillion during that period. These figures were obtained from staff analysis of 

Morningstar Direct data, and are based on fund categories defined by Morningstar. While mutual funds 

holding U.S. equities continue to make up the largest category of funds in terms of fund assets, their share 

of the total industry assets has declined from 65.2% in 2000 to 44.7% in 2015. DERA Study, infra footnote

95, at Table 2. The statistics in the DERA Study were calculated through the end of 2014. Commission 

staff used the CRSP US Mutual Fund Database to update them as of the end of 2015.

92 See Securities and Exchange Commission, Transcript: Roundtable on Fixed Income Markets (Apr. 16, 

2013), available at https://www.sec.gov/spotlight/fixed-income-markets/2013-04-16-fixed-incomemarkets-transcript.txt (discussing, among other topics, liquidity characteristics and risks in the municipal 

bond and corporate bond markets); Securities and Exchange Commission, Report on the Municipal 

Securities Market (July 31, 2012), available at

https://www.sec.gov/news/studies/2012/munireport073112.pdf (discussing, among other topics, the low 

liquidity, opacity and fragmentation of the municipal securities market).

93 See Proposing Release, supra footnote 9, at n.62.

94 See, e.g., IM Guidance Update No. 2014-01, Risk Management in Changing Fixed Income Market 

Conditions (Jan. 2014) (“2014 Fixed Income Guidance Update”), available at 

https://www.sec.gov/divisions/investment/guidance/im-guidance-2014-1.pdf; National Exam Program,

Office of Compliance Inspections and Examinations, Examination Priorities for 2016 (2016), available at

https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf (“Amidst the 

changes in fixed income markets over the past several years, we will examine advisers to mutual funds, 

ETFs, and private funds that have exposure to potentially illiquid fixed income securities. We will also 

examine registered broker-dealers that have become new or expanding liquidity providers in the 

marketplace. These examinations will include a review of various controls in these firms’ expanded 

business areas, such as controls over market risk management, valuation, liquidity management, trading 

activity, and regulatory capital”); National Exam Program, Office of Compliance Inspections and 

Examinations, Examination Priorities for 2015 (2015) (“National Exam Program 2015 Examination 

Priorities”), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities2015.pdf (“With interest rates expected to rise at some point in the future, we will review whether mutual 

funds with significant exposure to interest rate increases have implemented compliance policies and 

procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not 

misleading and that their investments and liquidity profiles are consistent with those disclosures.”); 
36

We also have observed significant growth in alternative mutual funds over the last 

decade.95 Although the assets of open-end funds pursuing alternative strategies accounted for a 

relatively small percentage of the mutual fund market as of December 2014, the growth of assets 

in these funds has been substantial. Assets of open-end funds with alternative strategies grew 

from approximately $365 million at the end of 2005 to approximately $334 billion at the end of 

2014.96

Unlike alternative mutual funds and ETFs, private funds (such as hedge funds and private 

equity funds) and closed-end funds pursuing similar alternative strategies can invest in portfolio 

assets that are relatively illiquid without generating the same degree of redemption risk for the 

fund because investor redemption rights are often limited.97 In addition, investor expectations of 

private funds’ redemption rights differ from the redemption expectations of typical retail 

investors in open-end funds.98 For example, investors in private equity funds typically commit 

 

National Exam Program, Office of Compliance Inspections and Examinations, Examination Priorities for 

2014 (2014), available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities2014.pdf (“The staff will monitor the risks associated with a changing interest rate environment and the 

impact this may have on bond funds and related disclosures of risks to investors.”).

95 Paul Hanouna, Jon Novak, Tim Riley & Christof Stahel, Liquidity and Flows of U.S. Mutual Funds, 

Division of Economic and Risk Analysis White Paper (Sept. 2015) (“DERA Study”), at 7-8, available at

https://www.sec.gov/dera/staff-papers/white-papers/liquidity-white-paper-09-2015.pdf . While there is no 

clear definition of “alternative” in the mutual fund space, an alternative mutual fund is generally 

understood to be a fund whose primary investment strategy falls into one or more of the three following 

buckets: (i) non-traditional asset classes (for example, currencies or managed futures funds); (ii) nontraditional strategies (such as long/short equity, event driven); and/or (iii) less liquid assets (such as private 

debt). Their investment strategies often seek to produce positive risk-adjusted returns that are not closely 

correlated to traditional investments or benchmarks, in contrast to traditional mutual funds that historically 

have pursued long-only strategies in traditional asset classes.

96 See Proposing Release, supra footnote 9 at nn.64-66 and accompanying text. See also id.

97 A private fund is an issuer that would be an investment company, as defined in section 3 of the Investment 

Company Act, but for the exclusion from the definition of “investment company” in section 3(c)(1) or 

3(c)(7) of the Act. Section 202(a)(29) of the Advisers Act.

98 Hedge Funds often contain “lock-up” provisions and impose gates, suspensions of redemptions, and side 

pockets to manage liquidity stress. See Proposing Release, supra footnote 9, at n.69 and accompanying 

text.
37

their capital for the life of the fund.99 

In contrast, alternative strategy mutual funds and ETFs have no such ability to tailor 

investor redemption rights based on the liquidity profile of the funds’ portfolios. Yet some of 

these funds seek to pursue similar investment strategies as hedge funds and other private funds, 

while still being bound by the redemption obligations applicable to open-end funds. 

Accordingly, our staff has been focused on the liquidity of alternative strategy mutual funds and 

ETFs (excluding ETMFs), as well as the nature of liquidity and redemption risks faced by 

investors in these funds given their legal right to be paid the proceeds of any redemption request 

within seven days and a fund’s representations about payment in less than seven days.

100 Certain

observations by the Commission’s Division of Economic and Risk Analysis (“DERA”) have lent 

further support to our focus on liquidity risk management practices in this industry segment, as 

DERA’s analysis has shown that alternative strategy mutual funds demonstrate cash flows that 

are significantly more volatile than other strategies, indicating that these funds may face higher 

levels of redemptions, and thus higher liquidity risk.101 Volatility in flows places additional 

importance on liquidity risk management to prevent some of the consequences from a failure to 

adequately manage liquidity discussed in section II.B.2 above. The final rules and rule 

amendments build off of many of the observations we and our staff have made through efforts 

examining the growth in funds and ETFs with fixed income strategies and alternative strategies.

2. Evolution of Settlement Periods and Redemption Practices 

Practices relating to securities trade settlement periods and the timing of the payment of 

 99 See Comment Letter of the Private Equity Growth Capital Council on the Notice Seeking Comment on 

Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015).

100 See Proposing Release, supra footnote 9, at n.72.

101 See DERA Study, supra footnote 95.
38

redemption proceeds to investors also have evolved considerably over the decades since the 

Commission last addressed liquidity needs in open-end funds.102 Due to the adoption of rule 

15c6-1 under the Exchange Act in 1993, the standard settlement time frame declined from five 

business days (T+5) to three business days (T+3).103 Furthermore, while standard settlement 

periods for securities trades in many markets have tended to fall significantly over the last 

several decades—and investor expectations that redemption proceeds will be paid promptly after 

redemption requests have risen—settlement periods for other securities held in large amounts by 

certain funds have not fallen correspondingly. For example, some bank loan funds do not 

consider most of their portfolio holdings to be illiquid and generally represent in their disclosures 

that they comply with the Commission’s current guidelines,

104 even though the settlement 

periods associated with some bank loans and participations may extend beyond the period of 

time the fund would be required to meet shareholder redemptions. This creates a potential 

mismatch between the timing of the receipt of cash upon sale of these assets and the payment of 

cash for shareholder redemptions.105

Overall, the evolution of the market towards shorter settlement periods – and 

corresponding fund disclosures – combined with open-end funds holding certain securities with 

longer settlement periods have raised concerns for us about whether fund portfolios are 

sufficiently liquid to support a fund’s ability to meet its redemption and other legal obligations.

 102 See supra footnotes 7-9 and accompanying text. 

103 The decline in the securities trading settlement period from T+5 to T+3 prompted funds that were sold 

through broker-dealers to satisfy redemption requests within three business days. See supra footnote 32.

104 See supra section II.B.3. 

105 See discussion of this timing mismatch of the Proposing Release, supra footnote 9, at n.79 and 

accompanying text.
39

D. Overview of Current Practices 

Over the last several years, Commission staff has observed through a variety of different 

events the current liquidity risk management practices at a cross-section of fund complexes with 

varied investment strategies. The staff has observed that liquidity risk management techniques 

may vary across funds, including funds within the same fund complex, in light of unique fund 

characteristics, including, for example, the nature of a fund’s investment objectives or strategies, 

the composition of the fund’s investor base, and historical fund flows. These observations 

collectively have shown the staff that, even with various unique characteristics, many open-end 

funds and fund complexes have implemented procedures for assessing and managing the 

liquidity of their portfolio assets.106 

Specifically, some of the funds observed by the staff assess their ability to sell particular 

assets within various time periods (typically focusing on one-, three-, and/or seven-day 

periods).107 In conducting this analysis, these funds may take into account relevant market, 

trading, and other factors, and monitor whether their initial liquidity determination should be 

changed based on changed market conditions. This process helps these funds determine their 

ability to meet redemption requests without significant dilution in various market conditions 

within the disclosed period for payment of redemption proceeds. 

Funds observed by the staff that have implemented procedures for assessing the liquidity 

of their portfolio assets also often have developed controls to manage fund portfolio liquidity risk 

 106 There are varying degrees of formality in the adoption and implementation of these procedures. Several 

commenters also discussed existing liquidity risk management practices. See, e.g., Blackrock Comment 

Letter; ICI Comment Letter I; Comment Letter of Vanguard (Jan. 6, 2016) (“Vanguard Comment Letter”).

107 See 2014 Fixed Income Guidance Update, supra footnote 94 (noting that fund advisers “generally assess 

overall fund liquidity and funds’ ability to meet potential redemptions over a number of periods” and 

discussing certain steps that fund advisers may consider taking given potential fixed income market 

volatility); see also Proposing Release, supra footnote 9, at n.151 and accompanying text. 
40

and the risk of changing levels of shareholder redemptions, such as holding certain amounts of 

the fund’s portfolio in highly liquid investments, setting minimum cash reserves, and 

establishing committed back-up lines of credit or interfund lending facilities.108 A few of the 

funds observed by staff conduct stress testing relating to the availability of liquid assets to cover 

possible levels of redemptions.109 Some of these funds’ advisers also have periodic discussions 

with their boards of directors about how the funds approach liquidity risk management and what

emerging risks they are observing relating to liquidity risk. The staff has observed that some of 

the funds with the more thorough liquidity risk management practices have appeared to be able 

to better meet periods of higher than typical redemptions without significantly altering their risk 

profile or materially affecting their performance, and thus with less dilutive impacts. 

Conversely, the Commission is concerned that some funds employ liquidity risk 

management practices that are substantially less rigorous. Some funds observed by the staff do 

not take different market conditions into account when evaluating portfolio asset liquidity, and 

do not conduct any ongoing liquidity monitoring. Some funds do not incorporate any 

independent oversight of fund liquidity risk management outside of the portfolio management 

process.110 Staff has observed that some of these funds, when faced with higher than normal 

redemptions, experienced particularly poor performance compared with their benchmark and 

some even experienced an adverse change in the fund’s risk profile, each of which can increase 

the risk of investor dilution as well as the risk that the fund will be unable to meet those 

redemptions. 

 108 See Proposing Release, supra footnote 9, at n.100 and accompanying text. 

109 See Proposing Release, supra footnote 9, at n.101. 

110 See Proposing Release, supra footnote 9, at n.102. 
41

Finally, the Commission learned through staff outreach that many funds treat their risk 

management process for assessing the liquidity profile of portfolio assets, and the incorporation 

of market and trading information, as entirely separate from their assessment of assets under the 

15% guideline. The former process is typically conducted on an ongoing basis through the 

fund’s risk management function, through the fund’s portfolio management function, or through 

the fund’s trading function (or a combination of the foregoing), while assessment of assets under 

the 15% guideline is more typically conducted upon purchase of an asset through the fund’s 

compliance or “back-office” functions, with little indication that information generated from the 

risk management or trading functions informs the compliance determinations. This functional 

divide may be a by-product of the limitations of the 15% guideline as a stand-alone method for 

comprehensive liquidity risk management, a situation that our final liquidity risk management 

program framework is meant to address.111

Overall, our staff outreach has increased our understanding of some of the valuable 

liquidity risk management practices employed by some firms as a matter of prudent risk 

management. This outreach also has shown us the great diversity in liquidity risk management 

practices that raises concerns regarding various funds’ ability to meet their redemption and other 

legal obligations and minimize the effects of dilution under certain conditions. Collectively, 

these observations have informed our understanding of the need for an enhanced minimum 

baseline requirement for fund management of liquidity risk.

E. Rulemaking Adoption Overview

Against this background, today we are adopting a set of reforms designed to promote 

effective liquidity risk management throughout the open-end fund industry and thereby reduce

 111 See supra section II.B.2 for a discussion of the limitations of the 15% guideline.
42

the risk that funds will not be able to meet redemption or other legal obligations and mitigate 

potential dilution of the interests of fund shareholders. We believe that limitations on illiquid 

holdings and more effective liquidity risk management among funds would, in turn, result in 

significant investor protection benefits and enhance the fair and orderly operation of the 

markets.112 The final amendments also seek to enhance reporting and disclosure regarding fund 

liquidity and redemption practices.

First, we are adopting new rule 22e-4, which requires each registered open-end fund, 

including open-end ETFs but not including money market funds, to adopt and implement a 

written liquidity risk management program reasonably designed to assess and manage the fund’s 

liquidity risk.113 The new rule requires a fund’s liquidity risk management program to 

incorporate certain specified elements. These include: (i) assessment, management, and periodic 

review of the fund’s liquidity risk; (ii) classification of the liquidity of each of the fund’s 

portfolio investments,

114 as well as at-least-monthly reviews of the fund’s liquidity 

classifications; (iii) determining and periodically reviewing a highly liquid investment

minimum—the percentage of its net assets that the fund invests in highly liquid investments that 

are assets; (iv) limiting the fund’s investment in illiquid investments that are assets to no more 

than 15% of the fund’s net assets; and (v) for funds that engage in, or reserve the right to engage 

 112 See infra section IV.C.

113 See rule 22e-4(b). Rule 22e-4, as adopted today, defines “liquidity risk” as the risk that a fund could not 

meet requests to redeem shares issued by the fund without significant dilution of remaining investors’ 

interests in the fund.

114 As discussed in more detail below, rule 22e-4 as adopted requires a fund to classify each of the fund’s 

portfolio investments, including investments that are liabilities of the fund (e.g., certain out-of-the-money 

derivatives transactions). See infra footnote 480 and accompanying text. As proposed rule 22e-4 would 

have required each fund to classify the liquidity of its portfolio positions (or portions of a position in a 

particular asset), but did not specifically address the treatment of a fund’s holdings that are liabilities. 

Thus, in this Release, we use the term “assets” when referring to the proposed classification requirement 

and comments on the proposed requirement, and the term “investments” when referring to the adopted 

classification requirement.
43

in, redemptions in kind, the establishment of policies and procedures regarding how they will 

engage in such redemptions in kind. 

The liquidity risk assessment requirement generally provides a broad, principles-based 

foundational framework for a fund’s liquidity risk management program, including a 

requirement that the fund assess whether its investment strategy is appropriate for an open-end 

fund. The final rule also provides for a tailored program for ETFs, requiring them to consider 

additional factors as part of their liquidity risk assessment and management that reflect potential 

liquidity-related concerns that could arise from the structure and operation of ETFs, and 

excepting ETFs that redeem in kind (“In-Kind ETFs”) from the classification and highly liquid 

investment minimum requirements.115 The final rule also provides that funds whose assets

primarily consist of highly liquid investments need not adopt a highly liquid investment

minimum.116 Additionally, rule 22e-4 will not apply to closed-end funds, and will apply to 

principal underwriters and depositors of UITs only to a limited degree, as discussed further 

below. The classification requirement will provide important liquidity profile information to the 

Commission and investors and reflects that liquidity may be viewed as falling on a spectrum 

rather than a binary conclusion that an investment is either “liquid” or “illiquid.”117 The highly 

 115 Under the final rule, each “In-Kind ETF,” or an ETF that meets redemptions through in-kind transfers of 

securities, positions, and assets other than a de minimis amount of cash, will be subject to the tailored 

program requirement. See rule 22e-4(a)(9) (definition of “In-Kind Exchange Traded Fund” or “In-Kind 

ETF”); rule 22e-4(b)(1)(i)(D) (incorporating additional factors that an ETF would be required to consider 

as applicable as part of its liquidity risk assessment and management that reflect liquidity-related risks that 

could be particularly relevant to the ETF). Under rule 22e-4(a)(5), the term “fund” is defined to exclude an 

In-Kind ETF. As a result, rule 22e-4(b)(1)(ii) and rule 22e-4(b)(1)(iii), which apply to funds as defined in

rule 22e-4(a)(5), exclude In-Kind ETFs from the classification and highly liquid investment minimum

requirements, respectively.

116 See rule 22e-4(b)(1)(iii) (applying the highly liquid investment minimum requirement only to a fund that 

does not primarily hold assets that are highly liquid investments).

117 The Commission is adopting a classification framework consisting of four liquidity categories based on the 

number of days within which it is determined that the investment is reasonably expected to be convertible 

to cash (or, in the case of the least-liquid categories, sold or disposed of) without the conversion (or, in the 
44

liquid investment minimum requirement is aimed at decreasing the likelihood that funds would 

be unable to meet their redemption obligations. 

Rule 22e-4 includes board oversight provisions related to the liquidity risk management 

program. Specifically, a fund’s board will approve, but not design, the fund’s liquidity risk 

management program, as well as the fund’s designation of the fund’s investment adviser or 

officers as responsible for administering the day-to-day aspects of the fund’s liquidity risk 

management program.118 A fund also will be subject to board reporting requirements to the 

extent that its investments in assets that are highly liquid investments fall below its minimum or 

its assets that are illiquid investments rise above 15% of its net assets.

119 We anticipate that the 

new program requirement will result in investor protection benefits, as improved liquidity risk 

management could decrease the chance that a fund could meet its redemption obligations only 

with significant dilution of remaining investors’ interests or changes to the fund’s risk profile. 

Rule 22e-4, by requiring funds to limit illiquidity and manage liquidity, should reduce the 

potential likelihood and extent of dilution of non-transacting shareholders that otherwise could 

result from redemptions effected at prices determined in accordance with rules 22c-1 and 2a-4. 

Thus, rule 22e-4, although it is numbered with reference to section 22(e), has a broader scope 

and also should separately help rule 22c-1 operate so as to reduce dilution, as contemplated by 

 case of the least-liquid categories, sale or disposition) significantly changing the market value of the 

investment. More specifically, as discussed below, rule 22e-4 would require a fund to classify each of its 

portfolio investments into one of the following liquidity categories: highly liquid investments (category 

based on fund’s reasonable expectation that an investment can be converted to cash within three business 

days); moderately liquid investments (category based on fund’s reasonable expectation that an investment

can be converted to cash within four to seven calendar days); less liquid investments (category based on 

fund’s reasonable expectation that an investment can be sold or disposed of in seven calendar days but the 

settlement is reasonably expected to be greater than seven calendar days); and illiquid investments

(category based on fund’s reasonable expectation that an investment cannot be sold or disposed of within 

seven calendar days). 

118 Rule 22e-4(b)(2).

119 Rule 22e-4(b)(1)(iii)(A)(3) and rule 22e-4(b)(1)(iv).
45

sections 22(a) and (c).

Second, we are adopting certain public disclosure- and confidential reporting-related 

rules and amendments to provide shareholders and other users with additional information with 

respect to funds’ liquidity risk profile as well as assist the Commission in its monitoring efforts. 

Specifically, we are adopting reporting requirements on Form N-PORT that will require a fund 

to report monthly position-level liquidity classification information and its highly liquid 

investment minimum to the Commission on a confidential basis.120 Form N-PORT will also

require a fund to publicly disclose the aggregated percentage of its portfolio representing each of 

the four classification categories adopted by the Commission as of the end of each of its fiscal 

quarters.

121 

We are adopting new rule 30b1-10 and Form N-LIQUID to require a fund to 

confidentially notify the Commission when the fund’s illiquid investment holdings exceed 15% 

of its net assets or if its amount of highly liquid investments declines below its highly liquid 

investment minimum for more than a brief period of time. We also are adopting amendments to 

Form N-1A to require a fund to publicly disclose certain information regarding the fund’s 

redemption procedures. Finally, we are adopting requirements for funds to provide information 

on Form N-CEN about funds’ use of lines of credit and interfund lending. 

We anticipate that these new requirements will facilitate the Commission’s risk and 

 120 We are adopting Form N-PORT today in a companion release. See Investment Company Reporting 

Modernization, Investment Company Act Release No. 32314 (October 13, 2016) (“Investment Company 

Reporting Modernization Adopting Release”) We discuss the Form N-PORT reporting requirements 

related to rule 22e-4 in this Release, including the requirements that a fund report: (i) the liquidity 

classification assigned to each portfolio position (which may be based on asset type to the extent discussed 

below); (ii) the asset type label that the fund has assigned to each portfolio position, using any asset type 

labeling scheme the fund employs in its own portfolio management systems; and (iii) the fund’s highly 

liquid investment minimum. 

121 This information will be reported monthly on Form N-PORT, but it will be disclosed to the public only for 

the third month of each fiscal quarter with a 60-day delay. 
46

compliance monitoring efforts by providing greater transparency regarding the liquidity 

characteristics of fund portfolio holdings, as well as its ability to monitor and assess compliance 

with rule 22e-4. While Form N-PORT and Form N-CEN are primarily designed to assist the

Commission, we believe that the requirements to publicly disclose certain information will also 

help investors and other potential users utilize information on particular funds’ liquidity-related 

risks and redemption policies, which in turn may assist investors in making more informed 

investment choices.122 As further discussed below, we believe that these reporting requirements 

strike the right balance between protecting the funds from certain adverse effects that could arise 

from public disclosure of detailed portfolio liquidity information with the need to provide 

shareholders and other users with improved information about funds’ liquidity risk profile. 

III. DISCUSSION

A. Program Requirement and Scope of Rule 22e-4

Today the Commission is adopting rule 22e-4 under the Investment Company Act. This 

rule will require each registered open-end management investment company, including open-end 

ETFs but not including money market funds, to establish a written liquidity risk management 

program. Rule 22e-4 will not apply to closed-end funds, and will apply to UITs only to a limited 

degree, as discussed further below.

1. Liquidity Risk Management Program

Rule 22e-4 generally will require each registered open-end management investment 

 122 See, e.g., Comment Letter of Markit on the Notice Seeking Comment on Asset Management Products and 

Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015) (“[W]e believe that liquidity and redemption risk 

contained in asset management products can be mitigated by providing risk managers or investors of 

pooled investment vehicles better information about the liquidity risk associated with pool investments so 

that they can price it more accurately. This could be done through, among other things, disclosures of the 

‘prudent valuation’ (accounting for pricing uncertainty) of the fund’s investments and the implementation 

of appropriate liquidity risk management policies and procedures.”).
47

company to establish a written liquidity risk management program. The majority of commenters 

generally supported the proposed requirement for each fund to adopt a formal, written liquidity 

risk management program,123 although many commenters objected to certain aspects of the 

proposal and suggested modifications to certain proposed program elements, as discussed in 

more detail below. Other commenters opposed the proposed written program requirement, 

asserting that funds have a history of successfully managing their liquidity and that the proposed 

requirement was thus unnecessary.124 We continue to believe, as discussed in the Proposing 

Release, that the program requirement will produce significant investor protection benefits, in 

light of the fact that funds are not currently subject to specific requirements under the federal 

securities laws or Commission rules obliging them to manage their liquidity risk. Outreach by 

Commission staff has identified practices at some funds that raise concerns regarding funds’ 

ability to meet their redemption obligations and lessen the effects of dilution.125 The 

Commission is thus adopting, as proposed, a requirement for each fund to adopt and implement a 

written liquidity risk management program.126 However, we note that the program requirement 

 123 See, e.g., Comment Letter of Alternative Investment Management Association (Jan. 13, 2016) (“AIMA 

Comment Letter”); Comment Letter of Capital Research and Management Company (Jan. 13, 2016) 

(“CRMC Comment Letter”); Comment Letter of Cohen & Steers (Jan. 13, 2016) (“Cohen & Steers 

Comment Letter”); Comment Letter of Dechert LLP (Jan. 13, 2016) (“Dechert Comment Letter”); 

Comment Letter of Fidelity Management & Research Company (Jan. 13, 2016) (“Fidelity Comment 

Letter”); Comment Letter of Association of the Bar of the City of New York (Jan. 13, 2016) (“NYC Bar 

Comment Letter”); Comment Letter of Securities Industry and Financial Markets Association (Jan. 13, 

2016) (Comments on Proposal to Require Liquidity Risk Management Programs and Related Liquidity 

Disclosures) (“SIFMA Comment Letter I”); Comment Letter of T. Rowe Price (Jan. 13, 2016) (“T. Rowe 

Comment Letter”).

124 See Comment Letter of Cove Street Capital (Oct. 8, 2015) (“Cove Street Comment Letter”); Comment

Letter of Jim H. Francis (Nov. 4, 2015); Comment Letter of Jordana Keefer (Jan. 7, 2016) (“Keefer 

Comment Letter”); Comment Letter of Don G. Powell (Oct. 5, 2015); Comment Letter of John Wahh (Oct. 

1, 2015) (“Wahh Comment Letter”).

125 See Proposing Release, supra footnote 9, at section IV.C.1.b.

126 See rule 22e-4(b).
48

we are adopting incorporates modifications to most of the proposed program elements.127 

A fund may, as it determines appropriate, expand its liquidity risk management 

procedures and related disclosure concerning liquidity risk beyond the required program 

elements.128 While a fund would be required to adhere to certain requirements—such as the 

requirement to classify the liquidity of a fund’s portfolio investments and determine a highly 

liquid investment minimum129—in other respects, the proposed program requirements would 

permit each fund to tailor its liquidity risk management program to the fund’s particular risks and 

circumstances. Commenters stressed that many funds are currently engaged in operational 

practices that are designed to support fund liquidity and the redeemability of fund shares.130 

Commenters also noted that funds’ approaches to liquidity risk management should, and 

currently do, differ markedly depending on their individual risks.131 We believe that the program 

requirement will permit funds that already have programs that satisfy the rule requirements to 

continue to engage in the liquidity risk management practices that they have found to be 

effective. However, the program requirement’s common obligations should strengthen liquidity 

risk management across the fund industry, while also providing important transparency into 

funds’ liquidity profiles and risk management practices. 

2. Scope of Rule 22e-4 and Related Disclosure and Reporting Requirements

 127 As discussed throughout this Release, we believe that these modifications respond appropriately to specific 

concerns noted by commenters and help to increase the effectiveness of the program requirement in 

advancing the Commission’s goals, while at the same time reducing associated burdens.

128 See supra footnotes 113-115 and accompanying text for a description of the required program elements. 

129 In-Kind ETFs are excepted from the classification and highly liquid investment minimum requirements. 

See infra section III.J. In addition, funds whose portfolios consist primarily of highly liquid investments 

would not be required to determine a highly liquid investment minimum. See infra section III.D.5.

130 See, e.g., ICI Comment Letter I; BlackRock Comment Letter; Invesco Comment Letter; Vanguard 

Comment Letter.

131 See, e.g., ICI Comment Letter I; Dechert Comment Letter; Vanguard Comment Letter. 
49

The liquidity risk management program requirements of rule 22e-4, as well as related 

disclosure and reporting requirements, will apply to all registered open-end funds, except money 

market funds.132 Rule 22e-4 will apply to open-end ETFs, but incorporates tailored program 

requirements to reflect their particular liquidity-related risks.133 The final rule also excludes from 

the highly liquid investment minimum requirement funds whose portfolios consist primarily of 

highly liquid investments. Closed-end funds are excluded from the scope of rule 22e-4,134 and 

UITs are not subject to the rule’s general program requirement, although each UIT’s principal 

underwriter or depositor will be required to determine, on or before the date of the initial deposit

of portfolio securities into the UIT, that the portion of illiquid investments that the UIT holds or 

will hold at the date of deposit that are assets is consistent with the redeemable nature of the 

securities it issues.

135 We discuss these scope determinations in more detail below.

a. Inclusion of Funds with All Investment Strategies and Inclusion of ETFs within the 

Scope of Rule 22e-4

We are not excluding funds with any particular strategies from the scope of rule 22e-4.136 

We proposed to apply rule 22e-4 to all open-end funds (except money market funds) regardless 

of the fund’s investment strategy, stating that even funds with investment strategies that have 

historically entailed little liquidity risk could experience liquidity stresses in certain 

 132 Although money market funds are excluded from the scope of rule 22e-4, they will be subject to the 

amendments to Form N-1A and Form N-CEN. See infra section III.A.2.a (“Inclusion of Funds with All 

Investment Strategies and Inclusion of ETFs within the Scope of Rule 22e-4”); section III.A.2.b (“Inclusion 

of Funds of All Sizes within the Scope of Rule 22e-4”); and section III.A.2.e (“Exclusion of Money Market 

Funds from the Scope of Rule 22e-4”).

133 See infra section III.J.

134 See infra section III.A.2.c (“Exclusion of Closed-End Funds from the Scope of Rule 22e-4”).

135 See infra section III.K.

136 But see infra section III.D.5 (discussing exclusion of In-Kind ETFs as well as funds that primarily hold 

highly liquid investments from the highly liquid investment minimum requirement). 
50

environments.137 We also stated that different types of funds within the same broad investment 

strategy could demonstrate different levels of liquidity and relatedly, different levels of liquidity 

risk. 

Some commenters expressed concern about the costs of some of the proposed 

requirements relative to the liquidity risks typically associated with certain investment 

strategies,138 as well as concerns about burdensome effects of some particular requirements for 

certain strategies.139 Other commenters, however, generally supported a program requirement 

that applies to all registered open-end funds, regardless of the fund’s investment strategy.140 We 

believe the modifications to the proposal we are adopting (in particular, changes to the 

classification requirement and the proposed three-day liquid asset minimum requirement) 

appropriately address commenters’ concerns and reflect support that some commenters provided 

for a program requirement that applies to all registered open-end funds. 

As noted above, rule 22e-4 will apply to open-end ETFs, although we are adopting 

certain tailored program requirements for ETFs.141 Some commenters objected to all or certain 

 137 See Proposing Release, supra footnote 9, at nn.123-125 and accompanying text.

138 See, e.g., infra footnote 1107 and accompanying text.

139 For example, some commenters expressed concerns about the extent to which the proposed liquidity 

classification factors were applicable to certain investment strategies, particularly funds that invest in fixed 

income or other OTC assets (see, e.g., Comment Letter of Federated Investors, Inc. (Jan. 13, 2016) 

(“Federated Comment Letter”); Comment Letter of Government Finance Officers Association (Jan. 13, 

2016) (“GFOA Comment Letter”); Comment Letter of Nuveen Fund Advisors, LLC (Jan. 13, 2016) 

(“Nuveen Comment Letter”); Comment Letter of OppenheimerFunds (Jan. 13, 2016) (“Oppenheimer 

Comment Letter”)). Commenters also expressed concerns about the extent to which a three-day liquid 

asset minimum requirement could impede an index fund’s ability to track its index (see, e.g., BlackRock 

Comment Letter; HSBC Comment Letter; Invesco Comment Letter; SIFMA Comment Letter I). 

140 See, e.g., CRMC Comment Letter; Comment Letter of Eaton Vance Investment Managers (Jan. 13, 2016) 

(“Eaton Vance Comment Letter I”).

141 We note that rule 22e-4 only applies to ETFs that are structured as open-end funds. For ease of reference, 

however, unless indicated otherwise, when we refer to ETFs we mean open-end ETFs only. 
51

proposed program requirements applying to ETFs.142 We respond in detail to these comments in 

section III.J below. We note, however, that while ETFs’ liquidity risks can differ from the 

liquidity risks faced by other open-end funds, ETFs still have liquidity-related risks that could 

affect their shareholders, as well as the broader markets in which they operate. The tailored 

requirements that we are adopting for ETFs respond to commenters’ suggestions that the 

Commission tie these funds’ liquidity risk management obligations to the particular risks that 

they face, as well as our assessment of how these funds’ risks could most appropriately be 

addressed.143

b. Inclusion of Funds of All Sizes within the Scope of Rule 22e-4

Also, as proposed, we are not excluding any fund from the scope of rule 22e-4 on the 

basis of size or adopting different liquidity requirements for relatively small funds. As discussed 

in the Economic Analysis section below, smaller funds tend to demonstrate relatively high flow 

volatility, and thus we believe they should be subject to the same liquidity risk management 

requirements as other funds.144 Conversely, some commenters argued that the proposed 

classification requirement could unduly burden larger funds by inappropriately making these 

funds appear to be less liquid than they actually are, and we have incorporated certain 

modifications to the proposed classification requirement that we believe respond to these 

concerns, as discussed below.145 

c. Exclusion of Closed-End Funds from the Scope of Rule 22e-4

As proposed, rule 22e-4 would have excluded closed-end investment companies from the 

 142 See infra footnotes 839-841 and accompanying text.

143 See infra section III.J.

144 See infra footnote 1160 and accompanying text.

145 See infra section III.C.3.b.
52

scope of rule 22e-4. As discussed in detail in the Proposing Release, closed-end funds’ liquidity 

needs are different from those of open-end funds, because closed-end funds generally do not 

issue redeemable securities and are not subject to sections 22(c) and 22(e) of the Investment 

Company Act.146 Although closed-end interval funds do have to comply with certain liquidity 

standards under rule 23c-3 and therefore must manage their liquidity risk, we are not subjecting 

them to rule 22e-4 because they are already required to adopt written liquidity procedures under 

rule 23c-3(b)(10)(iii).147 Closed-end interval funds may be better able to anticipate their liquidity 

needs than open-end funds because closed-end interval funds do not permit daily redeemability, 

closed-end interval funds must limit the size and timing of repurchase offers, and rule 23c-3 

requires shareholders who wish to tender their shares pursuant to a repurchase offer to provide 

advance notice thereof to such funds.148 Commenters uniformly agreed that closed-end funds 

should be excluded from the scope of rule 22e-4 and we continue to believe that closed-end 

funds (including closed-end interval funds) should be excluded from the rule’s scope.

d. Separate Requirements for UITs Under Rule 22e-4

 146 See Proposing Release, supra footnote 9, at nn.132-135 and accompanying text. Certain closed-end funds 

(“closed-end interval funds”) do elect to repurchase their shares at periodic intervals pursuant to rule 23c-3

under the Investment Company Act. 

147 See Proposing Release, supra footnote 9, at n.134.

148 See id., at text following n.135.
53

As proposed, the scope of rule 22e-4 did not include UITs.149 As adopted today, the rule 

will require a limited liquidity review under which the UIT’s principal underwriter or depositor 

determines, on or before the date of the initial deposit of portfolio securities into the UIT, that the 

portion of the illiquid investments that the UIT holds or will hold at the date of deposit that are 

assets is consistent with the redeemable nature of the securities it issues.

150 UITs and their 

principal underwriters and depositors will not, however, be subject to any of the rule’s other 

liquidity risk management program requirements. 

While one commenter supported excluding UITs from the scope of rule 22e-4,151 several 

other commenters argued that ETFs structured as UITs should be subject to the same rule 

requirements as ETFs structured as open-end funds.152 We respond in detail to these comments 

in section III.K below, including discussing how we believe the requirement to determine that a 

UIT’s illiquid investment holdings are consistent with the redeemable nature of the UIT’s 

securities responds to commenters’ concerns. 

e. Exclusion of Money Market Funds from the Scope of Rule 22e-4

Finally, as proposed, money market funds are excluded from the scope of rule 22e-4. 

Money market funds are currently subject to extensive requirements concerning the liquidity of 

their portfolio assets that are more stringent in many respects than the requirements of rule 22e-4,

due to the historical redemption patterns of money market fund investors and the characteristics 

 149 See Proposing Release, supra footnote 9, at section III.A.2.

150 See rule 22e-4(c). The rule also requires UITs to maintain a record of that determination for the life of the 

UIT and for five years thereafter.

151 See ICI Comment Letter I.

152 See, e.g., Comment Letter of Anonymous (Jan. 13, 2016) (“Anonymous Comment Letter I”); BlackRock 

Comment Letter.
54

of the assets held by money market funds.153 Money market funds also are already subject to 

broad liquidity-related disclosure and reporting requirements,154 and they have certain tools at 

their disposal to manage heavy redemptions that are not available to other open-end funds.155 For 

these reasons, we did not include money market funds within the scope of the proposed rule, and 

commenters uniformly agreed that money market funds should be excluded from the rule’s 

scope.156 We continue to believe that money market funds should be excluded from the scope of 

rule 22e-4.

B. Assessment, Management, and Review of Liquidity Risk

Section 22(e) of the Investment Company Act requires a registered investment 

company157 to make payment to shareholders for securities tendered for redemption within seven 

days of their tender.158 The legislative history of the Act indicates that shareholder dilution was a 

significant concern of the Act’s framers.

159 An open-end fund’s ability to pay redeeming 

shareholders within this seven-day period without significant dilution is directly related to its

liquidity. Thus, assessing and managing liquidity risk in a comprehensive manner is critical to 

an open-end fund’s capacity to honor redemption requests within this seven-day period, as well 

as within any shorter time period disclosed in the fund’s prospectus or advertising materials, 

while mitigating dilution. 

 153 See Proposing Release, supra footnote 9, at nn.145-150 and accompanying text. 

154 See id., at nn.151-152 and accompanying text.

155 See id., at nn.153-155 and accompanying text.

156 See, e.g., CRMC Comment Letter; Eaton Vance Comment Letter I; ICI Comment Letter I; Comment Letter 

of Voya Investment Management (Jan. 12, 2016) (“Voya Comment Letter”).

157 See supra footnote 4 and accompanying text.

158 See supra footnote 36.

159 See supra footnote 7 and accompanying text.
55

Today we are adopting a new liquidity risk assessment and management framework for 

funds. Specifically, rule 22e-4 requires a fund to assess, manage, and periodically review its 

liquidity risk, considering certain factors as applicable. As discussed in more detail below, the 

requirements we are adopting incorporate a definition of “liquidity risk” that focuses on whether 

a fund can meet redemption requests without significant dilution of remaining investors’ interests

rather than, as proposed, whether the fund can meet redemption requests without materially 

affecting the fund’s NAV.

160 We are also adopting certain changes to the proposed factors that a 

fund would consider in assessing and managing its liquidity risk. These changes aim to simplify 

and streamline the proposed liquidity risk assessment and management factors, and reflect 

additional considerations that the Commission, along with certain commenters, believes could 

entail heightened liquidity risk. Notably, the proposed requirement to consider a fund’s 

investment strategy and portfolio liquidity in assessing and managing liquidity risk now 

incorporates the instruction that this consideration includes whether the investment strategy is 

appropriate for an open-end fund, as well as whether the strategy involves a relatively 

concentrated portfolio or large positions in particular issuers.

161 Additionally, the proposed 

requirement to consider a fund’s short-term and long-term cash flow projections has been 

simplified to eliminate the five separate sub-considerations relevant to this factor that were 

incorporated in the proposed rule, but which now are discussed as guidance in this Release.

162

We proposed liquidity risk assessment and management program requirements with the 

primary goals of reducing the risk that funds would be unable to meet redemption and other legal 

 160 See infra section III.B.1.a. 

161 See infra section III.B.2.a.

162 See infra section III.B.2.b.
56

obligations, minimizing dilution, and elevating the overall quality of liquidity risk management 

across the fund industry while at the same time providing funds with reasonable flexibility to 

adopt policies and procedures that would be most appropriate to assess and manage their 

liquidity risk.

163 As we discuss throughout this section, we believe that the modified 

requirements we are adopting today continue to reflect these goals, while promoting a more 

efficient and workable framework.

1. Definition of “Liquidity Risk” 

Rule 22e-4, as adopted today, defines “liquidity risk” as the risk that a fund could not 

meet requests to redeem shares issued by the fund without significant dilution of remaining 

investors’ interests in the fund.

164 This definition is largely similar to the proposed definition of 

“liquidity risk,” that is, the risk that a fund could not meet requests to redeem shares issued by 

the fund that are expected under normal conditions, or are reasonably foreseeable under stressed 

conditions, without materially affecting the fund’s NAV.

165 However, in response to comments, 

the revised definition substitutes the phrase “without significant dilution of remaining investors’ 

interests in the fund” for the phrase “without materially affecting the fund’s net asset value.” 

The definition also does not include references to redemption requests that are expected under 

normal conditions or reasonably foreseeable under stressed conditions. Instead, the final 

definition simply refers to “requests to redeem.” We believe our modifications to the liquidity 

 163 See Proposing Release, supra footnote 9, at paragraph following n.261.

164 When determining whether a fund’s liquidity risk will cause significant dilution for purposes of this 

definition, a fund should consider the impact of liquidity risk on the total net assets of the fund and the 

adverse consequences such dilution will have on all the fund’s remaining shareholders. Furthermore, as 

discussed above, a fund’s inability to meet redemption requests may cause harm to shareholders. See, e.g.,

supra footnotes 81-84 and accompanying text for a discussion of the suspension of shareholder 

redemptions in the Third Avenue Focused Credit Fund following a period of heavy redemptions that the 

fund stated reduced the fund’s portfolio liquidity. 

165 See proposed rule 22e-4(a)(7); see also Proposing Release, supra footnote 9, at text accompanying n.255.
57

risk factors used to assess a fund’s liquidity risk, as discussed below, make any reference to 

market conditions within the definition of liquidity risk unnecessary, confusing, and 

duplicative.

166

a. Evaluating Risk of Significant Dilution of Remaining Investors’ Interests

Multiple commenters objected to the proposed inclusion of any NAV-impact standard in 

the definition of “liquidity risk.” One commenter argued that including the concept of “without 

materially affecting the fund’s net asset value” in the definition of liquidity risk would 

inappropriately merge liquidity and valuation, which are subject to different regulatory and 

compliance controls.167 Many commenters also objected that including such a price concept in 

the definition of “liquidity risk” would incorrectly indicate that market impact can be accurately 

identified and measured separate from market price movements generally.168 These commenters 

argued that many factors (including market volatility, portfolio composition, and trade execution 

and activity) influence the price at which a fund transacts in a security as well as the levels of 

cash the fund holds, and thus it is difficult to identify the effects of the fund’s transaction activity 

on the fund’s NAV. Finally, some commenters argued that the inclusion of a NAV-impact 

standard in the definition of “liquidity risk” could lead investors to believe that appropriate 

liquidity risk management will protect their investments from declining in value.169 

While we agree that liquidity and valuation are distinct concepts, we consider these 

 166 See rule 22e-4(b)(1)(i).

167 See SIFMA Comment Letter I. 

168 See, e.g., Comment Letter of Credit Suisse (Jan. 13, 2016) (“Credit Suisse Comment Letter”); Comment 

Letter of Dodge & Cox (Jan. 21, 2016) (“Dodge & Cox Comment Letter”); Comment Letter of MFS 

Investment Management (Jan. 13, 2016) (“MFS Comment Letter”); SIFMA Comment Letter I; Comment 

Letter of Investment Company Institute (May 17, 2016) (“ICI Comment Letter III”) (encouraging the 

Commission to adopt a definition of liquidity risk that incorporates language related directly to dilution 

rather than value impact on the NAV).

169 See, e.g., ICI Comment Letter I; MFS Comment Letter; SIFMA Comment Letter I.
58

concepts as having certain inter-relationships. First, liquidity risk in an open-end fund inherently 

involves an assessment of the liquidity of the fund’s investments. Common definitions of 

investment liquidity include consideration of the value impact or costs from trading that 

investment.

170 Second, our staff has observed in its outreach many occasions when a fund was

unwilling to transact in certain portfolio investments when such sales would yield a price that the 

fund considered unacceptable.171 This relationship is clear in the Commission guidelines limiting 

a fund’s investment in illiquid investments. These guidelines specify that an illiquid investment

is one that cannot be sold or disposed of within seven days at approximately the value at which 

the fund has valued the investment” (emphasis added).172 We continue to believe that the 

 170 See, e.g., Radhakrishnan Gopalan, et al., Asset Liquidity and Stock Liquidity, 47 J. FIN & QUANT. ANAL.

333 (2012), available at http://apps.olin.wustl.edu/faculty/gopalan/asset_stock_liquidity.pdf (“An asset is 

liquid if it can be converted into cash quickly and at a low cost.”); Yakov Amihud & Haim Mendelson, 

Liquidity, Asset Prices, and Financial Policy, 47 FIN. ANAL. J. 56 (1991), available at 

http://www.jstor.org/stable/4479488?seq=1#page_scan_tab_contents (“An asset is liquid if it can be bought 

or sold at the current market price quickly and at low cost.”).

In addition, we note that many funds disclose liquidity risk as a principal investment risk in their 

prospectuses, and these disclosures often reference possible adverse value impacts from selling fund 

investments under certain conditions. See, e.g., Schwab Strategic Trust rule 485(b) Registration Statement 

(June 30, 2016), available at

https://www.sec.gov/Archives/edgar/data/1454889/000119312516632635/d203200d485bpos.htm

(“Liquidity Risk. The fund may be unable to sell certain securities, such as illiquid securities, readily at a 

favorable time or price, or the fund may have to sell them at a loss.”); Voya Variable Funds rule 485(b) 

Registration Statement (May 1, 2016), available at

https://www.sec.gov/Archives/edgar/data/2664/000119312516562669/d124096d485bpos.htm (“Liquidity: 

If a security is illiquid, the [fund] might be unable to sell the security at a time when the [fund’s] manager 

might wish to sell, or at all. Further, the lack of an established secondary market may make it more 

difficult to value illiquid securities, exposing the [fund] to the risk that the price at which it sells illiquid 

securities will be less than the price at which they were valued when held by the [fund]. The prices of 

illiquid securities may be more volatile than more liquid investments. The risks associated with illiquid 

securities may be greater in times of financial stress. The [fund] could lose money if it cannot sell a 

security at the time and price that would be most beneficial to the Portfolio.”).

171 That is, the price that a portfolio manager could realistically receive for certain portfolio investments could, 

in effect, render such investments de facto illiquid if these pricing considerations cause the portfolio 

manager to refrain from selling them. See, e.g., Third Avenue Temporary Order, supra footnote 12 (“On 

December 9, 2015, after considering the environment the Fund was in and the likelihood that incremental 

sales of portfolio securities to satisfy additional redemptions would have to be made at prices that would 

unfairly disadvantage all remaining shareholders, the Board determined that the fairest action on behalf of 

all shareholders would be to adopt a plan of liquidation.”).

172 See supra footnote 39 and accompanying text.
59

inclusion of a conceptual relationship between liquidity and sale price in the definition of 

“liquidity risk” is appropriate.173 Such a relationship indicates that liquidity risk involves the risk 

that a fund will not be able to meet redemption requests under any circumstances, as well as the 

risk that a fund could meet redemption requests, but only in a manner that adversely affects the 

fund’s non-redeeming shareholders through significant dilution.174 

We believe a definition of “liquidity risk” that includes a reference to the value impact 

from trading portfolio investments should not imply that mutual fund shareholders are 

guaranteed a protected NAV or that the fund cannot sell investments at a loss due to market risk, 

credit deterioration, or liquidity risk. Indeed, funds’ narrative risk disclosure in their registration 

statements and other shareholder communications generally should make clear those risks that 

could adversely affect the fund’s NAV, yield, and total return, including liquidity-related risks.175 

However, we believe defining liquidity risk clarifies what funds must manage under rule 22e-4, 

 173 We also note that several commenters favorably discussed foreign and international regulators’ liquidity 

risk management regimes, including ones that define the concepts of liquid (or illiquid) portfolio assets, as 

well as funds’ liquidity risk, with reference to value impact or a discount that the fund may incur upon sale. 

See, e.g., Dechert Comment Letter (favorably discussing certain liquidity risk management requirements, 

including the definition of “liquidity risk,” under the UCITS Directive); ICI Comment Letter I (noting that 

the Commission could look to other jurisdictions, including the European Union, for support for a 

principles-based program rule); Invesco Comment Letter (also noting that the UCITS Directive provides a 

framework for a principles-based liquidity risk management program requirement); see also Commission 

Directive 2010/43/EU, OJ L 176 (2010), at Ch. 1, Art. 3(8) (defining “liquidity risk” as “the risk that a 

position in the UCITS portfolio cannot be sold, liquidated or closed at limited cost in an adequately short 

time frame and that the ability of the UCITS to comply at any time with its redemption obligation is 

thereby compromised”); Ontario Securities Commission, Report on Staff’s Continuous Disclosure Review 

of Mutual Fund Practices Relating to Portfolio Liquidity, OSC Staff Notice 81-727 (June 25, 2015) 

(definition of “illiquid asset” refers to the “ability to readily dispose of a portfolio asset through a market 

facility on which public quotations are available at a price that approximates the amount at which the 

portfolio asset is valued”).

We note as well that U.S. banking regulators have defined “liquidity” as “a financial institution’s capacity 

to meet its cash and collateral obligations at a reasonable cost.” Interagency Policy Statement on Funding 

and Liquidity Risk Management, 75 FR 13656 (Mar. 22, 2010), available at http://www.occ.gov/newsissuances/federal-register/75fr13656.pdf. 

174 See supra footnote 79 and accompanying text.

175 See, e.g., Item 4(b) of Form N-1A. 
60

and, for the reasons discussed above, we believe impacts on valuation may play a significant role

in evaluating the ability to effectively meet shareholder redemptions while lessening the effects 

of dilution. 

Nonetheless, we agree with commenters that using the proposed specific standard of 

“materially affecting the fund’s NAV” may pose certain challenges. We recognize that it may be 

difficult to calculate the particular market impact that a fund’s transactions in an investment will 

have on that investment’s price, which some commenters suggested was inherent to the proposed 

standard. There could be other reasons for a fund’s NAV fluctuating, separate from the fund’s 

sales of portfolio investments to meet redemption requests as well. 

Accordingly, in the final rule we have modified the NAV-impact standard in the 

definition of “liquidity risk” to substitute the phrase “without significant dilution of remaining

investors’ interests in the fund” for the phrase “without materially affecting the fund’s net asset

value.” This revised standard more directly corresponds to the concerns of the Act176 and rule 

22e-4 by focusing on meeting investor redemptions without dilution. 

We also note that commenter interpretations of the term “materially” varied, with some 

commenters adopting very narrow interpretations177 of the term and others taking a more broad 

view.178 We note that, for purposes of this definition, the term “significant” is not meant to 

 176 See supra footnote 32and accompanying text for a discussion of the liquidity concerns of the Act. 

177 See Comment Letter of Interactive Data Pricing and Reference Data (Dec. 18, 2015) (“Interactive Data 

Comment Letter”) (noting that there are several possible interpretations of the term, including an NAV 

price impact based on a one penny movement, among others.). 

178 See SIFMA Comment Letter I (proposing the Commission substitute the phrase “assuming no fire-sale 

discounting” for the phrase “without materially affecting the fund’s net assets” and arguing that a fire-sale 

standard is a more appropriate outer boundary for price movements.). We believe that adopting a fire-sale 

standard as the outer boundary for price movements would be inappropriate because such an extreme outer 

boundary would fail to capture a fund’s liquidity risk exposure during normal and stressed conditions and 

would, thus, inadequately address the liquidity risk management concerns of rule 22e-4. 
61

reference slight NAV movements, the causes of which may not be easily distinguishable, nor is it 

limited only to fire-sale situations. Instead, a fund’s liquidity risk management program should 

focus on the fund’s ability to meet redemptions in a manner that does not harm shareholders.179 

In particular, “significant” dilution of remaining investors’ interests in the fund can occur at 

much lower levels of dilution than what would occur in a fire sale situation. We believe 

“significant” conveys more effectively than “materially” that the definition is not meant to 

reference slight NAV movements, while avoiding the confusion around the term “materially” 

evident in the comment letters and better focusing the rule on the level of dilution that would 

harm remaining investors’ interests even in the absence of a fire sale.

Under rule 22e-4, a fund would be required to adopt a liquidity risk management program 

that is “reasonably designed to assess and manage the fund’s liquidity risk.” A fund’s liquidity 

risk management program should be appropriately tailored to reflect that fund’s particular 

liquidity risks. Therefore, while a fund is required to consider certain liquidity risk factors 

specified in rule 22e-4 as applicable, a fund may also, as it determines appropriate, expand its

liquidity risk management program beyond the required program elements, and must do so to the 

extent it would be necessary to effectively assess and manage its liquidity risk.

180 This 

requirement, however, requires a fund to assess and manage liquidity risk and does not require a 

fund to eliminate all adverse impacts of liquidity risk, which would be incompatible with an 

investment product such as a mutual fund or ETF, whose NAV may fluctuate for a variety of 

 179 The classification requirements under rule 22e-4 include a value impact standard as well, which is based on 

the number of days within which it is determined that an investment would be convertible to cash (or, in the 

case of the less-liquid and illiquid categories, sold or disposed of) without the conversion (or, in the case of 

the less-liquid and illiquid categories, sale or disposition) significantly changing the market value of the 

investment. See infra section III.C and accompanying text.

180 Rule 22e-4(b) requires that a fund “adopt and implement a written liquidity risk management program that 

is reasonably designed to assess and manage its liquidity risk,” and identifies certain specific elements that 

a fund must consider in doing so. 
62

reasons, including changing liquidity conditions. 

b. Expected and Reasonably Foreseeable Redemption Requests

As proposed, the definition of “liquidity risk” would have required funds to consider 

redemption requests that are expected under normal conditions, as well as those that are

reasonably foreseeable under stressed conditions. Some commenters stated that the concept of 

redemption requests that are reasonably foreseeable under stressed conditions was vague and 

could subject funds to ex-post second guessing.

181 One commenter suggested that the 

Commission clarify: (i) whether funds should address both normal and reasonably foreseeable 

stressed conditions (or select one set of conditions) in assessing liquidity risk; and (ii) the level of 

market stress that funds should assume in conducting a liquidity risk assessment.182

The final definition of liquidity risk eliminates references to redemption requests that are 

expected under normal conditions or reasonably foreseeable under stressed conditions. The final 

definition simply refers to “requests to redeem.” We believe our modifications to the liquidity 

risk factors used to assess a fund’s liquidity risk, including the clarification that a fund must 

consider certain liquidity risk factors both during normal and reasonably foreseeable stressed 

conditions, makes any reference to market conditions within the definition of liquidity risk 

unnecessary, confusing and duplicative. We believe the revised definition also addresses

commenters’ concerns that the proposed definition was unclear. We have provided guidance 

below regarding each liquidity risk factor and the need to consider normal and reasonably 

foreseeable stressed market conditions. 

 181 See Federated Comment Letter; NYC Bar Comment Letter.

182 See AFR Comment Letter.
63

2. Liquidity Risk Factors

Rule 22e-4 will require each fund to assess, manage, and periodically review (with such 

review occurring no less frequently than annually) its liquidity risk, considering the following 

factors as applicable:

• Investment strategy and liquidity of portfolio investments during both normal and 

reasonably foreseeable stressed conditions (including whether the investment strategy 

is appropriate for an open-end fund, the extent to which the strategy involves a 

relatively concentrated portfolio or large positions in particular issuers, and the use of 

borrowings for investment purposes and derivatives);

• Short-term and long-term cash flow projections during both normal and reasonably 

foreseeable stressed conditions; and

• Holdings of cash and cash equivalents, as well as borrowing arrangements and other 

funding sources.183

A fund may incorporate other considerations, in addition to these factors, in evaluating its 

liquidity risk. 

Like the rule we are adopting today, rule 22e-4 as proposed would have required each 

fund to assess its liquidity risk, taking certain specified factors into account.184 Specifically, the 

proposed rule would have required each fund to take the following factors into account in 

 183 See rule 22e-4(b)(1)(i). We note that rule 22e-4 as adopted also includes two additional factors that an ETF 

will have to consider as applicable in assessing, managing, and periodically reviewing its liquidity risk, 

which reflect potential liquidity-related concerns that could arise from the structure and operation of ETFs

(including In-Kind ETFs). These are: (i) the relationship between the ETF’s portfolio liquidity and the way 

in which, and the prices and spreads at which, ETF shares trade, including, the efficiency of the arbitrage 

function and the level of active participation by market participants (including authorized participants); and 

(ii) the effect of the composition of baskets on the overall liquidity of the ETF’s portfolio. These factors 

are discussed in more detail below. See infra section III.J.

184 See Proposing Release, supra footnote 9, at section III.C.1.
64

assessing the fund’s liquidity risk: (i) short-term and long-term cash flow projections, 

considering size, frequency, and volatility of historical purchases and redemptions of fund shares 

during normal and stressed periods; the fund’s redemption policies; the fund’s shareholder 

ownership concentration; the fund’s distribution channels; and the degree of certainty associated 

with the fund’s short-term and long-term cash flow projections; (ii) the fund’s investment 

strategy and liquidity of portfolio investments; (iii) use of borrowings and derivatives for 

investment purposes; and (iv) holdings of cash and cash equivalents, as well as borrowing 

arrangements and other funding sources.185 The person(s) designated to administer the liquidity 

risk management program must also conduct reviews of the adequacy and effectiveness of the 

implementation of the liquidity risk management program, and such reviews must occur no less 

frequently than annually.186 Commenters generally supported the requirement for a fund to 

assess its liquidity risk.187 Additionally, some commenters expressed support for the proposed 

liquidity risk factors, as well as the proposed requirement to consider these factors in assessing 

liquidity risk.188 However, several commenters objected to the proposed requirement for a fund 

to consider certain specified factors and suggested instead that consideration of the factors be 

permissive instead of mandatory.189

We continue to believe that the factors are central to evaluating and managing a fund’s 

liquidity risk and that requiring each fund to consider, as a baseline, a standard set of factors for 

assessing and managing liquidity risk would promote effective and thorough liquidity risk 

 185 See proposed rule 22e-4(b)(2)(iii).

186 See id.

187 See, e.g., AFR Comment Letter; Comment Letter of CFA Institute (Jan. 12, 2016) (“CFA Comment 

Letter”); FSR Comment Letter; ICI Comment Letter I.

188 See, e.g., AFR Comment Letter; CRMC Comment Letter; ICI Comment Letter I; Invesco Comment Letter.

189 See, e.g., CFA Comment Letter; MFS Comment Letter; Voya Comment Letter.
65

management across the fund industry. However, we recognize that some of the proposed factors 

may not be applicable in assessing and managing the liquidity risk of certain funds or types of 

funds.190 One commenter requested that we clarify that a fund only needs to consider factors 

relevant to its operations, which may include some or all of the factors outlined in rule 22e-4, 

and others not enumerated.191 We agree, and to the extent any liquidity risk factor specified in 

rule 22e-4 is not applicable to a particular fund, the fund will not be required to consider it in 

assessing and managing its liquidity risk. We have therefore added the words “as applicable” in 

the rule’s instruction to consider the specified factors.

192 For example, a fund will not be 

required to consider the use of borrowings for investment purposes and derivatives, as specified 

under rule 22e-4(b)(1)(i)(A), if that fund does not engage in borrowing or use derivatives. 

Similarly, a fund that maintains borrowing sources for investment purposes will be required to 

consider the use of borrowings for investment purposes as specified under the rule. We also 

believe that condensing and simplifying the proposed factors helps respond to commenters’ 

concerns that the proposed factors were overly complex193 and potentially inapplicable to certain 

funds.194

As noted above, this list of liquidity risk factors is not meant to be exhaustive. In 

assessing, managing, and periodically reviewing its liquidity risk, a fund may take into account 

considerations in addition to the factors set forth in rule 22e-4 and must do so to the extent 

 190 See Proposing Release, supra footnote 9, at section III.C.1. 

191 See ICI Comment Letter I.

192 See rule 22e-4(b)(1)(i) (requiring a fund to consider, “as applicable,” certain factors); see also FSR

Comment Letter (supporting the proposed liquidity risk assessment requirement and agreeing with the 

Commission’s position in the proposal that a fund would not be required to consider those factors that are 

not applicable to that particular fund).

193 See, e.g., Comment Letter of Better Markets, Inc. (Jan. 13, 2016) (“Better Markets Comment Letter”).

194 See, e.g., ICI Comment Letter I; MFS Comment Letter. 
66

necessary to adequately assess and manage the fund’s liquidity risk.

195 For example, as discussed 

in the Proposing Release, if a fund elects to conduct stress testing to determine whether it has 

sufficient liquid investments to cover different levels of redemptions, a fund may wish to 

incorporate the results of this stress testing into its liquidity risk assessment and management.

196 

We continue to believe that stress tests that analyze the proposed factors could be particularly 

useful to a fund in evaluating its liquidity risk. 

Below we provide guidance on specific issues associated with each of the liquidity risk 

factors and also discuss the Commission’s decision to adopt each of these factors (some with 

modifications).

a. Investment Strategy and Portfolio Liquidity

We are adopting the proposed requirement for a fund to consider its investment strategy 

and portfolio liquidity in assessing, managing, and periodically reviewing its liquidity risk, but 

with certain modifications in response to commenters.

197 The principal changes include a 

requirement to consider whether the investment strategy is appropriate for an open-end fund, as 

well as the extent the strategy involves a relatively concentrated portfolio or large positions in 

particular issuers, and a clarification that this factor should be assessed both during normal and 

reasonably foreseeable stressed conditions. 

We continue to believe that various aspects of a fund’s investment strategy—including 

whether the fund is actively or passively managed198 and a fund’s portfolio management 

 195 See note 180 and accompanying text.

196 See Proposing Release, supra footnote 9, at paragraph accompanying n.266.

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

198 See Proposing Release, supra footnote 9, at paragraph accompanying nn.292-295 (discussing factors that 

could increase or decrease the liquidity risk associated with index-based strategies versus actively-managed 

strategies). 
67

decisions that are meant in part to decrease an undesirable tax impact on the fund199— could 

significantly affect the fund’s liquidity risk. Also the extent to which the fund is diversified,

including a fund’s status as a regulated investment company under Subchapter M of the Internal 

Revenue Code, as well as its principal investment strategies as disclosed in its prospectus, could 

affect its liquidity risk in that the fund could be limited by its diversification obligations in its 

ability to sell certain portfolio securities.200 We note, for example, that the Third Avenue 

Focused Credit Fund stated that its status as a regulated investment company under Subchapter 

M limited the fund’s ability to return cash to its shareholders after it suspended redemptions

because of its need to comply with certain asset diversification tests to maintain its regulated 

investment company status.201 As discussed in the Proposing Release, we also continue to 

caution that while a fund’s investment strategy is an important factor in evaluating a fund’s

liquidity risk, different types of funds within the same broad investment strategy may 

demonstrate different levels of liquidity, (and thus, presumably, different levels of liquidity

risk).

202 

 199 See Proposing Release, supra footnote 9, at paragraph accompanying n.299 (detailing the ways in which a 

fund’s tax management strategy could make its portfolio managers unwilling to sell certain portfolio assets 

in order to meet redemptions, which could in turn increase the fund’s liquidity risk compared to a similarly 

situated fund). 

200 See Proposing Release, supra footnote 9, at paragraph accompanying nn.296-298 (discussing the extent to 

which a fund’s portfolio is diversified (or, relatedly, a fund’s concentration in certain types of portfolio 

assets) could have ramifications on the fund’s potential liquidity risk, including the ways that various 

diversification requirements could constrain its ability to sell certain portfolio securities in order to meet 

redemptions). 

201 See Third Avenue Focused Credit Fund Update (Mar. 8, 2016), available at http://thirdave.com/wpcontent/uploads/2016/04/03-09-16-FCF-Call-Transcript-1.pdf (noting that, because one of the 

diversification tests under Subchapter M would require the fund to have less than 50% of its assets in 

concentrated positions, the fund needed to retain cash in order not to violate this test, in light of the manner 

in which it chose to manage the fund’s liquidation of its other assets).

202 See Proposing Release, supra footnote 9, at n.301 and accompanying text.
68

Consideration of Strategy Appropriateness for Open-End Fund Structure

We are adopting several modifications to the proposed requirement to consider a fund’s 

investment strategy and portfolio liquidity in assessing, managing, and periodically reviewing its 

liquidity risk. First, we clarify in final rule 22e-4 that consideration of investment strategy must 

take into account whether the fund’s strategy is appropriate for an open-end fund. This 

clarification reflects several commenters’ suggestions that a fund’s liquidity risk management 

program could (or should) involve a consideration of whether the fund’s investment strategy and 

permissible holdings are suitable for the open-end structure.

203

We agree with this suggestion raised by commenters. As discussed above, all open-end 

funds are subject to section 22(e) of the Investment Company Act, which requires a fund to pay 

redemption proceeds within seven days after receipt of a redemption request, and hold 

themselves out at all times as being able to meet redemptions (in many cases within an even 

shorter period of time).

204 To the extent that a fund’s investment strategy involves investing in 

securities whose liquidity is limited, or otherwise entails a significant degree of liquidity risk, the 

fund may not be able to meet its redemption and other legal obligations, or may not meet 

redemptions without diluting its shareholders’ interests in the fund. We understand that it is a 

common best practice for a fund and its management to consider the appropriateness of a fund’s

investment strategy in the context of launching an open-end fund, and then for an open-end fund 

 203 See BlackRock Comment Letter (“[W]e recommend that the Commission consider whether funds should be 

required to explicitly address the level of position concentration that is appropriate for the fund’s 

investment strategy and investor profile in [liquidity risk management] policies and procedures”); ICI 

Comment Letter I (“A risk-based liquidity management program could require a fund manager, when 

launching a new mutual fund, to assess whether the fund’s investment strategy and permissible holdings are 

suitable for the open-end structure in light of [its] liquidity characteristics.”); see also CRMC Comment 

Letter (encouraging the Commission to consider whether certain funds may be inappropriate for the 

open-end fund structure).

204 See supra footnotes 34-36, 42-47 and accompanying text.
69

to continue to manage its liquidity risk such that its strategy and holdings remain appropriate for 

the open-end structure. However, not all funds appear to consider this. Also, as we have 

observed funds beginning to pursue more complex investment strategies,205 we believe it is 

appropriate to require that each open-end fund consider whether it has a liquidity risk 

management framework in place that corresponds with the liquidity risks inherent in its strategy 

and its structure as a fund that offers redeemable securities. 

We believe that specifically requiring an open-end fund to consider whether its 

investment strategy is appropriate for the open-end structure would supplement existing practices

and provide an important additional layer of shareholder protection. For example, this 

requirement will likely cause funds to evaluate the suitability of investment strategies that will be 

permitted under the 15% illiquid investment requirement, but still could entail significant 

liquidity risk—such as strategies involving highly concentrated portfolios, or strategies involving 

investment in portfolio investments that are so sensitive to stressed conditions that funds may not 

be able to find purchasers for those investments during stressed periods.206 Furthermore, funds 

that have significant holdings of securities with extended settlement periods may face challenges

operating as open-end funds and should take these holdings into account when determining 

whether the fund’s portfolio is appropriate for an open-end fund.

207 For example, primarily 

holding securities with extended settlement periods beyond seven days may not be appropriate 

 205 See supra footnote 11 and accompanying text.

206 We note that, when a fund files its initial registration statement and post-effective amendments thereto with 

the Commission’s Division of Investment Management for review, Commission staff could request 

information from the fund regarding the fund’s basis for determining that its investment strategy is 

appropriate for the open-end structure, just as staff currently may request information from a fund to 

support its disclosure reflecting the fund’s compliance with various provisions of the Investment Company 

Act and rules thereunder.

207 See infra footnote 378 and accompanying text. 
70

for an open-end fund, as primarily having such extended settlement holdings may raise concerns 

with the fund’s ability to meet redemptions within seven days, particularly if the fund has not 

established adequate other sources of liquidity. 

Because a fund will be required to consider the liquidity risk factors (as applicable) in 

periodically reviewing its liquidity risk, the final rule requires a fund’s periodic liquidity risk 

review to include a consideration of whether the fund’s investment strategy is appropriate for an 

open-end fund.208 For example, if a fund’s illiquid investments exceed 15% of net assets, this 

could indicate that the fund is encountering liquidity pressures that could significantly impair the 

fund’s ability to meet its redemption and other legal obligations. In this case, we believe it 

would be appropriate for a fund to review and potentially update its liquidity risk management 

procedures for handling the fund’s high levels of illiquid investment holdings. In circumstances

in which it appears unlikely that the fund will be able to reduce its illiquid investment holdings to 

or below 15% within a period of time commensurate with its redemption obligations, a fund’s 

periodic liquidity risk review could lead the fund to reconsider its continued operation as an 

open-end fund.

209 

Consideration of Portfolio Concentration, and Holdings of Large Portfolio Positions

We also are adopting a modification to the proposed liquidity risk factors to clarify that 

consideration of a fund’s investment strategy must include an evaluation of whether the strategy 

involves a relatively concentrated portfolio or large positions in particular issuers. Some 

commenters suggested that funds with extraordinarily concentrated portfolios may have 

 208 See infra section III.B.3.

209 Moreover, we note that actions that either directly or indirectly extinguish the rights of shareholders to 

redeem their shares could, depending on the facts and circumstances, involve violations of section 22(e) 

and other provisions of the Act, such as section 48(a) (prohibiting a person from doing indirectly, through 

another person, what that person is prohibited by the Act from doing directly). 
71

particular liquidity risks that could make redeemability from these funds especially 

challenging.210 Our evaluation of these comments, together with recent events discussed below, 

have led us to revise the proposed “investment strategy” liquidity risk factor to focus on fund 

concentration issues. 

We believe that this component of a fund’s investment strategy is a particularly 

significant factor in evaluating the extent to which investment strategy contributes to liquidity 

risk. As we noted in the Proposing Release, while a fund with a relatively more diversified 

portfolio that needs to sell portfolio investments to build liquidity may be able to select 

investments for sale based on whether the markets for those investments are favorable, a 

relatively less diversified fund may have fewer options (i.e., because it has less choice of 

investments to sell or because the markets for its portfolio investments are uniform or correlated) 

and could thus be compelled to transact in unfavorable markets.211 In addition, as discussed 

below, holding a large portion of a particular issue could adversely affect a fund’s ability to 

convert the position to cash without a value impact, and this can hamper a fund’s portfolio 

management flexibility due to the higher liquidity risk in its positions.

212 Thus, we believe that 

investment strategies that involve holding large portions of a particular issue—particularly if the 

market for these securities is thinly traded213 or if the fund’s strategy involves investment in a 

 210 See, e.g., BlackRock Comment Letter; CRMC Comment Letter; ICI Comment Letter I; Invesco Comment 

Letter.

211 See Proposing Release, supra footnote 9, at paragraph accompanying nn.296-298. 

However, as also discussed above, the extent to which a fund is required to be diversified, including a 

fund’s status as a regulated investment company under Subchapter M of the Internal Revenue Code, could 

affect its liquidity risk in that the fund could be limited by its diversification obligations in its ability to sell 

certain portfolio securities. See supra footnotes 200-201 and accompanying text. 

212 See infra footnote 440 and accompanying text; infra paragraph accompanying footnote 450.

213 See infra footnote 544 and accompanying text.
72

relatively small number of holdings—could notably increase a fund’s liquidity risk. As 

discussed above, the recent suspension of redemptions by Third Avenue Focused Credit Fund, 

which had a concentrated portfolio and large holdings of particular issues, illustrates how these 

methods of concentration directly affect liquidity risk, which in turn could adversely affect 

shareholders to the extent that they are not able to redeem their shares, or redeem their shares 

only at a significant discount.214 

Use of Borrowings for Investment Purposes and Derivatives 

We have incorporated the proposed requirement to consider a fund’s use of borrowings 

for investment purposes and derivatives within the requirement to consider investment strategy 

in assessing, managing, and periodically reviewing a fund’s liquidity risk.215 As proposed, this 

consideration was not included within the investment strategy factor, but instead was a standalone liquidity risk factor. However, we believe that including this consideration within the 

general investment strategy factor is clearer, because a fund’s use of borrowings for investment 

purposes and derivatives may be viewed as a component of its investment strategy. We note that 

we have also revised the phrase “use of borrowings and derivatives for investment purposes” that 

was used in the Proposing Release, and instead are using the term, “use of borrowings for 

investment purposes and derivatives” in the final rule. We have made this revision in order to 

clarify that funds should consider all derivatives, including those used for hedging purposes. As 

 214 See, e.g., Jeffrey Ptak & Sarah Bush, Third Avenue Focused Credit Abruptly Shuttered, Morningstar (Dec. 

11, 2015), available at

http://ibd.morningstar.com/article/article.asp?id=733021&CN=brf295,http://ibd.morningstar.com/archive/a

rchive.asp?inputs=days=14;frmtId=12,%20brf295 (noting that “Third Avenue Focused Credit stood out for 

its large, concentrated allocation to distressed and other low-quality fare”); see also Third Avenue 

Temporary Order, supra footnote 12 (noting that “Applicants further state that relief permitting the Fund to 

suspend redemptions in connection with its liquidation would permit the Fund to liquidate its assets in an 

orderly manner and prevent the Fund from being forced to sell assets at unreasonably low prices to meet 

redemptions.”). 

215 See proposed rule 22e-4(b)(2)(iii)(C); rule 22e-4(b)(1)(i)(A).
73

proposed, this provision could potentially have been read to exclude the consideration of 

derivatives used for hedging, which was not the intent of the proposed requirement. We believe 

this clarification will make clear that the requirement is for a fund to consider both use of 

borrowings for investment purposes and use of derivatives in general. One commenter stated

that it agreed that funds should consider the use of derivatives when assessing liquidity risk, 

including the extent and types of derivatives used, as well as the structure and terms of a fund’s 

derivatives transactions.216 No commenters suggested that a fund’s use of borrowings for 

investment purposes and derivatives is inapplicable to a fund’s liquidity risk (provided that the 

fund engages in borrowing or uses derivatives217).

We continue to believe that the potential effects of the use of borrowings for investment 

purposes and derivatives are relevant to assessing, managing, and periodically reviewing a fund’s 

liquidity risk.218 As we noted in the Proposing Release, borrowing for investment purposes, 

whether from a bank219 or through financing transactions such as reverse repurchase agreements 

and short sales,

220 may affect a fund’s liquidity risk.221 Similarly, a fund’s use of derivatives

 216 See CFA Comment Letter.

217 See supra footnotes 191-192 and accompanying text (clarifying that, to the extent one of the factors 

specified in rule 22e-4(b)(1)(i) is not applicable to a particular fund, the fund would not be required to 

consider that factor in assessing its liquidity risk).

218 See Proposing Release, supra footnote 9, at section III.C.1.c. 

219 See id., at n.303 and accompanying text (noting that, in addition to the asset coverage limitations imposed 

by section 18 of the Investment Company Act, any borrowing from a bank would be subject to the terms 

agreed between a fund and the bank, including terms relating to the maturity date of the borrowing and any 

circumstances under which the borrowing may be required to be repaid).

220 See id., at nn.304-305 and accompanying text (noting that funds that borrow for investment purposes, for 

example through financing transactions such as reverse repurchase agreements and short sales, generally do 

so in reliance on certain Commission guidance, under which funds cover their obligations under such 

transactions by segregating certain liquid assets, and discussing the effects of asset segregation on funds’ 

liquidity risk). 

Segregated assets are considered to be unavailable for sale or disposition, including for redemptions, unless 

replaced by other appropriate non-segregated assets of equal value. See Securities Trading Practices of 

Registered Investment Companies, Investment Company Act Release No. 10666 (Apr. 18, 1979) [44 FR 
74

such as futures, forwards, swaps and written options may affect a fund’s liquidity risk as well.222 

We note that in addition to the liquidity of the derivatives positions themselves, assessing,

managing, and periodically reviewing liquidity risk generally may include an evaluation of the 

potential liquidity demands that may be imposed on the fund in connection with its use of 

derivatives, including any variation margin or collateral calls the fund may be required to 

meet.223 To the extent the fund is required to make payments to a derivatives counterparty, those 

assets would not be available to meet shareholder redemptions. 

 

25128 (Apr. 27, 1979)] (“Release 10666”). This means that a fund that receives significant redemption 

requests may need to exit a portion of its financing transactions in order make more liquid investments 

available for sale to fulfill such requests. Furthermore, if a fund seeks to exit its financing transactions in a 

declining market, it may need to dispose of a greater amount of its more liquid holdings in order to repay its 

borrowings, thereby reducing the amount of liquid investments it has available to meet redemptions. 

Consequently, a fund’s assessment and management of its liquidity risk must include an evaluation of the 

nature and extent of its borrowings and the potential impact of borrowings on the fund’s overall liquidity 

profile.

221 We note that borrowings for investment purposes pose a variety of liquidity risks, including the risk that 

redemptions may require the sale of securities in amounts exceeding the amount of the redemption, 

resulting in a reduction of the fund’s borrowings. Additionally, even without redemptions, the fund may 

need to sell securities and reduce borrowings if its investment values decline, which may have negative 

effects on the fund’s liquidity. 

222 See Proposing Release, supra footnote 9, at paragraph accompanying nn.306-307 (discussing how the use 

of derivatives may affect a fund’s liquidity risk). Funds that use derivatives under which they have an 

obligation to pay typically do so in reliance on the guidance we provided in Release 10666 and in related 

no-action letters issued by our staff, and therefore segregate liquid assets in respect of their obligations 

under derivatives transactions. See generally Use of Derivatives by Investment Companies under the 

Investment Company Act of 1940, Investment Company Act Release No. 29776 (Aug. 31, 2011) [76 FR 

55237 (Sept. 7, 2011)], at 13–17; see also Use of Derivatives by Registered Investment Companies and 

Business Development Companies, Investment Company Act Release No. 31933 (Dec. 1, 2015) [80 FR 

80884 (Dec. 28, 2015)] (“2015 Derivatives Proposing Release”), at n.47 and accompanying text; see also 

supra footnote 220. Derivatives may therefore raise concerns that are similar to those discussed at footnote 

220 in the context of borrowings. Funds also may be required to dispose of assets in order to post required 

margin with respect to their short sale transactions. In addition, some derivatives transactions—

particularly those that are complex or entered into OTC—may be less liquid, have longer settlement 

periods, or be more difficult to price than other types of investments, which potentially increases the 

amount of time required to exit such transactions.

223 See In re OppenheimerFunds, Inc., et al., Investment Company Act Release No. 30099 (June 6, 2012) 

(settled action) (“OppenheimerFunds Release”) (alleging the adviser made misleading statements 

regarding two fixed income mutual funds that suffered significant losses during the 2008 financial crisis 

primarily due to their use of total return swaps to obtain exposure to commercial mortgage-backed 

securities and noting that the funds “had to raise cash for anticipated [total return swap] contract payments 

by selling depressed bonds into an increasingly illiquid market.”).
75

Consideration of Investment Strategy and Portfolio Liquidity during Normal and 

Reasonably Foreseeable Stressed Conditions

Finally, we also are modifying the proposed liquidity risk assessment requirement to 

clarify that certain liquidity risk factors must be considered during both normal and reasonably 

foreseeable stressed conditions. As proposed, rule 22e-4 did not specify whether a consideration 

of these factors should consider normal conditions, stressed conditions, or both. One commenter 

stated that the proposed rule’s treatment of stressed conditions was unclear,224 and another said 

that the proposed rule was unclear about what needed to be considered in assessing “stress.”225 

For those liquidity risk factors that could vary depending on market conditions (i.e., a fund’s 

portfolio liquidity and cash flow projections), we believe that it is appropriate to require a fund to 

evaluate those factors in normal and reasonably foreseeable stressed conditions. Thus, if a 

fund’s portfolio strategy involves investing in securities whose liquidity is likely to decline in 

stressed conditions, a fund should take this into account in determining how its portfolio liquidity 

could contribute to its overall liquidity risk. For example, a fund’s portfolio liquidity could 

decrease in stressed conditions if such conditions led to market participants pulling back on 

transacting in the fund’s portfolio securities, or if stressed conditions affecting other assets or 

asset classes were to have correlated effects on the fund’s portfolio securities. In considering

normal and reasonably foreseeable stressed conditions, funds should consider historical 

experience but should recognize that such experience may not necessarily be indicative of future 

outcomes, depending on changes in market conditions and the fund’s particular circumstances. 

We note that “stressed” conditions will likely entail different scenarios for different types 

of funds. For example, differing levels of changes in interest rates and/or interest rates’ implied 

 224 See BlackRock Comment Letter.

225 See AFR Comment Letter.
76

volatility could affect two bond funds very differently, depending on factors such as the maturity, 

coupon rates and other characteristics of the funds’ portfolio holdings. Assessment of stressed 

conditions also should take into account stresses originating outside of market stress. For 

example, certain funds could be significantly affected by geopolitical stresses, such as an 

emerging markets debt fund whose holdings’ liquidity is affected by factors such as economic 

uncertainty in the holdings’ countries of issuance. The extent to which stressed conditions are 

reasonably foreseeable will vary depending on the fund’s facts and circumstances.

b. Cash Flow Projections

We are adopting the requirement for a fund to consider its short-term and long-term cash 

flow projections, during both normal and reasonably foreseeable stressed conditions, in assessing 

and managing its liquidity risk.226 The proposed rule also included the requirement for a fund to 

consider its cash flow projections in assessing its liquidity risk. However, we are adopting some 

modifications to this proposed requirement. Most significantly, although the proposed rule 

specified five separate considerations a fund would have to take into account in evaluating the 

extent to which its cash flow projections contribute to its liquidity risk, rule 22e-4 as adopted 

today does not enumerate these five considerations. Instead, we are discussing these five 

considerations as guidance that funds should generally take into account in evaluating their cash 

flow projections, as discussed in more detail below.

We continue to believe, as discussed in the Proposing Release, that understanding a 

fund’s cash flows is important in determining whether the fund will have sufficient cash to 

satisfy redemption requests.

227 We also continue to believe that the better a fund’s portfolio and 

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

227 See Proposing Release, supra footnote 9, at nn.267-268 and accompanying text. 
77

risk managers are able to predict the fund’s net flows, the better they will be able to measure and 

manage the fund’s liquidity risk.228 Predictability about whether periods of market stress or

declines in fund performance generally lead to increased redemptions of fund shares is 

particularly significant, as careful liquidity risk management during these periods could prevent 

the need to sell less-liquid portfolio assets under unfavorable circumstances. This type of selling,

in turn, could create significant negative price pressure on the assets and, to the extent the fund 

continues to hold a portion of those assets, decrease the value of the assets still held by the fund 

at least temporarily.229 To the extent a fund understands the composition of its shareholder base 

(for example, among retirement investors, other individual investors, or discretionary accounts), 

it may be able to better predict fund flows in response to market events or fund performance. 

Consideration of Cash Flow Projections during Normal and Reasonably Foreseeable 

Stressed Periods

We also are revising the rule to require a fund to consider its short-term and long-term 

cash flow projections during both normal and reasonably foreseeable stressed conditions.230 As 

discussed above, proposed rule 22e-4 would have required a fund, in evaluating short-term and 

long-term cash flow projections, to consider the size, frequency, and volatility of historical 

purchases and redemptions of fund shares during normal and stressed periods.231 Although we 

are not including a specific requirement for a fund to consider historical purchases and 

 228 See id., at n.269 and accompanying text. See also Fidelity Comment Letter (noting that the predictability of 

fund cash flows varies depending on the predictability of the redemption behavior of the fund’s shareholder 

base. “[F]unds whose shareholders include investors who purchased shares distributed through a 

retirement program or other planned savings program may exhibit redemption patterns that are relatively 

more predictable.”); BlackRock Comment Letter (noting that funds may need additional data from their 

distributors and transfer agents regarding shareholder redemption activity to allow funds to make shortterm and long-term cash projections). 

229 See Proposing Release, supra footnote 9, at n.270 and accompanying text.

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

231 See proposed rule 22e-4(b)(2)(iii)(A)(1).
78

redemptions in considering its cash flow projections, we believe continuing to incorporate the 

concept of normal and reasonably foreseeable stressed conditions within the requirement to 

consider cash flow projections is critical for a fund to obtain a complete picture of how its cash 

flows may affect its liquidity risk, particularly because greater, more frequent, or more volatile 

outflows during stressed conditions could exacerbate a fund’s liquidity risk.232 A fund and its 

portfolio and/or risk managers should review the guidance we provide below regarding funds’ 

evaluation of the size, frequency, and volatility of historical purchases and redemptions of fund

shares during normal and reasonably foreseeable stressed circumstances, as well as similar 

funds’ purchases and redemptions, in determining how normal and reasonably foreseeable 

stressed market conditions could affect a fund’s cash flows and contribute to the fund’s liquidity 

risk.233

Guidance on Evaluating a Fund’s Cash Flow Projections

As discussed above, rule 22e-4 as adopted today requires a fund to consider its short-term 

and long-term cash flow projections during both normal and reasonably foreseeable stressed 

conditions in assessing, managing, and periodically reviewing liquidity risk. This liquidity risk 

factor simplifies the rule as proposed, which would have codified five separate considerations 

that would comprise a fund’s consideration of its cash flow projections—namely, (i) the size, 

frequency, and volatility of historical purchases and redemptions of fund shares during normal 

and reasonably foreseeable stressed periods, (ii) the fund’s redemption policies, (iii) the fund’s 

shareholder ownership concentration, (iv) the fund’s distribution channels, and (v) the degree of 

certainty associated with the fund’s short-term and long-term cash flow projections. Instead of 

 232 See Proposing Release, supra footnote 9, at text accompanying and following n.273. 

233 See infra footnotes 236-239 and accompanying text.
79

enumerating these five considerations in the text of rule 22e-4, we are discussing each of them as 

guidance in this Release (together, the “cash flow guidance considerations”). 

We are not codifying the cash flow guidance considerations to simplify the rule 22e-4 

liquidity risk factors and to alleviate certain commenter concerns about the complexity of the 

proposed factors. Commenters argued that the requirement to consider a specified list of 

multiple liquidity risk factors is overly complex—making compliance more difficult for funds, 

and oversight more difficult for the Commission.234 Commenters discussed the dangers of an 

analysis that mandates consideration of multiple factors becoming a generic “checklist” approach 

to liquidity risk management that does not fully capture the business practices, strategies, and 

risks that are germane to certain funds.235 We agree that requiring an overly complex liquidity 

risk assessment analysis could lead to this result, to the detriment of investors. Such procedures 

could appear to be robust, but in actuality may not reflect (or may underweight) a fund’s most 

significant risk factors because of the perceived requirement to focus on enumerated factors that 

may not be particularly important to a fund’s operations and risks. Thus, we believe that 

simplifying the cash flow liquidity risk factor in rule 22e-4 will benefit funds and their 

shareholders and continue to advance the Commission’s goal of promoting meaningful liquidity 

risk analysis. 

With respect to the size, frequency, and volatility of historical purchases and redemptions 

of fund shares, we continue to believe, as discussed in the Proposing Release, that funds whose 

historical net flows are relatively less volatile in terms of size and frequency will likely entail 

 234 See, e.g., Better Markets Comment Letter.

235 See, e.g., MFS Comment Letter.
80

less liquidity risk than similar funds with more volatile net flows.236 A fund should generally 

review historical purchases and redemptions of fund shares across a variety of market conditions 

in order to determine how the fund’s flows may differ during normal and reasonably foreseeable

stressed periods (keeping in mind that historical experience may not necessarily be indicative of 

future outcomes).237 In addition to considering its own historical flow data, a fund, particularly a 

fund without substantial operating history, should consider purchase and redemption activity in 

funds with similar investment strategies.238 A fund may wish to evaluate whether the size, 

frequency, and volatility of its shareholder flows follow any discernible patterns (for example, 

patterns relating to seasonality, shareholder tax considerations, fund advertising, changes in fund 

performance ratings provided by third-party rating agencies, and the fund’s investment strategy 

and size). 239 

We also continue to believe that a fund generally should consider its normal redemption 

policies and practices in evaluating the extent to which its cash flow projections may contribute 

to its liquidity risk. Specifically, as discussed in the Proposing Release, a fund should generally 

consider its disclosed or advertised time period for paying (or endeavoring to pay) redemption 

 236 See Proposing Release, supra footnote 9, at nn.272 and accompanying text. 

237 See supra footnotes 230-233 and accompanying text. A fund may find it instructive to understand when its 

highest, lowest, most frequent, and most volatile purchases and redemptions occurred within various time 

horizons, such as the past one, five, ten, and twenty years (as applicable, considering the fund’s operating 

history).

238 See Proposing Release, supra footnote 9, at text following n.273. We note that consideration of similar 

funds’ purchases and redemptions could show whether the fund’s historical flows are typical or aberrant 

compared to those seen in similar funds and assist new funds in predicting flow patterns.

239 See Proposing Release, supra footnote 9, at nn.274-279 and accompanying text (discussing how a fund’s 

investment strategy could contribute to its shareholder flows and noting that smaller funds may experience 

greater flow volatility). For instance, we understand that certain investors tend to trade in and out of ETFs 

with index-based strategies frequently because they invest in these ETFs for hedging and/or short-term 

trading purposes. 
81

proceeds and whether this time period varies based on the payment method the fund employs.240 

For example, a fund whose policies require it to typically pay redeeming shareholders on a nextday basis may have fewer options for managing high levels of redemptions than a fund whose 

policies require it to typically pay redeeming shareholders on a T+3 basis.241

A fund’s shareholder ownership concentration also could affect its cash flow projections, 

as a fund that has a concentrated set of beneficial owners could experience considerable cash 

outflows from redemptions by a single or small number of shareholders, or by the decisions of an 

intermediary that has discretionary power over a significant number of shareholder accounts.

242 

This in turn could hamper a fund’s management of liquidity risk if the fund does not have

procedures in place to manage large redemptions. For these reasons, we believe a fund should

consider the extent to which its shareholder concentration affects its liquidity risk, particularly

taking into account other factors that could magnify shareholder concentration-related liquidity 

risk (e.g., if a fund has an investment strategy that attracts shareholders who trade based on 

short-term price movements).

We also continue to believe that a fund should consider how its distribution channels 

could affect its cash flows, including the predictability of its cash flows. For example, a fund 

may wish to consider the extent to which its redemption practices could depend on its 

 240 See Item 6(b) of Form N–1A (requiring a fund to briefly identify the procedures for redeeming shares);

infra section III.M.1 (discussing amendments to Item 11 of Form N–1A). 

241 To illustrate, when a fund that pays redemption proceeds within one day receives a large redemption 

request and a fund that pays redemption proceeds within three business days receives a redemption request 

of the same size, the first fund must satisfy the full request within one day, whereas the second fund has

more time to satisfy the redemption request. Even though the shareholder flows of the first and second 

fund are identical, the redemption policies of the first fund magnify its liquidity risks by requiring that the 

fund pay redemptions quickly. See, e.g., Proposing Release, supra footnote 9, at n.270.

242 We note that a relatively concentrated fund shareholder base may make it easier for funds to communicate 

with those shareholders or intermediaries about anticipated future redemptions, and thus plan liquidity 

demands. However, those shareholders are under no legal obligation to forewarn the fund of their 

redemptions and, particularly in times of stress, may not do so. 
82

distribution channels,243 as well as whether its distribution channels (particularly, whether the 

fund’s shares are held through omnibus accounts) could make it difficult for a fund to be fully 

aware of the composition of its underlying investor base,244 including investor characteristics that 

could affect the fund’s short-term and long-term flows.245 A fund’s distribution channels could 

affect its cash flow predictions because certain distribution channels are generally correlated with 

particular purchase and redemption patterns.246 Additionally, we note that investors in mutual

funds distributed through certain channels also may have similar purchase and redemption 

characteristics relating to their financial and tax-related needs.247

Finally, we continue to believe that a fund should consider the degree of certainty

surrounding its short-term and long-term cash flow projections. A fund could consider the 

length of its operating history (including the fund’s experience during points of market

instability, illiquidity, or volatility) and any purchase and redemption patterns. A fund may use

 243 For example, mutual funds that are sold through broker-dealers will generally have to meet redemption 

requests within three business days, because rule 15c6-1 under the Exchange Act effectively establishes a 

T+3 settlement period for purchases and sales of securities (other than certain types of securities exempted 

by the rule) effected by a broker or dealer, unless a different settlement period is expressly agreed to by the 

parties at the time of the transaction.

244 See, e.g., Comment Letter of Coalition of Mutual Fund Investors (Jan. 18, 2016) (“CMFI Comment 

Letter”) (raising concerns regarding omnibus account transparency).

245 These investor characteristics could include whether ownership in the mutual fund is relatively 

concentrated, as well as whether the types of underlying investors in the fund typically share common 

investment goals affecting redemption frequency and timing. 

246 For instance, investors in mutual funds distributed through a retirement plan channel or other planned 

savings channel (such as a qualified tuition plan authorized by section 529 of the Internal Revenue Code) 

may be more likely to be long-term investors who do not trade based on short-term price movements, and 

their purchase and redemption patterns thus may be relatively predictable compared to those of other 

investors.

247 For example, taxable investors who are considering purchasing mutual fund shares around capital gains 

distribution dates have an incentive to delay their purchases until after the distribution, but non-taxable 

shareholders (such as those who invest through IRAs and other tax-deferred accounts) face no such 

incentive for delaying purchases. See Woodrow T. Johnson & James M. Poterba, Taxes and Mutual Fund 

Inflows around Distribution Dates, NBER Working Paper 13884 (Mar. 2006, rev’d Mar. 2008), available 

at http://economics.mit.edu/files/2512; see also supra footnote 239 and accompanying text (discussing 

seasonality in mutual fund flows).
83

ranges in considering cash flow projections and their relationship to liquidity risk. If a fund has

implemented policies to encourage certain shareholders (e.g., large shareholders or institutional

shareholders) to provide advance notification of their intent to redeem a significant number of 

shares of the fund, this could increase the degree of probability surrounding its cash flow

projections.248

c. Holdings of Cash and Cash Equivalents, Borrowing Arrangements, and Other Funding 

Sources

We are adopting the requirement for a fund to consider its holdings of cash and cash 

equivalents, as well as its borrowing arrangements and other funding sources, in assessing,

managing, and periodically reviewing its liquidity risk, as proposed.

249 As discussed in the 

Proposing Release, current U.S. Generally Accepted Accounting Principles (“GAAP”) define 

cash equivalents as short-term, highly liquid investments that are readily convertible to known 

amounts of cash and that are so near their maturity that they present insignificant risk of changes 

in value because of changes in interest rates.250 While we understand based on staff outreach and 

the comments we received on the proposal that many asset managers establish minimum cash 

and cash equivalent targets as part of their liquidity risk management practices,251 commenters 

stated that significant cash and cash equivalent holdings are not necessarily appropriate for all 

 248 We understand, based on staff outreach, that advance notification procedures are a relatively common 

liquidity risk management tool that funds currently employ. See Comment Letter of Invesco on the Notice 

Seeking Comment on Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 

2015), at 11 (“Invesco FSOC Notice Comment Letter”) (noting that Invesco has advance notification 

arrangements regarding anticipated redemptions above certain levels in place with certain distribution 

partners). 

249 See rule 22e-4(b)(1)(i)(C).

250 See Proposing Release, supra footnote 9, at n.311 and accompanying text.

251 See, e.g., Comment Letter of Pacific Investment Management Company LLC (Jan. 13, 2016) (“PIMCO

Comment Letter”).
84

funds and as a stand-alone tool do not necessarily entirely mitigate liquidity risk.252 We agree 

with commenters that the amount of cash and cash equivalent holdings appropriate for liquidity 

risk management depends on a particular fund’s facts and circumstances. Similarly, we agree 

with commenters that significant holdings of cash and cash equivalents could still be insufficient 

to protect a fund with large holdings of illiquid investments (or investments whose liquidity 

decreases significantly during stressed periods) if the fund were faced with heavy redemptions.253 

But we continue to believe that holdings of cash and cash equivalents can be a valuable liquidity 

risk management tool because these holdings tend to remain very liquid under nearly all market 

conditions.254 Thus, a fund could use its cash and cash equivalent holdings in normal and 

stressed conditions to meet some redemption requests without significant dilution of remaining 

investors’ interests. Holdings of cash and cash equivalents also could provide a fund’s portfolio 

manager with flexibility to readjust its portfolio as it deems advantageous (either in terms of 

performance or risk management) under changing market circumstances. We therefore believe it 

is appropriate for a fund to consider its holdings of cash and cash equivalents as part of its 

liquidity risk assessment.

Several commenters discussed the extent to which a fund’s borrowing arrangements and 

 252 See, e.g., ICI Comment Letter I (noting that fund complexes that specialize in U.S. equity funds, especially 

those focusing on large-cap stocks, are likely to be able to meet redemptions with only modest holdings of 

cash or cash equivalents because the U.S. equity market is so liquid); see also infra footnote 662 and 

accompanying text (discussing commenters’ concerns that the proposed three-day liquid asset minimum 

requirement would be construed to require a fund specifically to hold cash and cash equivalents, which 

commenters argued could prevent funds from meeting their principal investment strategies and could give 

investors a false sense of security that cash buffers will eliminate liquidity risk). 

253 We also note that a substantial investment in cash and cash equivalents could decrease a fund’s total return 

and/or cause the fund to diverge from its investment strategy, and thus a fund may wish to calibrate its 

holdings of these instruments to manage its liquidity risk while taking these concerns into consideration. 

254 We note that cash and cash equivalent holdings and borrowing arrangements are just two of several 

liquidity management tools that are at a fund’s disposal. Though we are requiring funds to consider these 

tools, the rule neither creates a substantive obligation on funds to maintain specific levels of cash and cash 

equivalents nor requires funds to procure any specific borrowing arrangements. 
85

other funding sources could shape the fund’s liquidity risk. Some commenters strongly 

supported the use of borrowing arrangements to help mitigate liquidity risk, asserting that funds 

historically have generally succeeded in managing liquidity risk, partly due to lines of credit and 

interfund lending.

255 Commenters also asserted that obtaining access to backup sources of 

liquidity like lines of credit, interfund lending arrangements, and repurchase agreements should 

be considered beneficial as the flexibility to use these liquidity sources has value to a fund’s 

shareholders.256 However, another commenter argued that asset managers should not meet 

redemptions through the use of borrowing facilities other than to meet short-term settlement 

mismatches, as this could potentially disadvantage non-redeeming investors.

257 

We continue to believe that entering into borrowing or other funding arrangements could 

assist a fund in meeting redemption requests in certain cases (for example, by bridging any 

timing mismatches between when a fund is required to pay redeeming shareholders and when 

any asset sales that the fund has executed in order to pay redemptions will settle).258 However, 

we have concerns that, in some situations, borrowing arrangements may not be beneficial to a 

fund’s liquidity risk management to the extent that the fund’s use of borrowings to meet 

redemptions leverages the fund at the expense of non-redeeming investors. In such a case, nonredeeming shareholders would effectively bear the costs of borrowing and the increased risk to 

the fund created by leverage.

259 Thus, we believe that funds should consider the likely overall 

benefits and risks in including such borrowing or other funding arrangements within a liquidity 

 255 See, e.g., Comment Letter of Independent Directors Council (Jan. 13, 2016) (“IDC Comment Letter”).

256 See, e.g., BlackRock Comment Letter; Oppenheimer Comment Letter.

257 See HSBC Comment Letter.

258 See Proposing Release, supra footnote 9, at n.314 and accompanying text.

259 See Heartland Release, supra footnote 80.
86

risk management program.

In evaluating the extent to which a fund’s borrowing arrangements could help the fund 

manage its liquidity risk, a fund may wish to consider any aspects of those arrangements that 

could limit the fund’s ability to borrow. For instance, a fund generally may wish to consider the 

terms of the credit facility (e.g. whether the credit facility is committed or uncommitted), as well 

as the financial health of the institution(s) providing the facility. A fund also generally should

consider whether a credit facility would be shared among multiple funds within a fund family. 

When a credit facility is shared, a fund should assess the extent the facility mitigates its liquidity 

risk given the liquidity risk associated with the other funds sharing the facility.260 Similarly, with 

respect to interfund lending within a family of funds, the terms of an interfund lending 

arrangement and any conditions required under exemptive relief permitting the arrangement261

(including limitations on the circumstances in which interfund lending may be used) will shape 

the role that interfund lending has in a fund’s overall liquidity risk management.262 

 260 See Proposing Release, supra footnote 9, at paragraph accompanying nn.314-317. 

261 See, e.g., Nationwide Mutual Fund, et al., Investment Company Act Release No. 32115 (May 16, 2016) [81

FR 31988 (May 20, 2016)] (notice of application) (“Nationwide Exemptive Relief”); TCW Alternative 

Funds, et al., Investment Company Act Release No. 32113 (May 11, 2016) [81 FR 30585 (May 17, 2016)] 

(notice of application) (“TCW Exemptive Relief”); see also Proposing Release, supra footnote 9, at 

paragraph accompanying nn.318-319. 

262 For example, it is common for such exemptive orders to permit interfund lending in circumstances in which 

there is a timing mismatch between when a fund is required to pay redeeming shareholders and when any 

asset sales that the fund has executed in order to pay redemptions will settle (e.g., a fund may be required to 

pay redeeming shareholders within three business days, but the portfolio transactions the fund has executed 

in order to pay these shareholders may not settle for seven days). A fund can reasonably predict that it will 

repay borrowed money relatively quickly and reliably under these circumstances. Under these conditions,

this type of borrowing would tend to be low risk, and thus entail less liquidity risk than borrowing money 

to pay redemptions without already having secured a price at which the assets used to cover the borrowing 

will be sold.

Funds may only engage in interfund lending when it is in the best interests of both the lending and the 

borrowing fund. The exemptive relief anticipates a fund family’s interfund lending arrangements include 

an assessment of: (i) if the fund participates as a lender, any effect its participation may have on the fund’s 

liquidity risk; and (ii) if the fund participates as a borrower, whether the fund’s portfolio liquidity is 

sufficient to satisfy its obligation to repay the loan along with its other liquidity needs. See Nationwide 
87

3. Periodic Review of a Fund’s Liquidity Risk

Rule 22e-4 as adopted includes the requirement for a fund to periodically review the 

fund’s liquidity risk, taking into account the same liquidity risk factors a fund would have to 

consider in initially assessing and managing its liquidity risk.263 The proposed rule also included 

the requirement for a fund to periodically review its liquidity risk, considering those factors it 

would evaluate in initially assessing its liquidity risk.264 Commenters generally supported the 

proposed liquidity risk review requirement.265 Specifically, some commenters agreed that this 

requirement will help further the Commission’s goals,266 expressed support for the proposed 

liquidity risk review factors,267 and agreed with the Commission’s general approach of permitting 

funds to develop their own policies and procedures for conducting periodic liquidity risk 

reviews.268 Other commenters objected to the requirement for a fund to consider certain 

specified liquidity risk review factors and suggested instead that consideration of the factors be 

made permissive instead of mandatory.269 Still another commenter argued that the proposed 

liquidity risk review approach gives funds too much discretion and recommended that the

Commission adopt a baseline standard for the frequency of funds’ liquidity risk reviews (i.e., 

adopt an annual or quarterly review requirement).270 

 

Exemptive Relief, supra footnote 261; TCW Exemptive Relief, supra footnote 261. For example, the relief 

is not intended to permit a fund to act as lender of last resort to a borrowing fund. 

263 See rule 22e-4(b)(1)(i).

264 See proposed rule 22e-4(b)(2)(iii).

265 See, e.g., CRMC Comment Letter; CFA Comment Letter; Fidelity Comment Letter; ICI Comment Letter I. 

266 See CRMC Comment Letter.

267 See, e.g., CRMC Comment Letter; ICI Comment Letter I. 

268 See, e.g., CFA Comment Letter; Fidelity Comment Letter. 

269 See, e.g., MFS Comment Letter; Voya Comment Letter.

270 See Better Markets Comment Letter.
88

We are adopting a periodic review requirement substantially as proposed. As discussed 

above, we have revised the liquidity risk factors that a fund must consider in assessing, 

managing, and periodically reviewing its liquidity risk. A fund will not have to consider any

factor that is not applicable to a particular fund.271 This requirement is principles-based, and thus 

each fund may develop and adopt procedures to review the fund’s liquidity risk tailored as 

appropriate to reflect the fund’s particular facts and circumstances. 

After evaluating commenters’ concerns about the liquidity risk assessment factors, we 

continue to believe that these factors, modified as discussed above, are central to reviewing a 

fund’s liquidity risk. We also continue to believe that requiring each fund to consider a baseline 

set of factors, as applicable, in reviewing liquidity risk would promote effective liquidity risk 

management across the fund industry. As discussed above,272 we believe that our changes to the 

proposed liquidity risk factors—which highlight particular risks but also condense and simplify 

some proposed factors—strike an appropriate balance between promoting consistency in funds’ 

consideration of a standard set of liquidity risk factors and easing burdens associated with this 

analysis. 

We considered a commenter’s suggestion that the Commission adopt a minimum 

frequency for funds’ liquidity risk review, and we have modified the proposed rule to clarify that 

a fund’s periodic review of its liquidity risk must occur no less frequently than annually.273 As 

discussed below, we are adopting a requirement that a fund periodically review, no less 

frequently than annually its highly liquid investment minimum (as determined considering the 

 271 See supra footnote 192 and accompanying text.

272 See supra footnotes 193-194 and accompanying text.

273 See rule 22e-4(b)(1)(i).
89

same factors that a fund would reference in periodically reviewing its liquidity risk).274 Because 

this review of a fund’s highly liquid investment minimum would, de facto, necessitate a fund’s 

review of its liquidity risk, we believe it is appropriate to align the minimum periods for these 

reviews. Similarly, as discussed further below, we also are adopting a requirement that a fund’s 

board must review, no less frequently than annually, a written report that describes a review of 

the adequacy of the fund’s liquidity risk management program.275 Accordingly, the minimum 

period for the liquidity risk review will be aligned with the period in which this report will be 

presented to the fund’s board, creating further synergies. We note, however, that a fund may 

determine that it is appropriate for its liquidity risk to be reviewed more frequently than annually, 

depending on the extent to which the required review factors could vary based on market- or 

sector-wide developments, as well as changes to the fund’s operations or other fund-specific 

circumstances. 

C. Classifying the Liquidity of a Fund’s Portfolio Investments, and Disclosure and 

Reporting Requirements Regarding Portfolio Investments’ Liquidity 

Classifications

Today we are adopting requirements for each fund, with the exception of In-Kind ETFs,

to classify the liquidity of its portfolio investments. Rule 22e-4 as adopted today requires a fund 

to classify the liquidity of each portfolio investment based on the number of days within which it 

determined that it reasonably expects an investment would be convertible to cash (or, in the case 

of the less-liquid and illiquid categories, sold or disposed of) without the conversion (or, in the 

case of the less-liquid and illiquid categories, sale or disposition) significantly changing the 

market value of the investment. Specifically, rule 22e-4 will require a fund to classify each of its 

 274 See infra section III.D.4. 

275 See infra section III.H.2. 
90

portfolio investments, including its derivatives transactions,276 into one of four liquidity 

categories:

• Highly liquid investments, defined as cash and any investment reasonably expected to be 

convertible to cash in current market conditions in three business days or less without 

the conversion to cash significantly changing the market value of the investment.

• Moderately liquid investments, defined as any investment reasonably expected to be 

convertible to cash in current market conditions in more than three calendar days but in

seven calendar days or less without the conversion to cash significantly changing the 

market value of the investment.

• Less liquid investments, defined as any investment reasonably expected to be sold or 

disposed of in current market conditions in seven calendar days or less without the sale 

or disposition significantly changing the market value of the investment, but where the 

sale or disposition is reasonably expected to settle in more than seven calendar days.

• Illiquid investments, defined as any investment that may not reasonably be expected to be 

sold or disposed of in current market conditions in seven calendar days or less without 

the sale or disposition significantly changing the market value of the investment.

This determination must be based on information obtained after reasonable inquiry; the term 

“convertible to cash” in the category definitions refers to the ability to be sold, with the sale 

settled. The final rule requires a fund to take into account relevant “market, trading, and 

investment-specific considerations” in classifying its portfolio investments’ liquidity, but the rule 

 276 See rule 22e-4(b)(1)(ii). The final rule requires a fund to classify all portfolio investments, including 

investments that are liabilities of the fund. See infra section III.C.3.c.
91

does not detail a list of factors comprising these considerations.277 This Release does include, 

however, guidance on certain considerations that a fund may wish to evaluate in taking into 

account relevant market, trading, and investment-specific considerations when classifying the 

liquidity of its portfolio investments.278 The fund may classify portfolio investments based on 

asset class, so long as the fund or its adviser,

279 after reasonable inquiry, does not have

information about any market, trading, or investment-specific considerations that are reasonably 

expected to significantly affect the liquidity characteristics of an investment that would suggest a 

different classification for that investment.

280 As discussed in more detail below, the fund also 

must consider the investment’s market depth in classifying the investment.

281 The fund also must 

review its portfolio investments’ classifications at least monthly and more frequently if changes 

in relevant market, trading, and investment-specific considerations are reasonably expected to 

materially affect one or more of its investments’ classifications.282 Finally, the fund must take 

into account certain considerations for highly liquid investments that it has segregated to cover 

certain derivatives transactions.283 

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

278 See infra section III.C.4. 

279 The term “adviser” as used in this Release and rule 22e-4 generally refers to any person, including a subadviser, that is an “investment adviser” of an investment company as that term is defined in section 

2(a)(20) of the Investment Company Act. See infra paragraph accompanying footnote 818 (discussing the 

coordination of liquidity risk management efforts undertaken by various service providers, including a 

fund’s sub-adviser(s)).

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

281 More specifically, the fund must determine whether trading varying portions of a position in a particular 

investment, in sizes that the fund would reasonably anticipate trading, is reasonably expected to 

significantly affect the liquidity of that investment, and if so, the fund must take this determination into 

account when classifying the liquidity of that investment. See rule 22e-4(b)(1)(ii)(B).

282 See rule 22e-4(b)(1)(ii); see also rule 22e-4(b)(1)(i) (imposing an ongoing responsibility on the fund to 

assess and manage its liquidity risk).

283 More specifically, with respect to the fund’s derivatives transactions that it has classified as moderately 

liquid investments, less liquid investments, and illiquid investments, it must identify the percentage of the 
92

Rule 22e-4 as proposed would have required each fund to classify the liquidity of its 

portfolio positions (or portions of a position in a particular asset) and review the liquidity 

classification of each position on an ongoing basis.284 In classifying and reviewing the liquidity 

of portfolio assets, proposed rule 22e-4 would have required a fund to consider the number of 

days within which a fund’s position in a portfolio asset (or portions of a position in a particular 

asset) would be convertible to cash at a price that does not materially affect the value of that 

asset immediately prior to sale.285 Based on this determination, made using information obtained 

after reasonable inquiry, the proposed rule would have required a fund to classify each of its 

positions in a portfolio asset (or portions thereof) into one of six liquidity categories: (i) 

convertible to cash within 1 business day; (ii) convertible to cash within 2-3 business days; (iii) 

convertible to cash within 4-7 calendar days; (iv) convertible to cash within 8-15 calendar days; 

(v) convertible to cash within 16-30 calendar days; and (vi) convertible to cash in more than 30 

calendar days.

286 The proposed rule would have required a fund to consider certain specified 

factors, to the extent applicable, in determining the time period in which a portfolio position (or 

portion thereof) would be convertible to cash.287

Although some commenters acknowledged potential benefits to the proposed 

classification requirement, most commenters were generally opposed to the proposed 

six-category liquidity classification framework. As discussed further below, commenters’ 

 fund’s highly liquid investments that it has segregated to cover, or pledged to satisfy margin requirements 

in connection with, derivatives transactions in each of these classification categories. See rule 22e4(b)(1)(ii)(C); see also rule 22e-4(b)(1)(iii)(B) (addressing such percentage of highly liquid investments in 

connection with determining whether a fund primarily holds highly liquid investments).

284 See Proposing Release, supra footnote 9, at section III.B.

285 Proposed rule 22e-4(b)(2)(i).

286 Proposed rule 22e-4(b)(2)(i).

287 Proposed rule 22e-4(b)(2)(ii); see also infra section III.C.4.
93

primary objections were concerns that the proposed classification framework would: (i) not 

reflect current liquidity risk management practices or industry “best practices”; (ii) require funds 

to make overly subjective projections about asset liquidity, particularly to the extent that they 

would have to project a fund’s ability to sell and settle a position well into the future; (iii) place 

undue reliance on third-party data vendors and analysts; (iv) incorporate a materiality standard 

that is unclear and impractical to apply; and (v) inappropriately require funds to take position 

size and settlement timing into account when classifying the liquidity of a portfolio position. 

Commenters suggested many alternatives to the proposed classification requirement—

both changes to the structure of the proposed classification requirement, as well as suggestions 

about more granular aspects of the proposed requirement. Although the details vary, 

commenters raised three primary structural alternatives to the proposed classification 

requirement: (i) a “principles-based” liquidity classification approach, where each fund would 

have to classify the liquidity of its portfolio assets, but the Commission would not require any 

specific classification scheme;

288 (ii) a simplified version of the proposed classification system, 

with fewer classification categories based on shorter time projections than the proposal;289 and

(iii) an approach with new classification categories based on qualitative distinctions in the 

market- and trading-related characteristics of different asset classes under different market 

conditions, which generally would rely on the Commission mapping different asset classes to 

 288 See, e.g., AIMA Comment Letter; Comment Letter of the Loan Syndications and Trading Association (Jan. 

13, 2016) (“LSTA Comment Letter”); Comment Letter of State Street Global Advisors (Jan. 13, 2016) 

(“State Street Comment Letter”); Comment Letter of Wellington Management Company LLP (Jan. 13, 

2016) (“Wellington Comment Letter”).

289 See, e.g., Eaton Vance Comment Letter I; Interactive Data Comment Letter; Comment Letter of Markit

(Jan. 13, 2016) (“Markit Comment Letter”); Comment Letter of Wells Fargo Funds Management, LLC 

(Jan. 13, 2016) (“Wells Fargo Comment Letter”). Commenters generally suggested three, four, or five 

classification categories.
94

each of these new classification categories.

290

Our adopted liquidity classification requirement most closely resembles the second 

alternative described above and is designed to respond to commenters’ concerns while also 

continuing to advance the Commission’s goals. As discussed in the Proposing Release, we 

understand that funds today employ different practices for assessing the liquidity of their 

portfolios.

291 After considering comments, however, we continue to believe that a liquidity 

classification framework based on a days-to-cash determination, with certain modifications from

the proposal, is an effective approach to further our goals of creating a meaningful, uniform 

framework for reporting to the Commission and providing public disclosure about funds’ 

liquidity profiles. To achieve this goal, we believe the rule must provide a consistent 

methodology for assessing portfolio liquidity. This methodology also will form the basis for the 

highly liquid investment minimum and illiquid investment limit, each of which we believe will 

play an important role in fund liquidity risk management, as discussed in detail below. We also 

believe this classification system maintains the benefits of a spectrum-based liquidity analysis 

while responding to concerns about the burden and level of precision implied by the proposed 

approach. 

While we agree that the suggested “principles-based” alternative approach would have 

benefits in terms of flexibility and funds’ ability to leverage their existing procedures for 

assessing portfolio liquidity,292 this approach would not provide a uniform methodology for 

funds’ liquidity assessment procedures. It thus would not meaningfully advance our goal of 

 290 See, e.g., BlackRock Comment Letter; MFS Comment Letter; Nuveen Comment Letter; Comment Letter of 

Systemic Risk Council (Jan. 13, 2016) (“SRC Comment Letter”).

291 See Proposing Release, supra footnote 9, at section III.B.

292 See, e.g., supra footnote 288; see also section IV.C.
95

establishing a foundation for reasonably comparable reporting to the Commission and disclosure 

to the public about funds’ portfolio liquidity.

293 In particular, this approach would not permit 

detailed reporting about funds’ portfolio investments’ liquidity in a structured data format, as 

with reports on Form N-PORT, and thus would not provide an efficient basis for the Commission 

and its staff to monitor funds’ portfolio liquidity and liquidity risk.

We likewise believe the third alternative classification system, based on liquidity 

characteristics of different asset classes—as opposed to a days-to-cash framework—may not 

provide clear distinctions between each liquidity category without the Commission assigning 

specific asset classes to each classification category. Given the size of the fund industry and the 

wide variety and types of asset classes held by funds, we believe that it would be impractical for 

the Commission or its staff to attempt to prescriptively categorize every asset class by liquidity. 

Further, the classification requirement is designed to provide information regarding the liquidity 

of portfolio investments under current market conditions. We are concerned that a classification 

system by which the Commission assigns specific asset classes to specific liquidity categories 

would not be sufficiently flexible to account for the impact changing market conditions may 

have on the liquidity of fund investments.

Relatedly, some commenters suggested an alternative classification system could be

based on notions of liquidity other than “days-to-cash,” including, in whole or in part, on the 

fraction of average daily trading volume that each position size corresponds to, the expected 

behavior of bid-ask spreads in a given asset, or more qualitative liquidity buckets (e.g.

“converted to cash quickly under most circumstances”).294 Other commenters suggested that all 

 293 See infra section III.C.6.

294 See, e.g., AFR Comment Letter; BlackRock Comment Letter; SRC Comment Letter.
96

of the classification categories be defined based on a days-to-cash or days-to-trade

determination,295 while some recommended that only certain of the categories (generally, the 

relatively more liquid categories) be defined based on a days-to-cash or days-to-trade 

determination.296 After considering comments, we have chosen to adopt a classification system 

that most closely resembles the second alternative raised by commenters and includes days-tocash determinations for the more liquid categories. As noted below, some of the more specific 

criteria suggested by commenters in place of days-to-cash may not be appropriate for all asset

classes, while more qualitative criteria make it more difficult to compare classifications across 

funds relative to the days-to-cash approach in the rule.297

1. Primary Elements of Classification Framework

a. Consolidation of Proposed Classification Categories

Similar to the proposed classification requirement, the final classification requirement is 

generally based on a framework that would require a fund to determine the number of days in 

which each portfolio investment is convertible to cash. However, the final classification 

framework reduces the number of classification categories from six (as proposed) to four. In 

addition, a fund may classify portfolio investments based on asset class under the final 

classification requirement, so long as the fund or its adviser does not have information about any 

market, trading, or investment-specific considerations that are reasonably expected to 

significantly affect the liquidity characteristics of an investment and that would require a 

different classification for that investment. When we proposed the rule 22e-4 classification 

 295 AFR Comment Letter; Cohen & Steers Comment Letter; PIMCO Comment Letter; Charles Schwab 

Comment Letter.

296 Oppenheimer Comment Letter; SIFMA Comment Letter I; T. Rowe Comment Letter.

297 See infra section IV.C.1.
97

requirement, we noted that the framework was meant to promote a more nuanced approach than 

a classification requirement under which a fund would simply designate assets as liquid or 

illiquid.298 The proposed approach also was meant to provide the basis for detailed reporting and 

disclosure about the liquidity of funds’ portfolio positions in a structured data format, as the six 

liquidity categories described above would be incorporated into the fund’s portfolio holdings 

reported on proposed Form N-PORT.299 

Multiple commenters expressed concerns about the proposed six-category classification 

framework. Many argued that the proposed classification method would require funds to make 

overly subjective projections about asset liquidity because predicting the time to liquidate a 

position for cash at a given price—particularly well into the future—is limited by required 

assumptions and market data availability, even for sophisticated asset managers.

300 They stated

that making relatively subjective liquidity determinations would render liquidity assessments 

inconsistent across funds, and any appearance of objectivity and comparability among funds’ 

liquidity assessments thus would be false.301 Relatedly, commenters also maintained that the 

proposed liquidity classification categories were overly granular and therefore could present a 

false appearance of precision about portfolio assets’ liquidity.302 For example, commenters 

argued that determining whether an asset can be converted to cash in 15 calendar days versus 16 

 298 See Proposing Release, supra footnote 9, at n.174 and accompanying and following text.

299 See id.

300 See, e.g., Comment Letter of Michael Aguilar, et al. (Jan. 12, 2016) (“Aguilar Comment Letter”); Credit 

Suisse Comment Letter; Comment Letter of J.P. Morgan Asset Management (Jan. 13, 2016) (“J.P. Morgan 

Comment Letter”); Voya Comment Letter.

301 See, e.g., AIMA Comment Letter; CRMC Comment Letter; T. Rowe Comment Letter; Vanguard Comment

Letter.

302 See, e.g., Cohen & Steers Comment Letter; MFS Comment Letter; Nuveen Comment Letter; SIFMA 

Comment Letter I.
98

calendar days (that is, distinguishing between the fourth and fifth proposed classification 

categories) cannot realistically be known or predicted with accuracy.303 Some commenters

advocated reducing the number of classification categories304 and expressed concern that the 

proposal would entail overly subjective classification analysis, which would give funds too much 

discretion to determine which assets are relatively liquid and thus make enforcement difficult 

and hinder meaningful risk mitigation.305 Finally, commenters also predicted that the complexity 

of analyses inherent in the proposed six-category classification framework, and related 

operational burdens, could cause many funds to either shift their classification obligations to 

third-party analysts entirely, or to rely heavily on data provided by third-party vendors to help 

simplify funds’ own classification analyses.306

After considering these comments, we agree that the level of precision implied by the 

proposed six-category classification system could have unintended negative consequences. We 

also agree that the six liquidity classification categories that we proposed could lead to varying 

liquidity assessments and could give rise to an appearance of a level of precision about liquidity 

determinations that may not be achievable for some funds or asset classes. However, we 

continue to believe that a classification approach that involves funds evaluating investments’

liquidity across a liquidity spectrum (as opposed to making a binary determination of whether an 

investment is liquid or illiquid) provides a basis for more meaningful reporting and disclosure 

 303 See, e.g., Credit Suisse Comment Letter.

304 See AFR Comment Letter; see also Better Markets Comment Letter (expressing concern about the 

complexity of the proposed classification requirement).

305 See Better Markets Comment Letter; SRC Comment Letter. 

306 See, e.g., FSR Comment Letter; Comment Letter of Brian Reid, Chief Economist, Investment Company 

Institute (Jan. 13, 2016) (“ICI Comment Letter II”); Charles Schwab Comment Letter; Wells Fargo 

Comment Letter.
99

about funds’ portfolio liquidity. Our opinion corresponds with many commenters’ views that 

there are significant benefits associated with evaluating portfolio assets’ liquidity across a 

spectrum.307 

We believe that condensing the six proposed categories into four categories should 

decrease the variability in funds’ liquidity assessments, since funds will not be required to make 

liquidity distinctions that are as detailed as would have been required under the proposal. The 

adopted categories also should reduce inconsistency in funds’ liquidity assessments because the 

new categories do not include time periods in the least-liquid categories that are as granular or 

projected as far in the future as under the proposal. Furthermore, we believe that the adopted 

categories could decrease variability in some funds’ liquidity assessments because we understand 

that the four adopted categories may correspond more closely than the proposed categories with 

classification methods and categories that some funds currently use in evaluating their portfolio 

liquidity.

308 For example, the time frames referenced in the moderately liquid, less liquid, and 

illiquid classification categories are tied to the seven-calendar-day period in which funds are 

required to pay redeeming shareholders under section 22(e) of the Investment Company Act. 

We understand through staff outreach conducted prior to the proposal that certain funds already 

classify their portfolios across a number of liquidity categories, taking into account days-to-cash 

determinations and focusing on assets that can be used to meet redemptions in the short- and 

medium-term.309 Certain commenters likewise acknowledged that some asset managers may 

currently classify portfolio positions with categories that take days-to-cash or days-to-trade 

 307 See, e.g., CRMC Comment Letter; HSBC Comment Letter; J.P. Morgan Comment Letter; Comment Letter 

of MSCI (Jan. 13, 2016) (“MSCI Comment Letter”).

308 See infra text accompanying footnotes 366, 375, 383. 

309 See Proposing Release, supra footnote 9, at paragraph accompanying n. 183.
100

determinations into account, although not at the level of detail suggested by the proposal or for 

all classes of portfolio assets.310 

We recognize that, although we are providing a uniform classification framework, 

different funds may still classify the liquidity of similar investments differently, based on the 

facts and circumstances informing their analyses. This simply reflects the fact that different 

funds likely have different views on liquidity based on considerations such as their assessment of 

various market, trading, and investment-specific factors, and the size of their position in a 

particular investment. We acknowledge that liquidity can be difficult to estimate and that there 

is no agreed-upon measure of liquidity for all asset classes.311 Nevertheless, we believe the 

reporting of the liquidity classification information to us, and aggregated information to the 

public, will provide important information about fund liquidity.

b. Market, Trading, and Investment-Specific Considerations 

Rule 22e-4 as adopted today requires a fund to take into account “relevant market, 

trading, and investment-specific considerations” in classifying and reviewing its portfolio 

investments’ liquidity.312 Rule 22e-4 as proposed did not include this requirement but instead 

included an enumerated list of nine separate factors that a fund would be specifically required to 

consider, as applicable, in classifying and reviewing the liquidity of its portfolio assets.313 The 

 310 See, e.g., HSBC Comment Letter; MFS Comment Letter; Nuveen Comment Letter; Wellington Comment 

Letter.

311 Indeed our recognition of these facts is part of what has lead us to adopt requirements that the more detailed 

liquidity classification of each individual portfolio investment be reported to us confidentially, with only 

the aggregated fund liquidity profile reported publicly, as discussed in section III.C.6 below.

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

313 Rule 22e-4 as proposed would have required a fund to take into account the following nine factors, to the 

extent applicable, when classifying the liquidity of each portfolio position in a particular asset: (1) 

existence of an active market for the asset, including whether the asset is listed on an exchange, as well as 

the number, diversity, and quality of market participants; (2) frequency of trades or quotes for the asset and 

average daily trading volume of the asset (regardless of whether the asset is a security traded on an 
101

Proposing Release requested comment generally on whether the Commission should codify the 

proposed list of nine liquidity classification factors. While one commenter agreed that the 

factors should be codified,314 most opposed codification and stated that funds should be 

permitted, but not required, to consider the factors.

315 Commenters stated that codifying the 

proposed factors would mandate a classification process that would be overly burdensome on 

funds’ resources316 and could limit portfolio managers’ ability to rely on industry expertise in 

evaluating portfolio assets’ liquidity.317 One commenter specifically expressed concern that “the 

scope and complexity of the required analysis may excessively burden fund boards of directors 

and may actually act to distract fund managers and directors from the assessment of liquidity and 

redemption risk, which we view as the more important analysis.”318 Commenters also argued 

that a codified list of liquidity assessment factors could create a presumption that a fund must 

consider each factor in evaluating each portfolio holding, even if certain factors would not be 

useful or relevant to evaluating certain portfolio assets’ liquidity.319 Some commenters also 

 exchange); (3) volatility of trading prices for the asset; (4) bid-ask spreads for the asset; (5) whether the 

asset has a relatively standardized and simple structure; (6) for fixed income securities, maturity and date of 

issue; (7) restrictions on trading of the asset and limitations on transfer of the asset; (8) the size of the 

fund’s position in the asset relative to the asset’s average daily trading volume and, as applicable, the 

number of units of the asset outstanding; and (9) relationship of the asset to another portfolio asset. See 

proposed rule 22e-4(b)(2)(ii). These proposed factors are discussed in more detail in infra section III.C.4.

314 See, e.g., CRMC Comment Letter.

315 See, e.g., AFR Comment Letter; Invesco Comment Letter; J.P. Morgan Comment Letter; Vanguard 

Comment Letter.

316 See, e.g., CFA Comment Letter; LSTA Comment Letter; Oppenheimer Comment Letter.

317 See, e.g., Federated Comment Letter; Charles Schwab Comment Letter.

318 See AFR Comment Letter.

319 See, e.g., ICI Comment Letter I (“We are concerned that [the proposed factors’] inclusion in the rule could 

create a presumption that funds consider each factor in evaluating each portfolio holding . . .”);

Oppenheimer Comment Letter (“As an example, a fund that invests solely in equity securities of large 

capitalization issuers that are traded on U.S. exchanges might reasonably determine that the frequency of 

trades in those equity securities and their average daily trading volumes are sufficient factors to determine 

their liquidity, and that consideration of factors such as bid-ask spread and volatility of trading prices are 
102

stated that a codified list of factors could lead funds to place undue reliance on third-party data 

vendors,320 and such reliance could result in these vendors being viewed as “rating agencies” for 

liquidity, which could lead to potential systemic risk issues.

321 In addition, they expressed more 

granular concerns about certain of the proposed factors, which are discussed in detail in section 

III.C.4 below. 

After considering commenters’ suggestions and concerns, we are not including the 

classification factors in the rule as proposed because we are concerned that including this list in 

rule 22e-4 could lead funds to focus too heavily on evaluating certain factors that may not be 

particularly relevant to the liquidity of a specific fund’s portfolio investments, the evaluation of 

which may not help produce meaningful outcomes in terms of effective classification. This 

could operate to the detriment of efficient and appropriate liquidity assessments that focus on the 

liquidity characteristics most directly affecting a particular asset class or investment. 

We are instead adopting a principles-based requirement that a fund take into account 

relevant market, trading, and investment-specific considerations in classifying its portfolio 

investments. We understand based on staff outreach that it is common for some funds, in 

assessing the liquidity of their portfolio investments, to look only at basic structural 

characteristics of an investment (such as asset class or restrictions on transfer) and not to 

supplement this analysis with market information or other potentially relevant factors.322 This 

 

not useful or informative in a liquidity assessment. However, because these securities have observable bidask spreads and volatility, the fund would nonetheless be required to obtain and consider such data.”).

320 See, e.g., Dechert Comment Letter; Dodge & Cox Comment Letter; Comment Letter of the Mutual Fund 

Directors Fund (“MFDF Comment Letter”); T. Rowe Comment Letter.

321 See, e.g., Federated Comment Letter; ICI Comment Letter II; MFDF Comment Letter; SIFMA Comment 

Letter I.

322 See, e.g., infra section III.E.
103

could lead to circumstances in which a fund’s liquidity classifications do not reflect a fund’s 

actual ability to sell its portfolio investments without significant dilution to meet redemptions 

within a given time period, or do not otherwise result in an accurate picture of a fund’s liquidity 

profile. Thus, we believe that the classification requirement must require funds to evaluate

relevant considerations in making liquidity determinations. We believe the requirement to take 

into account relevant market, trading, and investment-specific considerations achieves this goal 

and is broad and flexible enough to be relevant for all investment strategies and fund risk 

profiles. In addition, we continue to believe that the proposed classification factors could help 

funds in evaluating relevant market, trading, and investment-specific considerations, and thus we 

have included guidance on many of these areas in section III.C.4 of this Release that may be 

relevant to a fund’s assessment of portfolio investments’ liquidity characteristics. 

We understand that some third-party service providers currently provide data and 

analyses assessing the relative liquidity of a fund’s portfolio investments, and that many of these 

service providers assess certain market, trading, and investment-specific considerations in doing 

so. We believe that a fund could appropriately use this type of data to inform or supplement its 

own consideration of the liquidity of an asset class or investment. However, a fund would not be 

required to do so.323 Also, we generally believe that a fund should consider having the person(s) 

at the fund or investment adviser designated to administer the fund’s liquidity risk management

program review the quality of any data received from third parties, as well as the particular 

methodologies used and metrics analyzed by third parties, to determine whether this data would

effectively inform or supplement the fund’s consideration of its portfolio holdings’ liquidity 

 323 See Nuveen Comment Letter (requesting that the Commission confirm that data from third-party vendors 

may be used in a fund’s assessment of liquidity, but that funds are not required to use data provided by 

third-party vendors in classifying the liquidity of their portfolio assets).
104

characteristics. This review could include an assessment of whether modifications to an 

“off-the-shelf” product are necessary to accurately reflect the liquidity characteristics of the 

fund’s portfolio holdings. As discussed above, certain commenters expressed concern that the 

proposed six-category classification framework, including the proposed codification of certain 

factors that a fund would be required to consider (as applicable) in classifying its portfolio 

holdings, would place undue reliance on data vendors and analysts, and that such reliance could 

produce potential systemic risk issues.324 We believe that our decisions to simplify the proposed 

classification framework and not to include the proposed classification factors as part of rule 

22e-4, together with the guidance on the appropriate use of data vendors discussed in this 

paragraph, should largely mitigate these concerns.

c. Value Impact Standard

As discussed further below, in a modification to the proposed standard, each of the 

liquidity categories included in the classification requirement we are adopting requires a fund to 

determine the time period in which an investment would be reasonably expected to be converted 

to cash (or in some cases, sold or disposed of) in current market conditions without the 

conversion to cash (or in some cases, sale or disposition) significantly changing the market value

of the investment.

325 This modification highlights that the standard does not require a fund to 

actually re-value or re-price the investment for classification purposes, nor does the standard

require the fund to incorporate general market movements in liquidity determinations or estimate 

market impact to a precise degree. 

Many commenters opposed the value impact standard incorporated in the proposed 

 324 See supra footnotes 320-321 and accompanying text.

325 See rule 22e-4(a)(6); 22e-4(a)(8); 22e-4(a)(10); and 22e-4(a)(12). We note the term “market value” as used 

in the value impact standard includes the value of investments that are fair valued.
105

liquidity classification requirement—that the asset was convertible to cash “at a price that does 

not materially affect the value of that asset immediately prior to sale.”326 Many suggested that 

the value impact component of the proposed standard was inappropriate for liquidity analyses327

and should be eliminated from the classification requirement.328 Commenters particularly were 

concerned that a “materiality” standard could be difficult and impractical to apply because they 

argued any sale of an asset could impact its market value to some degree.

329 They stated that it is 

difficult to separate and quantify the market impact of a fund’s trades in a particular asset from 

other reasons that an asset’s price could move (such as market events), particularly in dynamic 

markets, and that projections of future market impact are difficult to make.

330 Furthermore, they 

stated that without further guidance from the Commission funds may not know what “material” 

should mean in the context of the proposed classification requirement.331 Some commenters 

specifically noted that the proposed value impact standard differed from the value impact 

standard incorporated in the Commission’s guidelines limiting funds’ illiquid asset holdings, 

which is based on whether a fund could sell an asset at approximately the value at which the fund 

 326 See, e.g., BlackRock Comment Letter; MFS Comment Letter; Comment Letter of Milliman Financial Risk 

Management LLC (Jan. 7, 2016) (“Milliman Comment Letter”); Vanguard Comment Letter.

327 See, e.g., Eaton Vance Comment Letter I; Fidelity Comment Letter; PIMCO Comment Letter; Vanguard 

Comment Letter.

328 See, e.g., CRMC Comment Letter; J.P. Morgan Comment Letter (recognizing, however, the concern 

underlying the proposed standard—“namely that if funds sell assets at ‘fire sale’ prices there can be 

negative price pressure on those assets as well as correlated assets, which could transmit stress to other 

funds or portions of the market”); PIMCO Comment Letter; Vanguard Comment Letter.

329 See, e.g., CRMC Comment Letter; IDC Comment Letter; PIMCO Comment Letter; T. Rowe Comment 

Letter.

330 See, e.g., BlackRock Comment Letter; CRMC Comment Letter; MFS Comment Letter; Voya Comment 

Letter.

331 See, e.g., Aguilar Comment Letter; Markit Comment Letter; Milliman Comment Letter; SIFMA Comment 

Letter I.
106

has valued it, and that conflicting standards could raise confusion and operational difficulties.

332 

Finally, several commenters argued that the inclusion of the value impact standard in the 

proposed classification categories could give fund shareholders the false impression that the fund 

guarantees a protected NAV.333 

As we noted when discussing the definition of “liquidity risk,” we continue to believe 

that incorporating a value impact analysis into liquidity considerations is appropriate because it 

indicates that liquidity risk for a fund captures not just the risk of being unable to meet 

redemption requests, but also the risk that a fund could only meet redemption requests in a 

manner that significantly dilutes the funds’ non-redeeming shareholders. Separately, as we noted 

above, the inclusion of some consideration of value impact is common in regulators’ 

characterization of portfolio liquidity and fund liquidity risk.

334 Because we believe that the 

liquidity of portfolio investments is a significant component of a fund’s overall liquidity risk,335

we continue to believe that the inclusion of a value impact standard in the rule 22e-4 

classification categories is appropriate. We also understand that many current trade order 

management systems estimate value impacts that may result from trades, which may assist funds 

in making these estimates.

Nevertheless, we have determined that certain modifications to the proposed value impact 

standard are warranted to address certain concerns raised by commenters. First, we recognize 

 332 See, e.g., Interactive Data Comment Letter; NYC Bar Comment Letter; see also infra text accompanying 

footnotes 341-342 (discussing the harmonization of the value impact standard incorporated in the definition 

of “illiquid asset” that we are adopting with the standard incorporated in the rule 22e-4 classification 

requirement generally).

333 See, e.g., BlackRock Comment Letter; ICI Comment Letter III; PIMCO Comment Letter; SIFMA 

Comment Letter I.

334 See supra footnote 173.

335 See rule 22e-4(b)(1)(i)(A) (requiring a fund to consider its portfolio investments’ liquidity in assessing its 

liquidity risk).
107

that in complying with the value impact standard, funds will be making assessments about the 

trading behavior of certain asset classes (and individual investments, for investments that need to 

be treated on an exception basis in the final classification framework we are adopting today). 

Accordingly, funds should be able to rely on their reasonable expectations at the time they make

these assessments, and we do not expect them to estimate to a precise degree the market impact 

of trading that investment or the value of that investment as the trades occur.

336 As a result, we 

have modified the final rule to provide that an investment’s classification be based a fund’s 

reasonable expectations in current market conditions (emphasis added).

337 We also expect that 

the consolidation of the liquidity classification categories into ones that only require days-to-cash 

projections out to seven days should also mitigate commenters’ concerns about the uncertainty 

involved in these value impact projections because the consolidated categories do not involve 

projections as far into the future as the proposed categories.

We also changed the standard to capture only value impacts that significantly change the 

investment’s market value, rather than the proposed standard that focused on materially affecting 

the value of the asset immediately prior to sale (emphasis added). We believe that funds will be 

less likely to interpret significant changes in market value as capturing very small movements in 

price, and thus this change should address commenters’ concern that the proposal would create a 

value impact standard that is impractical to apply because any sale of an investment could affect

 336 In the proposal, we noted that the proposed term “immediately prior to sale” was not meant to require a 

fund to anticipate and determine in advance the precise current value of an asset at the moment before the 

fund would sell the asset. We believe that the alterations to the final value impact standard reinforce this 

intent. See Proposing Release, supra footnote 9, at text following n.170

337 A fund’s reasonable expectations pertain to each aspect of the definition of highly liquid investments, 

moderately liquid investments, less liquid investments, and illiquid investments – i.e., a fund may rely on 

its reasonable expectations as to the fund’s ability to convert the investment to cash (or, in some cases, sell 

or dispose of the investment) in current market conditions in a certain number of days and a fund may rely 

on its reasonable expectations as to whether the conversion to cash (or, in some cases, sale or disposition) 

of the investment can be done without significantly changing the market value of the investment.
108

its market value to some degree. We also believe that a fund’s classification policies and 

procedures should address what it would consider to be a significant change in market value. 

Common alternatives that commenters suggested in place of the proposed value impact standard

included an “assuming no fire sale discounting” (or similar) standard338 or various quantitative 

materiality standards.339 We believe a standard based on fire sale discounting would be too high

of a value impact threshold, whereas suggested quantitative standards would be too precise and 

require burdensome calculations. However, we believe that the final value impact standard of 

“without the conversion to cash (or in some cases, sale or disposition) significantly changing the 

market value” appropriately balances our desire to capture the risk of dilution in cases of 

inadequate liquidity, while not also requiring funds to account for every possible value

movement. 

Finally, we note that the final value impact standard does not require the fund to 

incorporate general market movements in liquidity determinations. We recognize that there can

be many reasons for the market value of a particular investment to fluctuate, separate from the 

fund’s transactions in those investments. We do not intend for the value impact standard to 

capture movements in an investment’s value due to market events. For this reason, we are not 

adopting a value impact standard based on the fund’s most recent valuation of that investment as 

suggested by some commenters.340 This type of standard may have required a fund to compare 

the investment’s traded price with the fund’s prior day valuation of the investment – such a 

 338 See, e.g., SIFMA Comment Letter I; T. Rowe Comment Letter; see also AFR Comment Letter (suggesting 

standard should be that an asset could be sold at a price that does not create harm to fund shareholders due 

to the fund being forced to accept disadvantageous terms of sale in order to find a buyer).

339 See, e.g., Interactive Data Comment Letter (asset could be sold at a price that has a less than 5% impact on 

the value of that asset; asset could be sold at a price that does not create a 1 penny or more impact on the 

fund’s NAV; fund could use volatility measures to determine security-specific materiality thresholds). 

340 IDC Comment Letter; NYC Bar Comment Letter.
109

comparison likely would reflect the effects of general market movements. The value impact 

standard we are adopting today only requires a fund to consider the market value impact of a 

hypothetical sale of an investment.

We recognize that the value impact standard incorporated in the “illiquid investment” 

definition is slightly different from the standard used in the definition of “illiquid asset” under 

the Commission’s current guidelines, as the latter is based on whether a fund could sell an asset 

at “approximately the value at which the fund has valued the investment.”341 We believe the 

revised value impact standard in the illiquid investment definition is preferable both because it 

prevents confusion by harmonizing the value impact standards within the classification 

framework and because, as just discussed, it removes any confusion that the value impact 

standard incorporates general market movements that would occur between when a fund strikes 

its NAV and when it trades the investment.

342

With respect to commenters’ concerns that the inclusion of a value impact standard in the

rule 22e-4 classification categories could give fund shareholders the false impression that the 

fund guarantees a protected NAV, we do not believe that the final rule’s classification categories

imply a protected NAV. As noted in our discussion of the rule 22e-4 definition of “liquidity 

risk,” we believe that funds’ narrative risk disclosure in their registration statements and other 

shareholder communications generally should make clear those risks that could adversely affect 

the fund’s NAV, yield, and total return, including liquidity-related risks. All open-end funds are 

required to disclose that loss of money is a risk of investing in the fund.343 

 341 See supra section II.B.2

342 See also infra section III.C.2.d.

343 See Item 4(b)(1)(i) of Form N-1A.
110

d. Consideration of Current Market Conditions

The definition of each liquidity category in the classification requirement we are adopting 

today specifically requires a fund to consider the time period in which an investment can be 

converted to cash (or, in some cases, sold or disposed of) in current market conditions.

344 The 

“current market conditions” specification is a change from the proposed classification 

requirement, which did not explicitly require that a fund consider current market conditions in 

making liquidity classification determinations.345 The proposal, however, did require a fund to 

“engage in an ongoing review” of the liquidity of each of its portfolio positions.346 The 

Commission suggested in the Proposing Release that a fund’s policies and procedures for 

reviewing the liquidity of its portfolio positions generally should include procedures for 

assessing market-wide developments, as well as security- and asset-class-specific developments 

that could demonstrate a need to change the liquidity classification of a portfolio position.347 The 

proposal’s ongoing review standard (as opposed to the at-least-monthly review standard we are 

adopting today348) thus would have implicitly required that a fund’s liquidity determinations 

reflect current market conditions.

Multiple commenters requested guidance and provided suggestions regarding the market 

conditions a fund should consider in classifying its portfolio assets’ liquidity. Some commenters 

 344 See rule 22e-4(a)(6); 22e-4(a)(8); 22e-4(a)(10); and 22e-4(a)(12). See also infra section III.C.5. (discussing 

the requirement to review liquidity classifications at least monthly and more frequently if changes in 

relevant market, trading, and investment-specific considerations are reasonably expected to materially 

affect one or more of a fund’s classifications of investments) and section III.E. (discussing the prohibition 

on acquiring illiquid investments if, immediately after acquisition, the fund would have invested more than 

15% of its net assets in illiquid investments that are assets).

345 See proposed rule 22e-4(b)(2)(i).

346 Id.

347 See Proposing Release, supra footnote 9, at text following n.253.

348 See section III.C.5.
111

requested clarity on whether a fund would be required to classify the liquidity of its portfolio 

assets based on an assessment of normal market conditions or stressed market conditions.349 One 

commenter suggested that the Commission provide additional guidance on how to assess the 

value impact that a fund’s sale of portfolio assets could have under future stressed market 

conditions.350 Additionally, one commenter suggested that any final liquidity classification 

framework should incorporate an assessment of reasonably foreseeable stressed conditions 

instead of current market conditions.351 

In addition to the commenters who requested clarification or made suggestions about the 

market conditions referenced in the proposed liquidity classification framework, multiple 

commenters suggested alternative classification schemes that would more explicitly define 

liquidity categories based on distinctions in how a particular asset would trade under normal 

versus stressed market conditions.352 One commenter suggested that this alternative method of 

defining liquidity classification categories would reflect directly the extent to which assets’ 

liquidity can dynamically change as market conditions evolve.353 

After considering commenters’ suggestions and concerns, we are adopting liquidity 

classification categories that reflect current market conditions. We appreciate commenters’ 

concerns that liquidity classifications based on current market conditions capture only a 

moment-in-time picture of a fund’s portfolio liquidity, which may not accurately reflect liquidity 

 349 See, e.g., AFR Comment Letter; HSBC Comment Letter.

350 See ICI Comment Letter II.

351 See AFR Comment Letter.

352 See, e.g., BlackRock Comment Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter III; T. Rowe

Comment Letter.

353 See BlackRock Comment Letter. This commenter also noted that “the time needed to liquidate a position 

at a given price in a normal market environment will not be reflective of the market impact incurred when 

liquidating positions during stressed markets.”
112

in changing market conditions. We also appreciate commenters’ concerns that investments that 

are relatively liquid under normal conditions may exhibit significantly reduced liquidity during 

times of stress.354 However, we are concerned that requiring a fund to predict how an investment

may trade in stressed market conditions would introduce an additional layer of subjectivity into 

the classification process. Specifically, we are concerned that funds would likely assume

varying levels of stress when classifying the liquidity of their portfolio investments. We believe 

that liquidity categories requiring consideration of stressed conditions thus could impede our 

goals of promoting consistency in funds’ processes for assessing portfolio investments’ liquidity 

and enhancing the data quality of funds’ liquidity-related reporting and disclosure. Conversely, 

we believe the requirement to assess current market conditions would increase consistency 

among funds’ liquidity determinations by limiting the number of variables informing funds’ 

classification determinations. Although we understand that the adopted classification scheme 

may not produce absolute consistency in how funds classify the liquidity of their portfolio 

investments as funds’ assumptions and individual facts and circumstances may differ,

355

classifying based on current market conditions will result in all funds’ classifications at a given 

time reflecting the same market conditions. 

We believe that it would be informative to Commission staff to understand how the same 

set of market conditions could disparately affect different funds’ assessments of their liquidity 

and that of different asset classes. Also, we note that, to the extent that the markets in which 

funds’ portfolio investments trade are currently stressed, consideration of current market 

 354 See generally MFS Comment Letter; NYC Bar Comment Letter.

355 As discussed above, we recognize that funds are likely to make different assumptions in classifying the 

liquidity of their portfolio investments depending on the facts and circumstances relating to funds and their 

trading practices. See supra paragraph accompanying footnote 311.
113

conditions would de facto reflect consideration of stressed market conditions. Therefore, the 

requirement to consider current market conditions, along with the requirement for funds to 

review the liquidity of their portfolio investments at least monthly356 and the Form N-PORT 

reporting requirements concerning funds’ liquidity classifications,

357 will provide data that will 

help the staff evaluate the role of changing market conditions on funds’ liquidity by comparing 

liquidity data across different sets of current market conditions over time. We believe this 

liquidity data would be more useful than data based on projected stressed market conditions, 

because it would reflect funds’ assessments in light of actual, not anticipated, market stresses.

Finally, we note that while we are not incorporating a requirement to evaluate potential 

future stressed market conditions in the portfolio investment liquidity classification requirement, 

we continue to believe that it is appropriate to require funds to consider reasonably foreseeable 

stressed conditions as part of the liquidity risk assessment and management requirements.

358 We 

believe that funds’ liquidity risk assessment should inform the extent to which funds are prepared 

to manage their liquidity under both normal and reasonably foreseeable stressed conditions—

particularly because, for many asset classes, liquidity is adversely affected by market stress and 

funds need to have a liquidity risk management program that is resilient under all market 

conditions. Thus, as discussed throughout this Release, a fund must establish liquidity risk 

management policies and procedures appropriate in light of both normal and reasonably 

foreseeable stressed market conditions. 

 356 See infra section III.C.5.

357 See infra section III.C.6.b.

358 See supra section III.B. In discussing funds’ liquidity risk assessment obligations under rule 22e-4, we 

note above that if a fund conducts stress testing to determine whether it has sufficient liquid investments to 

cover different levels of redemptions, a fund should incorporate the results of this stress testing into its 

liquidity risk assessment. See supra footnote 196. 
114

2. Discussion of Specific Classification Categories 

a. Highly Liquid Investments

The classification requirement we are adopting today requires a fund to identify its 

“highly liquid investments,” that is, cash held by a fund and investments that the fund reasonably 

expects to be convertible to cash in current market conditions in three business days or less 

without the conversion to cash significantly changing the market value of the investment. This 

category condenses the first two liquidity classification categories in the proposed classification 

requirement (assets convertible to cash within one business day, as well as two-to-three business 

days) to simplify the proposed classification framework. Multiple commenters who suggested 

simplified alternatives to the proposed approach suggested including a classification category 

based on portfolio assets’ convertibility to cash within three days.359 One such commenter 

suggested that “highly liquid assets” should include cash and any asset that can be converted to 

cash in the ordinary course of business within three business days.360 Additionally, another 

commenter agreed that, given current redemption practices, funds should assess how much 

liquidity they may need over a three-day period.361

We continue to believe, as discussed in the Proposing Release, that it is important for 

funds to determine what percentage of their portfolio is convertible to cash—that is, available to 

meet redemptions—within the relatively short term. We understand that most funds typically 

pay redemption proceeds within a fairly short period (typically, one to three days) after receiving 

 359 See, e.g., Federated Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter I; Vanguard 

Comment Letter. 

360 See Vanguard Comment Letter.

361 See MFDF Comment Letter (stating in the context of the proposed three-day liquid asset minimum, that 

“[g]iven current redemption practices in the industry, we agree with the Commission that funds should 

assess how much liquidity they may need, both in normal and stressed market conditions, over a three-day 

period to effectively meet anticipated redemption requests.”). 
115

a shareholder’s redemption request, even though a fund may disclose that it reserves the right to

delay payment for up to seven calendar days, as permitted by section 22(e) of the Act.

362 

Likewise, funds may find it useful to identify portfolio investments that may be converted to 

cash quickly in order to meet unexpected or unusually high redemption requests, or to rebalance 

or otherwise adjust a portfolio’s composition in all market conditions. 

We also understand that funds often consider which portfolio investments can be sold and 

settled on a T+1 to T+3 basis when determining their very liquid investments.363 While such an 

analysis may be useful, our decision to define highly liquid investments to include any 

investment that the fund reasonably expects to be convertible into cash in current market 

conditions in three business days or less is founded in our belief that funds should understand 

what portion of their investments are convertible to cash in a short period of time taking into 

account current market conditions, not solely on which asset transactions can be settled in three 

days or less from the trade date. An investment that takes two days to sell but one day to settle, 

for example, would be convertible to cash in a short period of time. Conversely, an asset that 

may settle two days after trade date, but which is reasonably expected to take at least three days 

to trade, would not be available in a short period of time. Accordingly, we believe we have 

appropriately defined “highly liquid investments” under rule 22e-4 notwithstanding initiatives to 

shorten the standard settlement cycle for most broker-dealer transactions from T+3 to T+2.364 

In addition, we emphasize that the highly liquid investment category (and the related 

highly liquid investment minimum) should not be interpreted as the Commission suggesting that 

 362 See supra footnote 9 and accompanying text.

363 See supra footnote 309. 

364 See supra footnote 9.
116

a fund should, as a matter of routine practice, meet redemptions first by selling its highly liquid 

investments. Rather, we believe part of a thorough understanding of a fund’s liquidity profile 

includes an understanding of the nature and level of the fund’s highly liquid holdings.365 As 

noted above, we understand that funds currently place significance on understanding the portion 

of their portfolio representing very liquid investments, as it is not unusual for funds to determine 

the percentage of their portfolio that can be liquidated in the short-to-medium term.366 We 

anticipate that a fund could determine that a broad variety of investments within different asset 

classes could be classified as highly liquid investments, depending on facts and circumstances.367 

We note that, as with the proposal, the highly liquid investment category measures the 

time period in which an investment could be converted to cash in business days, as opposed to 

the other liquidity categories, which use calendar days. Some commenters suggested that, 

instead of the references to both business days and calendar days, the categories that the 

Commission adopts should only reference business days.368 One commenter stated that basing 

all classification categories on business days instead of calendar days would be “preferable from 

a consistency standpoint, and reasonable given the lack of expectations around receiving cash

flows on non-business days.”369 Other commenters suggested alternative liquidity classification 

categories that, like the proposed categories, would reference both business days and calendar 

 365 See infra footnote 374 and accompanying text (discussing the use of moderately liquid assets to meet 

redemption requests).

366 See supra footnote 363 and accompanying text. 

367 See infra section III.D.

368 See, e.g., Interactive Data Comment Letter; Nuveen Comment Letter.

369 See Interactive Data Comment Letter; see also ICI Comment Letter I; T. Rowe Comment Letter (noting 

that the proposed classification categories could require a fund to make difficult distinctions in determining 

which assets can be converted to cash in three business days versus four calendar days). The note to rule 

22e-4(b)(1)(ii) addresses situations where the period to convert an investment to cash depends on the 

calendar or business day convention. See infra footnotes 376 and accompanying text. 
117

days.370 

After considering these comments, we are continuing to reference business days in the 

highly liquid investment definition we are adopting, while referencing calendar days in the other 

liquidity classification categories. We appreciate commenters’ concerns that classification 

categories that reference both business days and calendar days could add some complexity in the 

assumptions and models that funds may use in classifying the liquidity of their portfolio 

investments. However, as discussed below, we believe it is important to tie the time frames 

referenced in the moderately liquid, less liquid, and illiquid classification categories to the 

seven-calendar-day period in which funds are required to pay redeeming shareholders under 

section 22(e) of the Investment Company Act.371 Although we could have referenced calendar 

days instead of business days in the highly liquid investment definition to help standardize the 

time periods referenced in all of the classification categories, we continue to reference business 

days in this classification category for several reasons. First, for short time periods, a calendar 

day standard could be unworkable and create absurd results if the time period were to encompass 

weekends or holidays, during which trading cannot be expected to occur. Second, many of the 

alternate classification categories that commenters suggested incorporated categories that 

referenced a three-business-day period,372 and we understand from these comments and staff 

outreach that this is a workable (and, for some fund complexes, currently-used) period for a fund 

to consider in assessing the liquidity of its portfolio investments.

373

 370 See, e.g., Markit Comment Letter; PIMCO Comment Letter.

371 See infra sections III.C.2.b-d.

372 See, e.g., Fidelity Comment Letter; Invesco Comment Letter; T. Rowe Comment Letter; Vanguard 

Comment Letter.

373 We also note that rule 15c6-1 under the Exchange Act, which was adopted in 1993 and became effective in 

1995, established three business days as the standard settlement period for securities trades effected by a 
118

b. Moderately Liquid Investments

A fund also will be required to identify its “moderately liquid investments,” that is, those 

investments the fund reasonably expects to be convertible into cash in current market conditions 

in more than three calendar days, but in seven calendar days or less, without the conversion to 

cash significantly changing the market value of the investment. These investments are those that 

are not immediately or very quickly convertible to cash, but that nevertheless may be converted 

to cash in a time frame that would permit funds to pay redeeming shareholders within the 

seven-day period established by section 22(e) of the Investment Company Act. We expect that 

this classification category will be an important component of the Form N-PORT reporting 

obligations because it will provide the Commission with information regarding the portion of a 

fund’s portfolio that is not on the most liquid end of the spectrum, but still is sufficiently liquid 

to meet redemption requests within the statutory seven-day period without causing significant

dilution. We also anticipate that the public will have an interest in gaining transparency into this 

information on an aggregate basis.

374 Several commenters who suggested simplified alternatives 

to the proposed classification approach recommended including a classification category based 

on portfolio investments’ convertibility to cash within seven days.375

We understand that circumstances could arise in which the sale and settlement period for 

a particular portfolio position could be viewed as within three business days or four-to-seven 

calendar days. For example, if a sale were to occur on a Thursday and be settled on a Monday, 

 broker-dealer. Thus, we understand that many funds pay redemption proceeds within three business days 

after receiving a redemption request, because a broker or dealer will be involved in the redemption process. 

See supra footnote 32 and accompanying text. See also supra footnote 366.

374 See infra section III.C.6.c. 

375 See, e.g., Federated Comment Letter; Fidelity Comment Letter; PIMCO Comment Letter; Vanguard 

Comment Letter.
119

the sale and settlement period could be viewed either as within three business days or four 

calendar days. This situation could cause ambiguity for reporting purposes. Thus, rule 22e-4, 

similar to the proposed rule, includes a note stating that a fund should classify the portfolio 

position based on the shorter period (i.e., as a highly liquid investment).376 

c. Less Liquid Investments

Additionally, a fund will be required to identify its “less liquid investments,” that is, 

those investments that the fund reasonably expects to be able to sell or dispose of in current 

market conditions in seven calendar days or less a without the sale or disposition significantly 

changing the market value of the investment, but where the sale or disposition is reasonably 

expected to settle in more than seven calendar days. Thus, the less liquid investments category 

focuses on investments whose sale cannot be settled quickly. For example, transactions in 

certain types of securities—such as certain foreign securities377 and U.S. bank loan 

participations378—have historically entailed settlement periods that are longer than standard 

 376 See note to rule 22e-4(b)(1)(ii); see also note to proposed rule 22e-4(b)(2)(i); see also supra footnote 369

(discussing comments that noted situations where the period to convert an asset to cash depends on the 

calendar or business day convention).

377 See, e.g., Comment Letter of the Global Foreign Exchange Division to the European Commission and the 

European Securities and Markets Authority re: Consistent Regulatory Treatment for Incidental Foreign 

Exchange (FX) Transactions Related to Foreign Securities Settlement—“FX Security Conversions” (Mar. 

25, 2014), available at www.gfma.org/Initiatives/Foreign-Exchange-(FX)/GFMA-FX-Division-SubmitsComments-to-the-HKMA-on-the--Treatment-of-Securities-Conversion-Transactions-under-the-Marginand-Other-Risk-Mitigation-Standards (“Typically, the settlement cycle for most non-EUR denominated 

securities is trade date plus three days (‘T+3’). Accordingly, the bank custodian or broker-dealer would 

enter into a FX transaction on a T+3 basis as well. In some securities markets, for example in South Africa, 

the settlement cycle can take up to seven days (T+7).”).

378 See, e.g., BlackRock, Who Owns the Assets? A Closer Look at Bank Loans, High Yield Bonds and 

Emerging Market Debt, Viewpoint (Sept. 2014) (“Who Owns the Assets?”), available at

https://www.blackrock.com/corporate/en-fi/literature/whitepaper/viewpoint-closer-look-selected-assetclasses-sept2014.pdf; Michael Mackenzie & Tracy Alloway, Lengthy US loan settlements prompt liquidity 

fears, Fin. Times (May 1, 2014) available at http://www.ft.com/intl/cms/s/0/32181cb6-d096-11e3-9a81-

00144feabdc0.html; Comment Letter of OppenheimerFunds on the Notice Seeking Comment on Asset 

Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015) (stating that “loans 

still take longer to settle than other securities. Median settlement times for buy-side loan sales are 12 days” 

and noting that an “important tool in managing settlement times is the establishment of a credit line 
120

settlement periods in the broader securities markets. If a fund were to determine that securities 

within these asset classes, or other asset classes with longer-than-standard settlement periods, 

were able to be sold within seven calendar days, but could not be settled within this period, the 

fund should classify these securities as less liquid investments. As an example, certain foreign 

securities may be able to be sold in seven calendar days or less, but may be subject to capital 

controls that would limit the extent to which the foreign currency could be repatriated or 

converted to dollars within this time frame. Thus, these securities would be considered to be less 

liquid investments because they would be reasonably expected to settle in more than seven 

calendar days. We note that trades in certain investments, however, may take an extended period 

of time to settle.379 In the event of an extended settlement period, at some point, a fund may need 

to consider re-classifying such an investment as illiquid.380 We also note that if a fund holds a 

forward contract on a security, such as a forward in a transaction in the “To-Be-Announced”

(“TBA”) market,381 the convert to cash determination for that instrument may be based on the 

forward contract and not on the underlying securities to be received.382 

The “less liquid investments” category, like the “moderately liquid investments” category

 

dedicated to bank loan funds.”). See also LSTA Comment Letter.

379 See infra footnote 416 and accompanying text.

380 See rule 22e-4(b)(1)(ii) (requiring review of portfolio classifications at least monthly, and more frequently, 

if changes in relevant market, trading, and investment-specific considerations are reasonably expected to 

materially affect one or more of its investments’ classifications).

381 In the TBA market, lenders enter into forward contracts to sell agency mortgage-backed securities and 

agree to deliver such securities on a settlement date in the future. The specific agency mortgage-backed 

securities that will be delivered in the future may not yet be created at the time the forward contract is 

entered into. The purchaser will contract to acquire a specified dollar amount of mortgage-backed 

securities, which may be satisfied when the seller delivers one or more mortgage-backed securities pools at 

settlement. For a discussion of the TBA market, see Task Force on Mortgage-Backed Securities 

Disclosure, Staff Report: Enhancing Disclosure in the Mortgage-Backed Securities Markets (Jan. 2003), at 

section II.E.2, available at http://www.sec.gov/news/studies/mortgagebacked.htm.

382 See ICI Comment Letter I (noting that the “TBA market is similar to the futures market, in which 

physically-settled futures contracts may trade continuously (e.g., daily) but the underlying reference assets 

are delivered at a later date (e.g., once every 3 months).”).
121

and the “illiquid investments” category, directly reflects the statutorily required seven-day period 

for meeting redemption requests. The “less liquid investments” category is meant to identify for

the Commission and its staff, as well as investors and other potential users, the portion of a 

fund’s portfolio investments that may be available to meet redemption requests within seven 

days, but only to the extent that the fund addresses the lengthier settlement period associated 

with these investments. Because less liquid investments are those that may be sold, but not 

settled, within seven days, a fund generally could use less liquid investments to meet 

redemptions within seven days only if the fund obtained an additional source of financing (for 

example, a line of credit) to bridge the period until the sales would settle, or if the fund used its 

cash holdings to meet the redemptions while simultaneously selling the less liquid investment

and then replenishing its cash holdings upon settlement. 

Transparency regarding the portion of a fund’s portfolio held in less liquid investments

also could demonstrate those investments that could be liquidated in order to meet redemptions 

that would occur more than a week in the future, if a fund were to enter into a period of extended 

redemptions that it anticipates would last for multiple days. Because an open-end fund has an 

obligation to meet redemption requests within seven days, we believe it is important for funds to 

identify those investments that could pose certain challenges in being used to meet redemption 

requests within that time period, for purposes of the fund’s own liquidity risk assessment and 

management,383 as well as to provide transparency into certain funds or strategies that could have 

relatively limited liquidity compared to peer funds. 

d. Illiquid Investments

 383 For example, a fund’s holdings of less liquid investments typically would be a relevant consideration when 

assessing whether its strategy is appropriate for an open-end fund and determining its highly liquid 

investment minimum. See supra section III.B; see also infra section III.D.2.
122

A fund also will be required to identify those investments that it considers to be “illiquid 

investments.” Rule 22e-4 as adopted today defines an illiquid investment as any investment that 

a fund reasonably expects cannot be sold or disposed of in current market conditions in seven 

calendar days or less without the sale or disposition significantly changing the market value of 

the investment. Like the “less liquid investments” and “moderately liquid investments” 

category, the “illiquid investments” category references the statutorily required seven-day period 

for meeting redemption requests. However, while the “less liquid investments” and “moderately 

liquid investments” categories are based on the time period in which investments are convertible 

to cash—that is, sold with the sale settled—the “illiquid investments” category only reflects the 

period for selling (or otherwise disposing of) an investment and does not also consider settlement 

timing.

Rule 22e-4 as proposed would have included a limit on funds’ ability to acquire “15% 

standard assets,” or any asset that may not be sold or disposed of in the ordinary course of 

business within seven calendar days at approximately the value ascribed to it by the fund.384 

Under the proposal, 15% standard assets were not a category in the classification framework. In 

determining whether an asset was a 15% standard asset, a fund would not have been required to 

take into account any specific market or other factors, or assess position size as it could reflect 

market depth, in determining whether it could sell the asset within seven days without the 

specified value impact.

385 The proposed limit was intended to be consistent with the 

Commission’s guidelines limiting funds’ holdings of illiquid assets to 15% of net assets386 and 

 384 See proposed rule 22e-4(b)(2)(iv)(D).

385 See Proposing Release, supra footnote 9, at text following n.355.

386 See id., at section III.C.4.
123

most commenters supported the proposed 15% limit.

387

We understand, however, that funds have engaged in a variety of practices in determining 

the illiquidity of investments. It has been our staff’s experience that some of these practices are 

less robust than others. We believe that the definition of illiquid investments we are adopting 

today will provide a clear standard for determining the illiquidity of investments and will better 

ensure that all funds are determining the illiquidity of investments more consistently. We 

recognize, however, that as a result of this new definition, some funds may take into account 

relevant market, trading, and investment-specific considerations, as well as market depth, for the 

first time and therefore, as discussed below, some funds may determine that a greater percentage 

of holdings are illiquid.

388

We note that some commenters suggested strengthening the current illiquid asset 

guidelines.

389 Many commenters also suggested that these assets continue to be referred to as 

“illiquid assets” (not 15% standard assets) and be harmonized with any classification system that 

the Commission ultimately adopts. 390 Additionally, commenters requesting such a 

harmonization also stated that value impact standards should be consistent between the 15%

standard asset definition and the categories used in the classification.391 

We have determined to incorporate an illiquid investment category into rule 22e-4’s 

broader classification requirement for several reasons. Specifically, harmonizing funds’ illiquid 

 387 See, e.g., Federated Comment Letter; Fidelity I Comment Letter; SIFMA Comment Letter I; State Street 

Comment Letter.

388 See infra paragraph accompanying footnote 419.

389 See infra footnotes 399-401 and accompanying text.

390 See, e.g., AFR Comment Letter; BlackRock Comment Letter; Interactive Data Comment Letter; Markit 

Comment Letter. 

391 See, e.g., AFR Comment Letter; Markit Comment Letter.
124

investment determinations with the general liquidity classification framework will create 

consistency in the value impact standards across liquidity categories.

392 As noted above, the 

illiquid investment value impact standard in final rule 22e-4 has been changed from whether a 

fund could sell an investment at “approximately the value at which the fund has valued the 

investment,” to whether a fund could sell the investment “without the sale or disposition

significantly changing the market value of the investment.”393 We are adopting this new value

impact standard for illiquid investment determinations in part as a response to commenters’ 

concerns about confusion that could arise from conflicting standards. Accordingly, the value 

impact standard for illiquid investments is substantially identical to the value impact standard for 

all other classification categories.394 As discussed in more detail above, the final classification 

value impact standard highlights that: (i) the standard does not require a fund to actually re-value 

or re-price an investment for classification purposes; and (ii) the standard does not require the 

fund to incorporate general market movements in liquidity determinations or estimate market 

impact to a precise degree.395

Significantly, in harmonizing features of the illiquid investment category with other 

categories in the liquidity classification framework, we also are replacing existing Commission 

guidance on identifying illiquid assets with new regulatory requirements regarding the process 

for determining that certain investments are illiquid.396 In the Proposing Release, we noted that 

we were proposing to withdraw Commission guidance because we believed the proposal would 

 392 See supra section III.C.1.c.

393 See rule 22e-4(a)(8).

394 Compare rule 22e-4(a)(8) with rule 22e-4(a)(6), (10) and (12).

395 See supra section III.C.1.c.

396 See infra footnote 561 and accompanying text.
125

provide “a more comprehensive framework for funds to evaluate the liquidity of their assets.”397 

We also requested comment on whether additional guidance is needed in connection with the 

proposed codification of the Commission’s illiquid asset guidelines. Although many 

commenters supported the proposed codification of the Commission’s guidelines on illiquid 

assets,398 most did not specifically comment on the Commission’s proposal to withdraw the 

guidance associated with its illiquid asset guidelines. However, certain commenters suggested 

that stronger requirements and guidance regarding assets subject to the 15% limit could be 

appropriate.399 One commenter expressed concern that the Commission’s guidelines today are 

having only a “limited impact on fund behavior” and that the current 15% limit “applies to an 

inappropriately narrow range of assets and is therefore ineffective as an investor protection 

mechanism.”400 This commenter suggested that the limit should encompass not only those assets 

that are not able to be sold within seven days at approximately the value ascribed by the fund, 

but also those assets that cannot be converted to cash (that is, sold with the sale settled) within 

this same period, taking into account this same value impact standard.

401

We agree with those commenters that suggested the Commission’s current guidelines, 

together with many funds’ interpretation of these guidelines today, may result in funds only 

focusing on certain largely structural features that can lessen the liquidity of an investment (such 

as transfer restrictions and trading halts) rather than more market- and trading-based features. 

 397 See Proposing Release, supra footnote 9, at text following n.356.

398 See supra footnote 387.

399 See, e.g., AFR Comment Letter; see also Keefer Comment Letter; Wahh Comment Letter (both suggesting 

that the 15% standard not just be limited to the time of purchase, but instead should be an ongoing 

requirement).

400 See AFR Comment Letter.

401 Id.
126

This can result in funds considering only an artificially narrow set of portfolio investments to be

illiquid. As we discussed in the Proposing Release, we understand that today it is common—

even for complexes with generally robust liquidity risk management procedures—to treat the 

process for determining whether an investment is illiquid under the current Commission 

guidelines as a compliance or “back-office” function, with little indication that information 

generated from the risk or portfolio management functions informs the compliance 

determinations. Thus, we understand that some funds currently may determine that an 

investment is liquid, rather than illiquid, primarily based on certain structural characteristics of

the investment without assessing market or trading information or other potentially relevant 

factors. Such investments include private equity securities and certain other privately placed or 

restricted securities,402 as well as certain instruments or transactions that by their structure do not 

mature and are not readily transferable in seven days or less, including term repurchase 

agreements.403 While a focus on structural features alone may be appropriate in some 

circumstances (for example, an across-the-board assumption that all securities with a trading halt 

are illiquid, without an additional assessment of market or trading factors), in other

circumstances the failure to consider market, trading, and other relevant information could result 

in a fund considering an investment to be liquid even if the fund cannot reasonably expect to sell 

amounts it reasonably anticipates trading without the sale or disposition significantly changing 

the market value of the investment within seven calendar days. 

For these reasons, rule 22e-4 as adopted today, requires a fund to incorporate certain 

additional considerations in determining whether an investment is illiquid. We are withdrawing

 402 See Restricted Securities Release, supra footnote 37; see also Rule 144A Release, supra footnote 37. 

403 See Interval Fund Proposing Release, supra footnote 41.
127

existing guidance and replacing it with new regulatory requirements and guidance regarding the 

process for determining whether a portfolio investment is illiquid.404 A fund would have to take 

into account “relevant market, trading, and investment-specific considerations” when

determining whether an investment is an illiquid investment.

405 

The guidance the Commission provides below on matters funds might consider in 

assessing market, trading, and investment-specific considerations reflects factors that the 

Commission has previously said are reasonable examples of factors to evaluate in determining 

whether a rule 144A security is liquid and makes them more generally applicable to assessing 

liquidity of other investments.

406 Thus, this guidance draws on past Commission guidance for 

evaluating whether a certain type of investment is liquid or illiquid, and extends this process to a 

fund’s liquidity determinations regarding all types of investments. We recognize that the 

guidance in the Rule 144A Release anticipates that fund boards will determine whether certain 

securities are liquid or illiquid.407 While we have considered the specific guidance factors 

discussed in the Rule 144A Release in the context of the guidance we provide herein with respect 

to classifying the liquidity of portfolio investments, neither our guidance nor the final rule places 

the responsibility for determining whether a specific security is liquid or illiquid on the fund’s 

board. The board would, however, be responsible for approving the fund’s liquidity risk 

management program, which provides the framework for evaluating the liquidity of the fund’s 

investments, and for reviewing (at least annually) a written report that describes a review of the 

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

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

406 See infra footnotes 560 and 561 and accompanying text.

407 See Rule 144A Release, supra footnote 37 (stating that “determination of the liquidity of Rule 144A 

securities in the portfolio of an investment company issuing redeemable securities is a question of fact for 

the board of directors to determine, based upon the trading markets for the specific security.”).
128

program’s adequacy and the effectiveness of its implementation. Overall, a fund must classify 

its investments by focusing on those market, trading, and investment-specific considerations that 

are relevant to its portfolio. We believe that this principles-based approach should result in funds 

making realistic and well-informed determinations about investments’ liquidity (or illiquidity) 

based on analysis beyond simple decisions solely about structural features of an asset class. 

As with other liquidity classification categories and as discussed in more detail in section 

III.C.3.a below, funds can determine illiquid investments on an asset-class basis, with exceptions

for investments whose liquidity characteristics significantly differ from the class. For example, a 

fund could employ procedures whereby certain asset classes are initially considered liquid, and 

then further evaluated to decide whether relevant market, trading, and investment-specific 

considerations should result in a particular investment being treated as an exception and a change 

to the initial liquidity determination.408 A fund could use the specific guidance factors we discuss 

in section III.C.4 below as part of its process for taking into account relevant market, trading, and 

investment-specific considerations in determining whether an investment is illiquid. For 

example, a fund that generally considers certain high-yield bonds not to be illiquid (for instance, 

a fund that typically considers high-yield domestic corporate bonds to be moderately liquid 

investments) could determine that certain securities within this class are actually illiquid 

investments, based on restrictions on trading that could occur if one of these bonds’ issuers were 

to enter bankruptcy and the debt were to become distressed. Conversely, a fund that generally 

considers certain investments to be illiquid (such as rule 144A securities) could determine that 

 408 See infra section III.C.3.a (discussing that, under rule 22e-4, a fund would generally be permitted to 

classify its portfolio investments according to their asset class, but if it has information that a particular 

investment has different liquidity characteristics than other investments within the same asset class, it 

would need to treat that investment as an exception to the way that the fund classifies its other holdings 

within the same asset class).
129

some of these investments should be included in another liquidity category based on relevant 

market, trading, and investment-specific considerations.409

We also understand, based on staff outreach, that some fund complexes make 

determinations of whether a portfolio investment is liquid (or illiquid) under the current 

Commission guidelines based on whether a single trading lot for the investment can be sold 

within seven days under normal market circumstances. Certain funds interpret this to allow them 

to declare an entire holding to be liquid even if they could only sell a very small portion of it 

without a significant value impact. Staff has observed that these fund practices and 

interpretations of current Commission guidelines may result in a fund determining that very few, 

if any, portfolio investments are illiquid under the current guidelines, even in situations in which 

the liquidity of a large portion of a fund’s portfolio is fairly limited.

Given the practices described above when funds did not consider market depth in making 

liquidity determinations and considering the comments discussed above regarding the proposed 

illiquid asset limit, under the final rule, a fund will be required to consider market depth in 

determining whether to classify portfolio investments as illiquid investments. To the extent that 

the fund determines that trading varying portions of a position is reasonably expected to 

significantly affect the liquidity characteristics of that investment—that is, the market depth for 

the investment is reasonably expected to significantly affect its liquidity—the fund would need 

to take this into account in classifying the investment as illiquid.410 These are the same market 

depth considerations a fund would have to take into account in classifying the liquidity of its 

 409 See rule 22e-4(b)(ii). See also section III.C (discussing the various considerations required when 

classifying the liquidity of fund securities). 

410 Rule 22e-4(b)(1)(ii).
130

portfolio investments generally, as discussed in detail below.

411 

Members of the fund industry have argued that because a fund will not likely need to sell 

its entire position in a particular investment under normal market circumstances, liquidity 

determinations should be based on the sale of a single trading lot for that investment, except in 

unusual circumstances.412 However, a fund could encounter situations in which it needs to 

liquidate larger portions than one trading lot of its positions in order to meet redemption requests, 

but cannot do so within the seven-day time period required under section 22(e). As discussed 

below, we believe that the market depth considerations required by the final classification 

requirement will appropriately require a fund to consider situations in which the size of a fund’s 

holdings could significantly affect those holdings’ liquidity and impact the fund’s ability to 

manage its liquidity risk—that is, when portfolio liquidity may be significantly constrained by 

the fund’s ability to trade meaningful sizes of its portfolio holdings. We believe this assessment 

of market depth will assist in illiquidity determinations incorporating a realistic analysis of a 

fund’s ability to meet redemption requests without significant dilution, and thus in funds better

managing liquidity risk.

As discussed above, one commenter suggested extending the definition of illiquid assets 

to encompass not only those assets that are not able to be sold within seven days at 

approximately the value ascribed by the fund, but also those assets where the sale cannot be 

settled within this same period, taking into account the same value impact standard.413 After 

considering this suggestion, we have ultimately decided that the “illiquid investments” category 

 411 See infra III.C.3.b.

412 See Investment Company Institute, Valuation and Liquidity Issues for Mutual Funds (Feb. 1997), at 42.

413 See supra footnote 401 and accompanying text. 
131

under rule 22e-4 should reflect only the period for selling or disposing of an investment and not 

also consider settlement timing. Instead, the “less liquid” category reflects those investments

that could be sold, but not settled, within seven days without a significant value impact. 

Investments that cannot be sold within seven days without a significant value impact (illiquid 

investments, under rule 22e-4) have different liquidity characteristics and are essentially less 

liquid than investments that can be sold within seven days without a significant value impact, but 

whose sale cannot be settled within this period (less liquid investments, under rule 22e-4).414 As 

discussed above, less liquid investments could still be considered a limited source of liquidity for 

meeting redemptions within the seven-day period specified under section 22(e) of the Act, with 

the caveat that a fund may have to address certain challenges associated with their settlement,

whereas a fund’s illiquid investments are structurally or as a matter of market dynamics less 

liquid and a fund may be unable to use them to meet redemptions within seven days.

415 

However, we note that trades in certain investments may take an extended period of time 

to settle. Trades in some low quality loans, for example, may not settle for a number of 

months.416 A fund that holds less liquid investments with extended settlement periods must 

develop a liquidity risk management program that takes into account the liquidity risks 

 414 When a fund sells an asset (even if the transaction has not yet settled), the fund has a receivable on its 

books, and any potential loss from the sale of that asset will be reflected in the fund’s NAV. If the fund has 

an asset it cannot sell, however, the fund continues to be exposed to the risk of unknown potential loss until 

the asset can be sold.

415 See supra paragraph accompanying footnote 383 (discussing less liquid investments and the extent to 

which less liquid investments may be available to meet redemption requests within seven days if a fund 

addresses certain challenges associated with their sale and settlement).

416 See e.g., Michael Mackenzie and Tracy Alloway, Lengthy US loan settlements prompt liquidity fears, 

Financial Times (May 1, 2014), available at http://www.ft.com/cms/s/0/32181cb6-d096-11e3-9a81-

00144feabdc0.html#axzz4HQiQv5wj (noting that a quarter of new loans being issued were taking more 

than 30 days to settle). 
132

associated with extended settlement periods.417 These policies and procedures could include 

limits on the amount of less liquid investments with extended settlement periods a fund will hold 

or more frequent liquidity classification reviews for this type of holding. Such a fund may also 

wish to consider the circumstances in which it would seek to obtain expedited settlement (where 

possible) and establish tailored policies and procedures regarding how and when it would seek 

expedited settlement. Funds may also wish to consider whether to obtain an additional source of 

financing (for example, a committed line of credit dedicated to that fund) to bridge the period 

until the sales would settle.

We believe that the new requirement to take into account market, trading, and 

investment-specific considerations, as well as to consider market depth, in identifying illiquid 

investments responds to the concern that the way illiquid investments are currently defined has 

only limited effects on funds’ liquidity risk management and the liquidity of their portfolios.418 

We understand that, to the extent a fund is not currently taking into account market, trading, and 

investment-specific considerations or market depth when assessing the illiquidity of its 

investments, the new regulatory requirements regarding the process for determining that certain 

investments are illiquid under the rule are likely to result in the fund determining that a greater 

percentage of its holdings are illiquid than under the guidelines. In extreme circumstances, 

this—in combination with the limitation on funds’ illiquid investment holdings to 15% of its net 

assets discussed at section III.E below—could cause certain funds to have to modify their 

investment strategies or reconsider their structure as open-end funds. We also understand that 

 417 Such extended settlement period securities have the potential to pose heightened liquidity risks for funds, 

and thus policies and procedures that are reasonably designed to assess and manage the liquidity risk of a 

fund that holds such securities would take into account the particular liquidity risks raised by such holdings. 

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

418 See supra footnote 400 and accompanying text. 
133

these requirements will entail additional operational costs, to the extent that funds today do not 

generally take into account relevant market, trading, and investment-specific considerations, or 

market depth, in determining whether their portfolio investments are illiquid. However, as 

discussed in detail in the Economic Analysis section below, we believe that these costs are 

justified by the investor protection benefits that we believe will result from better portfolio 

liquidity assessments.419 

3. Required Classification Procedures

a. Classification Based on Asset Class

Rule 22e-4, as adopted today, generally permits a fund to, as a starting point, classify the 

liquidity of its portfolio investments according to their asset class.420 Notwithstanding this 

general approach, a fund will be required to separately classify any investment if the fund or its 

adviser, after reasonable inquiry, has information about any market, trading, or 

investment-specific considerations that are reasonably expected to significantly affect the 

liquidity characteristics of that investment as compared to the fund’s other portfolio holdings 

within that asset class.

421 For example, if the fund or its adviser were to know that particular 

large-capitalization equity was affected by adverse events at the issuer that caused it to have

different liquidity characteristics than the asset class as a whole, it would be required to treat that 

investment as an exception and classify it separately. As another example, a fund could decide

that high credit quality corporate bonds generally fall into a particular liquidity category, but if 

the fund or its adviser had information that certain bonds’ bid-ask spreads are significantly wider 

 419 See infra section IV.C.

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

421 Id.
134

or more volatile than those of their peers, it would be required under rule 22e-4 to separately 

assess these bonds and potentially classify them into a less-liquid category than the fund’s other 

holdings within the same asset class. We expect that, based on a fund’s responsibility under the 

rule to classify each of its investments after reasonable inquiry and taking into account relevant 

market, trading, and investment-specific considerations, there are some asset classes, such as 

those encompassing some bespoke complex derivatives or complex structured securities,422 that 

have such a range of liquidity characteristics that each position would need to be classified 

individually.

Rule 22e-4 as proposed would not have allowed a fund to, as a starting point, classify its 

portfolio investments according to asset class. The proposed rule instead would have required a 

fund to classify each of its positions in a portfolio asset (or portions of a position) according to 

the liquidity categories included in the rule.423 In the Proposing Release, we requested comment 

on whether the proposed classification requirement and associated liquidity categories reflected

the manner in which funds currently assess and categorize the liquidity of their portfolio holdings 

as part of their portfolio and risk management. 

Many commenters objected to the proposed position-level classification requirement, 

arguing that it does not reflect recognized liquidity risk management practices and does not 

reflect industry best practices.424 Commenters likewise maintained that, instead of assessing 

portfolio liquidity on a position-by-position basis, asset managers tend to focus on the liquidity 

of certain asset classes and/or generally view liquidity at the portfolio level based on a 

 422 See 2015 Derivatives Proposing Release, infra footnote 222(discussing bespoke complex derivatives).

423 Proposed rule 22e-4(b)(2)(i).

424 See, e.g., Credit Suisse Comment Letter; Dodge & Cox Comment Letter; PIMCO Comment Letter; 

Vanguard Comment Letter. 
135

“top-down” analysis.425 On the other hand, some commenters acknowledged that certain asset 

managers may classify the liquidity of individual portfolio positions within a range of categories, 

albeit not at the level of detail suggested by the proposal, or for all classes of portfolio assets.426 

Commenters stated that considering portfolio liquidity on the basis of asset class, at least 

as a starting point, has practical, operational, and conceptual benefits compared to considering 

the liquidity of each portfolio position individually.427 Commenters stated that assets with certain 

similar characteristics are often “highly comparable and substitutable from a liquidity 

perspective,”428 and liquidity assessments based on asset class would permit a fund manager to 

account for differences in market structure and portfolio management objectives among asset 

classes.429 Commenters also argued that evaluating and classifying each portfolio asset

individually would be “overly burdensome and near-impossible to manage,” as a fund complex 

may collectively hold hundreds of thousands of individual portfolio assets,

430 and the data 

required to classify each asset individually may not be readily available for all asset types 

(particularly for fixed income or other OTC assets).

Relatedly, multiple commenters suggested alternative liquidity classification schemes 

that would be based on an “asset-type mapping with exceptions” analysis.431 These alternatives 

used an approach where a fund’s portfolio assets’ liquidity generally would be classified by asset 

 425 See, e.g., Dodge & Cox Comment Letter; ICI Comment Letter III; IDC Comment Letter; Charles Schwab 

Comment Letter.

426 See CFA Comment Letter; MFS Comment Letter; Nuveen Comment Letter; Wellington Comment Letter.

427 See, e.g., Dechert Comment Letter; HSBC Comment Letter; ICI Comment Letter I; Wellington Comment 

Letter.

428 See ICI Comment Letter I.

429 See Vanguard Comment Letter.

430 See Fidelity Comment Letter. 

431 See SIFMA Comment Letter III; see also BlackRock Comment Letter; T. Rowe Comment Letter.
136

class—with exceptions to the extent a particular portfolio asset demonstrates liquidity 

characteristics that differ from the liquidity of its asset class generally and that are deemed to 

make the position substantially more or less liquid.

432 Assets treated on an exception basis could 

be placed in a different liquidity category than the rest of their asset class, which could be either 

higher or lower.433 The asset class analysis provisions of final rule 22e-4 generally take this 

approach. The primary difference between commenters’ “asset-type mapping with exceptions” 

suggested approaches and the approach incorporated in final rule 22e-4 is that commenters’ 

suggested approaches would rely on the Commission (or an industry group) assigning default 

liquidity categories to each asset class, whereas the approach we are adopting would depend on 

each fund performing this exercise based on its adviser’s individual experience in the markets.

We believe that this approach strikes an appropriate balance between lessening 

operational burdens associated with classification and recognizing that many investments within 

an asset class may be considered interchangeable from a liquidity perspective, on one hand, and 

providing reasonably precise liquidity classifications that appropriately reflect investments’

liquidity characteristics, on the other hand. This approach also should leverage fund managers’ 

current practices to a greater degree than under the proposal. A fund’s asset-class-based 

classification procedures should incorporate sufficient detail to meaningfully distinguish between 

asset classes and sub-classes. For example, a fund may wish to distinguish how it classifies its 

equity securities based on factors such as the market(s) in which the security’s issuer is based, 

market capitalization, and whether the security is common or preferred stock. As another 

example, a fund may wish to distinguish its fixed income securities based on factors such as 

 432 See, e.g., SIFMA Comment Letter III.

433 Id.
137

issuer type, the market(s) in which the issuer is based, seniority, age, and credit quality, and to 

distinguish its holdings of structured products based on tranche seniority and credit quality. We 

do not consider it appropriate for a fund to use very general asset class categories (e.g., 

“equities,” “fixed income,” and “other”) in classifying the liquidity of its portfolio investments, 

as these broad categories would likely not permit a fund to identify investments with fungible 

liquidity characteristics. A fund’s asset-class-based classification procedures also should include 

procedures for updating default asset-class liquidity classifications as relevant market, trading, 

and investment-specific considerations warrant.

434 

A fund would be required to separately classify any investment within an asset class if 

the fund or its adviser were to have information about any market, trading, or investment specific 

considerations that are reasonably expected to significantly affect the liquidity characteristics of 

that investment as compared to the fund’s other portfolio holdings within that asset class (its 

“exception processes”).435 Rule 22e-4 does not specify precisely how a fund must identify 

investments that should be classified separately as part of its exception processes. However,

reasonably designed policies and procedures would likely include specifying the sources of 

inputs that inform its exception processes (for example, inputs from the fund’s portfolio 

management, risk management, and/or trading functions), as well as particular variables that 

could affect the fund’s classification of certain investments. For example, a fund could 

determine that a particular investment should be classified differently than other investments

within its asset class if the market for that particular investment were exceptional in terms of 

 434 See rule 22e-4(b)(1)(ii) (requiring funds to classify their investments taking into account relevant market, 

trading, and investment-specific considerations and to review their portfolio investments’ classifications if 

changes in these considerations are reasonably expected to materially affect one or more of their 

investments’ classifications).

435 See rule 22e-4(b)(1)(ii)(A).
138

size, breadth, or depth, or if the investment’s typical bid-ask spreads were generally wider, 

narrower, or more volatile than the bid-ask spreads of other assets within the asset class. A fund 

could incorporate an assessment of the liquidity classification guidance factors discussed below, 

as the fund determines appropriate, in its exception processes.436 

b. Required Procedures for Considering Market Depth

Under rule 22e-4 as adopted today, a fund would be required to determine whether 

trading varying portions of a position in a particular portfolio investment, in sizes that the fund 

would reasonably anticipate trading, is reasonably expected to significantly affect the liquidity 

characteristics of that investment.

437 To the extent that the fund determines that trading varying 

portions of a position is reasonably expected to significantly affect the liquidity characteristics of 

that investment—that is, the market depth for the investment is reasonably expected to 

significantly affect its liquidity—the fund would need to take this into account in classifying the 

liquidity of that investment.

438 As discussed in more detail below, this requirement would have a 

fund consider portions of a portfolio position that are larger than a single trading lot, but not

necessarily the position’s full size, in assessing its portfolio investments’ liquidity.

These market depth-related requirements are meant to substitute for, and modify, the 

language of proposed rule 22e-4 that would have effectively required a fund to consider position 

size in classifying the liquidity of its portfolio investments. As discussed above, proposed rule 

22e-4 would have had a fund consider, for each portfolio position, the amount of time it would 

take to convert the entire position, or portions thereof, to cash.439 Under this proposed 

 436 See infra section III.C.4.

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

438 Id.

439 See proposed rule 22e-4(b)(2)(i); see also supra section III.C.2.d.
139

requirement, if a fund were to conclude that it would take the fund longer to convert its entire 

position in an asset to cash, it could determine, for example, that 50% of the position should be 

classified in one liquidity category, and the remaining 50% should be classified in another 

category. 

This aspect of the proposed requirement arose from our belief that a fund should consider 

its ability to trade larger portions of a portfolio asset than a single trading lot in assessing its 

portfolio investments’ liquidity. The ability to quickly trade larger portions of a particular 

position is a reflection of market depth for a particular asset, which is a well-recognized aspect of 

assessing liquidity.440 In the Proposing Release, we responded to arguments that because a fund 

will not likely need to sell its entire position in a particular asset under normal market conditions, 

liquidity determinations should be based on the sale of a single trading lot for that asset, except 

in unusual circumstances.441 We noted that, although we agreed that a fund not being able to

convert its entire position in an asset to cash at a price that does not materially affect the value of 

that asset should not, by itself, be dispositive of a portfolio asset’s liquidity, assessing liquidity 

only on the basis of the ability to sell and receive cash for a single trading lot of an asset ignores

the fact that a fund may need to sell all (or a significant portion) of its position.442

Multiple commenters expressed concern about the proposed requirement to consider full 

position size in classifying the liquidity of a fund’s portfolio assets.443 Commenters argued that 

 440 See infra footnote 526 and accompanying text.

441 See Proposing Release, supra footnote 9, at n.177 and accompanying text.

442 See id., at paragraph accompanying n.177. For example, a fund needing to sell certain assets in order to 

meet redemptions may need to sell more than one trading lot of a particular asset. In addition, a fund may 

determine to dispose of an entire position because of deteriorating credit quality or other portfolio 

management factors. Similarly, an index fund may need to sell an entire position in an asset if that asset 

falls out of the tracked index.

443 See, e.g., BlackRock Comment Letter; IDC Comment Letter; SIFMA Comment Letter I; Wellington 
140

many industry participants currently assess asset liquidity by trading lot (as opposed to 

evaluating whether a fund can exit an entire position within a certain time period), reflecting that 

a fund generally would not need to liquidate an entire large position unexpectedly.444 

Commenters also contended that this aspect of the proposal could result in large funds’ portfolio 

liquidity appearing artificially low compared to smaller funds because large funds are more 

likely to hold larger positions and determine that they could not quickly liquidate these positions 

entirely without a value impact.

445 Commenters argued that it could be misleading for large 

funds to appear to be less liquid than smaller funds, because large funds’ portfolios might 

actually entail less liquidity risk compared to smaller funds (because each position, while large in 

absolute size, is a smaller portion of the overall portfolio than may be the case in smaller funds), 

and large funds may have greater resources than smaller funds to manage liquidity effectively.446 

For example, one commenter stated that large funds often have more diversified holdings than 

smaller funds and may wield more negotiating power with broker-dealers.447 

The market depth approach we are adopting takes commenters’ concerns into account, 

although as discussed above we continue to believe that an investment strategy involving large 

positions in particular issuers—particularly if the fund’s portfolio is relatively concentrated—is 

relevant to assessing liquidity risk.

448 We appreciate that, in many cases, a fund may not have to 

trade large portions of its portfolio holdings in relatively short time periods in order to meet 

 Comment Letter.

444 See, e.g., ICI Comment Letter I; Charles Schwab Comment Letter; Vanguard Comment Letter.

445 See, e.g., BlackRock Comment Letter; ICI Comment Letter I; Oppenheimer Comment Letter; SIFMA 

Comment Letter I.

446 See, e.g., SIFMA Comment Letter I; see also BlackRock Comment Letter; Oppenheimer Comment Letter; 

Vanguard Comment Letter; Wellington Comment Letter.

447 See BlackRock Comment Letter.

448 See supra footnotes 210-212 and accompanying text.
141

redemptions, or to otherwise manage its liquidity risk. For example, a fund may not need to 

often quickly convert large portions of its portfolio investments to cash, based on its cash flow 

projections (e.g., if the fund’s investors are known to be primarily long-term investors) and other 

liquidity risk assessment factors.449 We also recognize that there could be situations in which the 

requirement to consider entire position size in classifying a fund’s portfolio investments, 

regardless of the size of trades a fund typically engages in, could make a fund appear to be less 

liquid than the fund’s actual trading experiences in light of its portfolio investments’ market 

depth. This could be misleading if the fund were actually able to trade a large percentage of its 

holdings fairly quickly without the fund’s trades significantly moving the investments’ prices. 

We believe that the required market depth considerations incorporated into the final 

classification requirement will permit a fund to more realistically assess the liquidity of its 

portfolio investments because they allow a fund to classify and review its portfolio investments

taking into account position sizes that the fund would reasonably anticipate trading.

We believe that if a fund reasonably anticipates trading sizeable portions of its portfolio 

positions, the fund’s portfolio liquidity could be adversely affected by a lack of market depth for 

its portfolio investments. A fund could reasonably anticipate trading sizeable portions of its

portfolio positions if it often trades relatively large portions of its portfolio positions. Likewise, 

a fund may not trade larger portions of its portfolio positions on a regular basis, but could 

reasonably anticipate, based on past flow patterns or current market conditions that it could 

encounter larger-than-typical redemptions that would necessitate larger portfolio trades. In both 

of these examples, such a fund could conclude that it may be difficult to find trading partners for 

a particular portfolio investment, or may be difficult to sell the investment within a particular 

 449 See rule 22e-4(b)(1)(i).
142

time frame without this sale causing a significant value impact. For this reason, rule 22e-4 

requires a fund to consider the sizes of a particular investment that the fund would reasonably 

anticipate trading and whether trading in such sizes could significantly affect the investment’s

liquidity. If so, the fund would be required to take this into account in classifying the liquidity of 

that portfolio investment.

450 If the fund determined, after conducting the required market depth 

analysis, that a downward adjustment in the liquidity classification of a particular investment is 

appropriate, the new liquidity classification that the fund assigns to this investment would apply 

to the entirety of the fund’s position in that investment (not, as proposed, to portions of that 

position). This approach is meant to lessen burdens on funds, as well as respond to commenters’ 

concerns, by focusing a fund’s market depth considerations on circumstances in which a fund’s 

practices in trading varying portions of its portfolio positions could have a disproportionate 

effect on its portfolio investments’ liquidity. 

Rule 22e-4 directs a fund to consider sizes that the fund would reasonably anticipate 

trading in assessing the impact of market depth on an investment’s liquidity.

451 Depending on 

the liquidity risk factors that a fund must consider under rule 22e-4(b)(1)(i), as well as other 

factors including the fund’s size, a fund could reasonably anticipate selling various portions of its 

position in a particular portfolio investment, or various dollar amounts or block sizes of a 

particular portfolio investment.

452 For example, it may be appropriate for a fund with a highly 

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

451 Id.

452 See, e.g., Kapil Phadnis, Block Trading in Today’s Electronic Markets, Bloomberg Tradebook (May 20, 

2015), available at http://www.bloombergtradebook.com/blog/block-trading-in-todays-electronic-markets/

(discussing block trading in the equity markets and noting that New York Stock Exchange Rule 72 defines 

a “Block” as at least 10,000 shares or $200,000, whichever is less); Got Liquidity?, BlackRock Investment 

Institute (Sept. 2012) (“Got Liquidity?”), at 6, available at

https://www.blackrock.com/investing/literature/whitepaper/got-liquidity-us-version.pdf (indicating that, 

from 2010 – 2012, block trades of over $5 million represented between approximately 30% - 45% of the 
143

liquid portfolio, with very stable and minimal cash flow projections and significant cash holdings

and operating in very stable market conditions, to adopt policies and procedures that consider 

whether trading relatively small fractions of each of the fund’s portfolio holdings would result in 

significant liquidity impacts. On the other hand, we would generally consider it appropriate for a 

fund whose holdings are relatively illiquid and/or fairly concentrated, with unpredictable cash 

flow projections or deteriorating market conditions in the markets in which it invests, to consider

whether trading larger portions of its portfolio holdings would result in significant liquidity 

impacts. 

c. Classification Issues Arising with Respect to Derivatives Transactions

Rule 22e-4 requires that the liquidity classification and review requirements cover each 

of the fund’s investments, including derivatives transactions, and that a fund take into account 

relevant market, trading, and investment-specific considerations in classifying the liquidity of its 

investments.

453 The rule also states that for derivatives transactions that a fund has classified as 

moderately liquid investments, less liquid investments, and illiquid investments, the fund must 

identify the percentage of its highly liquid investments that are segregated to cover, or pledged to 

satisfy margin requirements in connection with, derivatives transactions in each of these 

classification categories.

454 A fund also will be required to disclose these percentages on its 

Form N-PORT filings.455 We believe a fund’s disclosure of this percentage will permit the 

Commission and its staff to understand what percentage of a fund’s highly liquid investment

 

U.S. investment grade corporate bond market’s trading volume).

453 Rule 22e-4(b)(1)(ii).

454 Rule 22e-4(b)(1)(ii)(C). Because, as discussed below, a fund generally will segregate certain liquid assets 

in order to cover the fund’s obligations under its derivatives transactions, rule 22e-4 assumes that a fund 

would not segregate any of its assets identified as illiquid investments to cover its derivatives transactions. 

See infra footnote 462 and accompanying text.

455 See infra section III.C.6.b.
144

minimum is composed of encumbered assets, and will allow the public to better understand that a 

certain percentage of a fund’s highly liquid investments may not be immediately available for 

liquidity risk management purposes. The final rule does not require the fund to determine or

disclose the percentage of the fund’s moderately liquid investments or less liquid investments

that the fund has segregated to cover, or pledged in connection with, its derivatives transactions, 

because we understand that funds are less likely to post moderately or less liquid investments as 

margin or collateral. We also expect that investors and others will find most valuable

information regarding the extent to which the fund’s highly liquid investments are segregated or 

pledged in connection with derivatives transactions because understanding that percentage may 

give investors a better understanding of whether such assets are truly available to make 

redemptions. 

These requirements replace the proposed requirement for a fund to consider the 

“relationship of [an] asset to another portfolio asset” in classifying and reviewing the liquidity of 

its portfolio assets,456 as well as the derivatives-focused guidance that the Commission provided 

in the Proposing Release regarding this proposed classification factor.457 The Commission’s 

guidance was meant to give direction to funds’ liquidity classification of derivatives transactions 

and the assets that a fund may segregate to cover its obligations under these transactions.458 As 

discussed below, we are not adopting the proposed factors that a fund would have had to 

consider in classifying the liquidity of its portfolio holdings, including the “relationship of [an] 

 456 See proposed rule 22e-4(b)(2)(ii)(I).

457 See Proposing Release, supra footnote 9, at section III.B.2.i.

458 Id.
145

asset to another portfolio asset” factor.459 However, we are adopting new classification 

provisions in rule 22e-4 that will apply to derivatives transactions460 as well as a provision that 

will address assets segregated to cover derivatives transactions461 so that funds consistently

consider certain unique aspects of these transactions, and also to respond to commenters’ 

concerns stemming from the treatment of derivatives under the proposal.

In the Proposing Release, we noted that when funds enter into certain transactions that 

implicate section 18 of the Investment Company Act, they generally will maintain, in a 

segregated account, certain liquid assets in order to “cover” the fund’s obligation under the 

transactions.462 We applied this framework to certain financing transactions in Release 10666, 

issued in 1979,463 and also understand that funds today apply this framework to certain 

derivatives, based on the guidance we provided in Release 10666 and on no-action letters issued 

by our staff.464 We explained in Release 10666 that “[a] segregated account freezes certain assets 

of the investment company and renders such assets unavailable for sale or other disposition.”465 

 459 Instead, we are requiring that a fund must take into account market, trading, and investment-specific 

considerations in classifying the liquidity of its portfolio investments. See rule 22e-4(b)(1)(ii); see also 

supra section III.C.1.b. We provide guidance below on specific factors that a fund may find appropriate to 

consider in furtherance of this requirement. See infra section III.C.4.

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

461 See rule 22e-4(b)(1)(ii)(C). This provision also applies to assets pledged to satisfy margin requirements in 

connection with derivatives transactions.

462 See Proposing Release, supra footnote 9, at section III.B.2.i.

463 Release 10666, supra footnote 220. In December 2015, the Commission proposed a new exemptive rule,

rule 18f-4, which would permit funds to enter into derivatives transactions and financial commitment 

transactions notwithstanding section 18 of the Investment Company Act, provided that the funds comply 

with the conditions of the proposed rule. In proposing rule 18f-4, the Commission noted that, should the 

rule be adopted, it would rescind Release 10666 and relevant staff no-action letters. See 2015 Derivatives 

Proposing Release, supra footnote 222, at section III.I.

464 See generally 2015 Derivatives Proposing Release, supra footnote 222, at section II.B (providing 

background information on the application of section 18 and Release 10666 to derivatives and certain other 

transactions). 

465 See also Dear Chief Financial Officer Letter from Lawrence A. Friend, Chief Accountant, Division of 

Investment Management (Nov. 7, 1997) (staff letter taking the position that a fund could segregate assets 
146

We also stated in Release 10666 that only certain types of liquid assets should be placed in a 

segregated account. 

Thus, we noted in the Proposing Release that, although assets used by a fund to cover

derivatives and other transactions should be liquid when considered in isolation, when evaluating 

their liquidity for purposes of proposed rule 22e-4, the fund would have to consider that they are 

being used to cover other transactions and, consistent with our position in Release 10666, are 

“frozen” and “unavailable for sale or other disposition.”466 We stated that because these assets 

are only available for sale to meet redemptions once the related derivatives position is disposed 

of or unwound, a fund should classify the liquidity of these segregated assets using the liquidity 

of the derivative instruments they are covering. We also provided guidance that, when a 

formerly segregated asset is no longer segregated, a fund generally should assess, as part of the 

proposed ongoing liquidity classification review requirement, whether the liquidity classification 

given to the portfolio asset when it was segregated continues to be appropriate. Finally, we 

noted in the Proposing Release that in addition to the liquidity of a fund’s derivatives positions 

themselves, assessing a fund’s liquidity risk generally may include an evaluation of the potential 

liquidity demands that may be imposed on the fund in connection with its use of derivatives, 

including any variation margin or collateral calls the fund may be required to meet.467

The Proposing Release included a request for comment on the proposed “relationship of 

[an] asset to another portfolio asset” liquidity classification factor, which included asking 

whether rule 22e-4 should explicitly require a fund to classify the liquidity of a position (or 

 by designating such assets on its books, rather than establishing a segregated account at its custodian).

466 See Proposing Release, supra footnote 9, at section III.B.2.i.

467 See id., at n.309 and accompanying text.
147

portions of a position in a particular asset) used to cover a derivative position using the same 

liquidity classification category as it assigned to the derivative, and whether the Commission 

should provide additional guidance regarding the circumstances in which a fund should consider 

the liquidity of a particular portfolio asset in relation to the liquidity of another asset.

468 Multiple 

commenters raised concerns about the proposed “relationship of [an] asset to another portfolio 

asset” liquidity classification factor and accompanying guidance in the Proposing Release.469 

Many stated that the Commission’s guidance as to classifying segregated assets using the 

liquidity of the derivative instrument they are covering would be unworkable and would raise 

costly operational burdens, because funds currently do not identify individual liquid assets to 

cover specific derivatives transactions.

470 Instead, commenters noted that it is common in the 

fund industry for a fund to review its outstanding obligations under its derivatives positions on a 

portfolio basis and determine an aggregate amount of liquid assets that must be segregated in 

connection with the transactions requiring coverage.471 One commenter suggested that, instead 

of the proposed “relationship of [an] asset to another portfolio asset” liquidity classification 

factor, the Commission alternatively could require funds to assign liquidity classifications to 

cover assets on an aggregate portfolio basis in amounts corresponding to the aggregate amount of 

derivatives exposure in each liquidity category.472 

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

469 See, e.g., Dechert Comment Letter; Milliman Comment Letter; T. Rowe Comment Letter; Vanguard 

Comment Letter.

470 See, e.g., Dechert Comment Letter; ICI Comment Letter I; Invesco Comment Letter; Vanguard Comment 

Letter. But see Nuveen Comment Letter (suggesting that, for purposes of the alternative liquidity 

classification approach that it recommends, a security used specifically to cover a derivatives transaction 

that cannot be unwound within seven days (and thus the derivative would be classified as “illiquid” under 

the commenter’s recommended approach) also would be considered to be “illiquid” under that approach). 

471 See Dechert Comment Letter.

472 See id.; see also ICI Comment Letter I (suggesting that the Commission add an item to Form N-PORT’s 
148

Some commenters also argued that the guidance provided in the proposal could make an 

otherwise liquid but segregated asset appear to be less liquid than it actually is when considered 

in isolation.

473 For example, if a cash equivalent security were used to cover a derivative that the 

fund determined to be convertible to cash within 8-15 days, under the Commission’s guidance, 

the cash equivalent also would be classified as an asset that could be converted to cash within 

8-15 days. However, the fund would be able to replace the cash equivalent as a coverage asset 

with another liquid asset at any time, which would immediately unencumber the cash equivalent

(but would encumber other liquid assets with the same value). 

Finally, commenters generally discussed features of derivatives transactions informing 

the way that their liquidity would be classified under proposed rule 22e-4. One commenter noted 

that the proposal seemed to suggest that derivatives are inherently more risky and present greater 

liquidity risk than other, more traditional assets.474 This commenter maintained that, in some 

situations, derivatives may be more liquid than more traditional assets. Another commenter 

stated that, while the liquidity of a derivatives transaction depends on the derivative’s underlying 

reference asset to some degree, its liquidity also largely stems from the needs of other market 

participants for that kind of derivative.475 

The requirements in rule 22e-4 regarding the classification of a fund’s derivatives 

transactions are meant to clarify and simplify the application of the classification requirements to 

derivatives transactions and respond to commenters’ concerns. First, rule 22e-4 specifies that the 

 Schedule of Portfolio Investments that permits a fund to note whether an asset (or portion thereof) is 

encumbered or linked to other assets as of the reporting date, without separately tying to or identifying a 

“linked” asset).

473 See ICI Comment Letter I; T. Rowe Comment Letter.

474 See T. Rowe Comment Letter.

475 See Milliman Comment Letter.
149

liquidity classification and review requirements apply to each of the fund’s investment

transactions (including derivatives) and requires a fund to take into account relevant market, 

trading, and investment-specific considerations in classifying derivatives’ liquidity.476 In

addition, we have modified rule 22e-4 from the proposal to require a fund to classify each of the 

fund’s portfolio investments.

477 We have made this change to clarify that the classification 

requirement (and the other requirements of rule 22e-4) applies to all of a fund’s investment 

positions, regardless of whether they are assets or liabilities, as the proposal intended.

478 The 

proposed classification requirement, which would have required each fund to classify the 

liquidity of its portfolio positions (or portions of a position in a particular asset), could 

potentially have been read to exclude certain derivatives and other transactions that are classified 

as liabilities on the fund’s balance sheet.479 Final rule 22e-4 thus requires the liquidity of all 

 476 Rule 22e-4(b)(1)(ii). As with other portfolio investments, funds may classify derivatives transactions by 

asset class, so long as the fund or its adviser does not have information about any market, trading, or 

investment-specific considerations that are reasonably expected to significantly affect the liquidity 

characteristics of a particular derivative that would require a different classification for that derivative. 

Rule 22e-4(b)(1)(ii)(A).

477 We note that in the Proposing Release, we requested comment on whether the rule should “focus not just 

on the liquidity of the fund’s assets but also more specifically and prominently on its liabilities, such as 

derivatives obligations, that may affect the liquidity of the fund.” See Proposing Release, supra footnote 9, 

at text following n.155. 

478 We note that use of the term “investments” is consistent with other reporting requirements on Form 

N-PORT, and reflects the proposal’s discussions of the classification requirement applying to all of a 

fund’s portfolio positions, not just those that are assets. See, e.g., id., at section III.B. (“[W]e are proposing 

new requirements for classifying and monitoring the liquidity of funds’ portfolio positions.”; “The 

proposed liquidity categorization process would be in addition to the existing 15% guideline (which would 

be retained, as discussed below) and would require a fund to assess the liquidity of its portfolio positions

individually, as well as the liquidity profile of the fund as a whole.” [emphasis added]). See also

Investment Company Reporting Modernization Adopting Release, supra footnote 120.

479 We note, however, that no commenters suggested that the proposal’s use of the terms “assets” and 

“positions” interchangeably would lead to derivatives or other investments that are liabilities not being 

subject to the rule, and that many commenters discussed the impact of the classification requirement on a 

variety of derivatives and other transactions that could be liabilities. See, e.g., ICI Comment Letter 

(discussing classifications of derivatives and TBA transactions); HSBC Comment Letter (noting that “[T]o 

the extent that this is possible, Asset Managers should attempt to take all liabilities into account when 

trying to calculate liquidity for a given fund.”). Nonetheless, to eliminate any potential confusion, we are 

changing the term “assets” to “investments” throughout rule 22e-4, related reporting items and definitions 
150

derivatives transactions to be classified, regardless of if they are classified as assets or liabilities

on a fund’s balance sheet, for the sake of operational simplicity, completeness (e.g., to help 

reduce confusion regarding a fund’s liquidity profile as disclosed on Form N-PORT), and 

because all derivatives transactions could implicate portfolio liquidity insofar as other assets are 

segregated to cover these derivatives and derivatives in a liability position involve transactions 

for which a fund would be required to pay fund assets to exit the transaction.

480 

Besides specifying that the liquidity of a derivatives transaction must be classified taking 

into account relevant market, trading, and investment-specific considerations, rule 22e-4 

provides no derivatives-specific factors that a fund would have to evaluate in classifying a 

derivatives transactions’ liquidity. We generally agree with commenters’ suggestions that the 

liquidity of a derivatives transaction may depend on market demand for that kind of derivative, 

as well as the liquidity of the derivative’s underlying reference asset.

481 Whether a derivatives 

transaction is centrally cleared also could indicate that the transaction is more liquid than an 

equivalent transaction that is not cleared.

482 In classifying and reviewing the liquidity of a 

derivatives transaction, like classifying the liquidity of any portfolio investment, a fund should

consider the guidance factors discussed in this Release, to the extent the factors are applicable 

 

on Form N-PORT and Form N-LIQUID. 

480 See rule 22e-4(b)(1)(ii) (requiring funds to classify each of the portfolio investments, including each of the 

fund’s derivatives transactions). We have made corresponding changes to each of the liquidity categories 

to account for the classification of all portfolio investments (i.e., the liquidity categories under rule 22e-4 as 

adopted are highly liquid investments, moderately liquid investments, less liquid investments, and illiquid 

investments). 

481 See supra footnotes 474-475 and accompanying text.

482 See, e.g., Deutsche Bank Research, Liquidity Is Key for the Central Clearing of Derivatives (Mar. 12, 

2015), available at https://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000000352403/Liquidity_is_key_for_the_central_clearing_of_deriv.pdf; see also infra

footnote 552.
151

and the fund deems their consideration to be appropriate.483 The provision in rule 22e-4 stating 

that a fund may generally classify its portfolio investments according to their asset class applies

to the fund’s derivatives transactions,484 as do the rule’s market depth provisions.

485 The 

definitions of “highly liquid investment,” “moderately liquid investment,” and “less liquid 

investment” that refer to the ability to convert an investment to cash or dispose of an investment

within a specified period, with respect to derivatives transactions that the fund classifies as 

liabilities on its balance sheet,486 should be read to refer to the time period in which the fund 

reasonably expects to be able to exit a transaction. 

Along with classifying the liquidity of each of its derivative transactions, final rule 22e-4 

requires a fund to identify, for derivatives transactions that a fund has classified as moderately 

liquid investments, less liquid investments, and illiquid investments, the percentage of the fund’s 

highly liquid investments that are segregated to cover, or pledged to satisfy margin requirements 

in connection with, the transactions in each of these classification categories.

487 When a fund’s 

assets are segregated or pledged in connection with derivatives transactions, they are only 

available for sale to meet redemptions once the related derivatives position is disposed of or 

unwound (or if other assets are segregated or pledged in their place). Thus, even if the 

segregated or pledged assets would, on their own, be considered extremely liquid, they would 

effectively not be able to be used to meet redemption requests or to rebalance or otherwise adjust 

a portfolio’s composition in order to manage liquidity risk. As discussed below, we believe that 

 483 See infra section III.C.4.

484 Rule 22e-4(b)(1)(ii)(A).

485 Rule 22e-4(b)(1)(ii)(B).

486 See supra footnote 480 and accompanying text.

487 Rule 22e-4(b)(1)(ii)(C).
152

it is important, for purposes of transparency regarding a fund’s portfolio liquidity, to provide 

clarity that certain percentages of a fund’s investments may not be functionally available to meet 

redemptions or for other liquidity risk management purposes.488 

We believe that requiring a fund to determine the percentage of highly liquid investments

that are segregated to cover, or pledged to satisfy margin requirements in connection with, its 

derivatives transactions classified in each of the “moderately liquid,” “less liquid,” and “illiquid” 

classification categories strikes an appropriate balance between providing this transparency and 

reducing burdens on funds. Under this approach, a fund generally would not need to specifically 

identify particular assets that are segregated or pledged to cover specific derivatives transactions, 

but instead a fund will calculate the percentage of highly liquid investments segregated or 

pledged to cover derivatives transactions that include derivatives transactions classified in each 

of the other three classification categories. For purposes of calculating these percentages, a fund 

that has segregated or pledged non-highly liquid investments as well as highly liquid investments

to cover derivatives transactions, should first use segregated or pledged assets that are highly 

liquid investments to cover derivatives transactions classified in the three lower liquidity 

classification categories.

489 This approach should promote consistency and comparability across

funds. In the absence of such an instruction, some funds might instead take the opposite 

approach, and assume that segregated non-highly liquid investments first cover these less liquid 

derivatives transactions, creating inconsistencies between funds.

The approach in the final rule responds to commenters’ concerns that funds rarely 

 488 See infra section III.C.6.

489 See note to rule 22e-4(b)(1)(ii)(C). However, if a fund has specifically identified individual assets that are 

not highly liquid investments as being segregated to cover such derivatives transactions, the fund may 

match those specific segregated assets to specific derivatives transactions and need not assume that 

segregated highly liquid assets cover those derivatives. 
153

identify and segregate a specific liquid asset against an individual derivative on a one-for-one 

relationship,

490 and would reduce burdens that could result if the Commission’s liquidity 

classification rules were to require a fund to do so. It also responds to commenters’ concerns 

that linking the liquidity of specific segregated assets to the liquidity of a fund’s derivatives 

transactions could understate the liquidity of those segregated assets, since a fund may be able to 

readily substitute another liquid asset for the segregated asset.491 However, the Commission’s 

approach also would provide the basis for needed transparency for the Commission, its staff, and 

the public into the way that a fund’s segregated or pledged assets may affect the fund’s overall 

portfolio liquidity. Rule 22e-4, which requires a fund only to determine percentages of 

segregated or pledged assets comprising the fund’s highly liquid investments, reflects our belief 

that this transparency is especially important with respect to funds’ highly liquid investments. 

As noted above, a fund’s disclosure of percentages of its highly liquid investments that are 

segregated or pledged assets would permit the Commission and its staff to understand what 

percentage of a fund’s highly liquid investment minimum is composed of encumbered assets, 

and would allow the public to better understand that a certain percentage of a fund’s highly 

liquid investments may not be immediately available for liquidity risk management purposes. 

While a fund will not need to identify which of its particular assets are segregated in 

connection with particular derivatives transactions, it will need to identify the percentage of its 

highly liquid investments that are segregated or pledged with respect to derivatives transactions 

classified in each of the moderately liquid, less liquid, and illiquid classification categories. We 

recognize that these requirements will likely entail additional evaluation of the liquidity character 

 490 See supra footnote 470 and accompanying text.

491 See supra footnote 473 and accompanying paragraph. We note, however, that the ability to substitute may 

not improve the overall liquidity of the portfolio.
154

of a fund’s segregated assets compared to what a fund might do today as part of its current asset 

segregation procedures.492 We believe these burdens are justified, however, by the important 

transparency benefits of identifying the percentages of highly liquid investments that are 

segregated or pledged assets. 

We also note that these burdens are further reduced because under the rule a fund need 

not identify the percentage of segregated or pledged assets covering derivatives that are highly 

liquid investments, or the percentage of segregated or pledged assets that are moderately liquid 

investments or less liquid investments.

493 A fund would be permitted to exclude its derivatives 

transactions that are classified as highly liquid investments in determining the percentages of 

highly liquid investments that are segregated or pledged assets since the fund could dispose of or 

exit these derivatives transactions within three business days and the segregated or pledged 

assets also would be available to the fund for liquidity risk management purposes within three 

business days. Furthermore, as described in the preceding paragraph, the rule’s requirement to 

identify the percentages of a fund’s highly liquid investments that are also segregated or pledged 

assets reflects our belief that asset segregation or margin transparency is most important with 

respect to a fund’s highly liquid investments.

4. Guidance on Liquidity Classification Factors

Unlike rule 22e-4 as proposed, final rule 22e-4 does not include an enumerated list of 

factors that a fund would be specifically required to consider in classifying and reviewing the 

liquidity of its portfolio investments. The rule instead generally requires a fund to take into 

account “relevant market, trading, and investment-specific considerations” in classifying and 

 492 See infra section IV.C.1.

493 See rule 22e-4(b)(1)(ii)(C). 
155

reviewing its portfolio investments’ liquidity.494 In contrast, under the proposed rule a fund 

would have been required to take the following nine factors into account, to the extent 

applicable, when classifying the liquidity of each portfolio position in a particular asset:

• Existence of an active market for the asset, including whether the asset is listed on an 

exchange, as well as the number, diversity, and quality of market participants;

• Frequency of trades or quotes for the asset and average daily trading volume of the asset 

(regardless of whether the asset is a security traded on an exchange);

• Volatility of trading prices for the asset;

• Bid-ask spreads for the asset;

• Whether the asset has a relatively standardized and simple structure;

• For fixed income securities, maturity and date of issue;

• Restrictions on trading of the asset and limitations on transfer of the asset;

• The size of the fund’s position in the asset relative to the asset’s average daily trading 

volume and, as applicable, the number of units of the asset outstanding; and

• Relationship of the asset to another portfolio asset.495

The Proposing Release requested comment generally on whether the Commission should 

codify a list of liquidity classification factors (as discussed above)496 and also requested 

comments relating to the usefulness of the proposed factors generally, as well as specific 

comments on the proposed factors.

497 With respect to the general usefulness of the proposed 

 494 See supra section III.C.1.b.

495 Proposed rule 22e-4(b)(2)(ii).

496 See supra section III.C.1.b.

497 See Proposing Release, supra footnote 9, at section III.B.2.j.
156

factors, multiple commenters suggested that the proposed factors would be largely informative in 

assessing assets’ relative liquidity,498 but others advised that the proposed factors would not be 

useful in assisting fund management in making liquidity determinations.499 Some who objected 

to the proposed factors argued that their usefulness would be limited by the fact that they would 

be based on backward-looking data and thus may not reflect future conditions.500 Some 

commenters also argued that some of the proposed factors (e.g., frequency of trades or quotes for 

an asset and average daily trading volume of an asset) are generally more appropriate for 

assessing the liquidity of exchange-traded securities than securities that are traded 

over-the-counter (“OTC”) and that evaluating certain OTC securities using the proposed factors 

may make these securities appear to be less liquid than they actually are.501 For example, 

multiple commenters contended that certain fixed income securities tend to trade infrequently on 

any given day, but these securities’ liquidity is nevertheless quite high because a fund would 

generally be able to sell them fairly quickly.502 As discussed specifically below, commenters 

also expressed more granular concerns about certain of the proposed factors (specifically, 

frequency of trades or quotes for an asset, trading price volatility, position size, and relationship 

of an asset to another portfolio asset503). 

 498 See, e.g., CRMC Comment Letter; ICI Comment Letter I; J.P. Morgan Comment Letter; Nuveen Comment 

Letter.

499 See, e.g., Cove Street Comment; GFOA Comment Letter; MFS Comment Letter; Vanguard Comment 

Letter.

500 See, e.g., Cove Street Comment; Dodge & Cox Comment Letter; Vanguard Comment Letter.

501 See, e.g., Banks Comment Letter; LSTA Comment Letter; Milliman Comment Letter; Wells Fargo 

Comment Letter.

502 See, e.g., GFOA Comment Letter; MFS Comment Letter; T. Rowe Comment Letter; Vanguard Comment 

Letter.

503 For a discussion of commenters’ concerns about this proposed factor in the context of derivatives 

transactions, see supra section III.C.3.c.
157

As discussed above, we are not codifying the proposed factors in part because we 

understand that certain factors would be more informative to some funds than others, depending 

on the fund’s investment strategy and liquidity risk profile. We also are concerned that codifying 

the factors, particularly if applied in a “check-the-box” fashion, could lead funds to adopt 

classification processes that do not reflect the extent of a fund’s ability to sell its portfolio 

investments to meet redemptions within a given time period without a market impact, or do not 

otherwise result in an accurate picture of a fund’s liquidity profile.

504 However, we continue to 

believe that the proposed classification factors could be useful and relevant as aspects of the 

general market, trading, and investment-specific considerations that a fund must take into 

account under the final rule. Thus, in this section III.C.4, we discuss each of the factors that 

funds could consider in evaluating portfolio investments’ liquidity characteristics and managing 

liquidity risk.

505 Based on staff outreach across the fund industry, we understand that certain of 

 

Commenters also expressed concerns about this proposed factor in the context of assets used for hedging or 

risk mitigation purposes. In the Proposing Release, we stated that, when a fund purchases an asset (a 

“hedging asset”) in order to hedge or mitigate the risks associated with another asset (a “hedged asset”), the 

fund should consider the liquidity of the hedged asset when evaluating the liquidity of the hedging asset. 

Commenters stated that current industry practice often involves hedging aggregate portfolio exposures, not 

specific securities. See, e.g., ICI Comment Letter I; Milliman Comment Letter; Oppenheimer Comment 

Letter; T. Rowe Comment Letter. These commenters argued that the Commission’s guidance instructing a 

fund to classify the liquidity of hedging assets in consideration of the hedged asset’s liquidity classification 

would therefore be unworkable and would raise costly operational burdens, because funds do not currently 

link hedging assets and hedged assets on a one-for-one basis. 

Unlike in the context of derivatives transactions, in which we have stated that a fund must segregate assets 

to cover derivatives transactions, and this renders the segregated assets “frozen” and “unavailable for sale 

or other disposition” (see supra footnote 465 and accompanying text), we have not previously stated that 

purchasing assets with the intent to hedge or mitigate the risks associated with another asset makes those 

hedging assets unavailable for sale. We thus do not view the linkages between hedging and hedged assets 

to be directly analogous with the linkages between derivatives transactions and assets segregated to cover 

those derivatives transactions, and we are not stating in this Release the guidance we included in the 

Proposing Release regarding the proposed “relationship of an asset to another portfolio asset” in the context 

of assets used for hedging or risk mitigation purposes.

504 Cf. supra paragraph accompanying footnote 322. 

505 Our discussion of factors that could be considered by funds does not include the proposed “relationship of 

[an] asset to another portfolio asset” factor because guidance on this factor, as discussed above, has been 

replaced by requirements in rule 22e-4 regarding classification issues that arise with respect to derivatives 
158

these factors reflect certain common considerations that funds often take into account in 

evaluating their portfolio investments’ liquidity.506 Moreover, as discussed above, multiple 

commenters stated that the proposed rule included factors that, largely, are useful for assessing a 

fund’s assets’ relative liquidity.507 For example, some commenters agreed that factors such as 

those incorporated in the proposal are generally relevant considerations to use when evaluating 

asset liquidity and would help promote effective liquidity risk assessments,508 and that portfolio 

assets’ liquidity should be evaluated using a variety of inputs such as those that the proposed 

factors represent.509 Some suggested that the Commission discuss the factors as guidance 

accompanying its adoption of rule 22e-4.510 Overall, we believe this approach provides 

flexibility that should facilitate meaningful liquidity analyses, and encourages funds to consider

relevant information.

We acknowledge, as stated by some commenters, that certain of these factors may 

involve consideration of backward-looking data and thus may not account for ways in which 

changing market conditions could affect the liquidity of certain asset classes or investments.

511 

But we believe analyzing past data, while considering how that data may change in the future, is 

an inherent aspect of all risk management and does not render such analysis fruitless. In 

addition, the review requirements embedded in the classification framework, when combined 

 

transactions. See supra footnotes 456-461 and accompanying text; see also supra footnote 503 (discussing 

this proposed factor in the context of assets used for hedging or risk mitigation purposes). 

506 See Proposing Release, supra footnote 9, at text preceding n.200.

507 See supra footnote 498 and accompanying text.

508 See, e.g., CRMC Comment Letter; Fidelity Comment Letter; J.P. Morgan Comment Letter; Nuveen 

Comment Letter.

509 See, e.g., HSBC Comment Letter; MSCI Comment Letter. 

510 See, e.g., IDC Comment Letter; Invesco Comment Letter; J.P. Morgan Comment Letter; SIFMA Comment 

Letter I.

511 See supra footnote 500 and accompanying text.
159

with the liquidity risk assessment requirement to consider portfolio liquidity during normal and 

reasonably foreseeable stressed periods, further responds to this critique. We also are cognizant 

that, for certain fixed income or other OTC assets or asset classes, certain of the proposed 

liquidity classification factors, if considered standing alone, may appear to make these assets or 

classes to appear less liquid than they actually are. In the guidance below, we discuss special 

concerns that may be relevant to funds’ consideration of the liquidity characteristics of fixed 

income or other OTC assets.512

As discussed above, a fund generally is permitted to classify the liquidity of its portfolio 

investments according to their asset class. Thus, a fund may wish to consider the guidance 

discussed below in assessing the general liquidity characteristics of the asset classes in which it 

invests. For investments that the fund determines must be treated as an “exception” and 

classified separate from their asset class,

513 the guidance provided below could assist funds in 

identifying and classifying those investments that may demonstrate liquidity characteristics that 

are distinct from the fund’s other portfolio holdings within that same asset class. 

The guidance we provide below is not meant to cover an exhaustive list of considerations 

that a fund may take into account in evaluating its portfolio investments’ liquidity. Also, we 

recognize that specific liquidity concerns appropriate for consideration could vary depending on 

the issuer and the particular investment.

514 Even if a fund’s liquidity classification policies and 

procedures were to incorporate all of the guidance factors discussed below, a fund may decide

that it is appropriate to focus more heavily on certain factors and less on others in evaluating its 

 512 See, e.g., text accompanying infra footnotes 536-538 and 545-558.

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

514 See, e.g., Fidelity Comment Letter; LSTA Comment Letter; Nuveen Comment Letter; T. Rowe Comment 

Letter (each suggesting that the Commission clarify that not every factor is required to be considered to 

evaluate the liquidity of each of a fund’s portfolio assets).
160

portfolio investments’ liquidity. 

In the following sections, we discuss certain factors that a fund could consider in 

assessing the liquidity of its portfolio investments and provide guidance on specific issues

associated with each of these factors. We also discuss comments we received on the proposed 

classification factors. 

a. Existence of Active Market for an Asset Class or Investment; Exchange-Traded Nature of 

an Asset Class or Investment

We continue to believe that the manner in which a fund may sell an asset class (or 

particular portfolio investment), including whether an asset class or investment is generally listed 

on an exchange, may affect the liquidity of that asset class or investment.

515 While in general, 

being listed on a developed and recognized exchange may increase an investment’s liquidity,516

we note, as certain commenters mentioned,517 the fact that an investment is exchange-traded does 

not necessarily mean that a fund would be able to sell or convert that investment to cash within a

relatively short period.518 For example, a small-cap equity stock might be listed on an exchange 

but trade quite infrequently, which would tend to decrease its relative liquidity. Conversely, as 

 515 See Proposing Release, supra footnote 9, at section III.B.2.a (discussing the proposed requirement for a 

fund to consider, to the extent applicable, the existence of an active market for an asset, including whether 

the asset is listed on an exchange, as well as the number, diversity, and quality of market participants, in 

classifying the liquidity of each portfolio position in a particular asset).

516 See, e.g., Basel Committee on Banking Supervision, Basel III: The Liquidity Coverage Ratio and Liquidity 

Risk Monitoring Tools (Jan. 2013), at part 1, section II.A.1, available at

http://www.bis.org/publ/bcbs238.pdf; see also Nuveen FSOC Notice Comment Letter, supra footnote 85

(“While securities that trade on exchanges. . . or in deep principal/over-the–counter (“OTC”) markets (e.g., 

U.S. Treasuries) are generally liquid even in stressed markets, other securities that trade on an OTC basis. . 

. have faced increasing liquidity challenges in normal markets and can be subject to insufficient quality bids 

in times of stress as market makers pull back their capital. This can make it not only more difficult to sell 

these securities, but also to accurately value those assets that are retained.”). 

517 See, e.g., ICI Comment Letter I.

518 We note that in certain cases the exchange on which an investment is listed may not be the primary market 

for that security. For example, we understand that certain bonds that are exchange listed trade 

predominantly in the OTC markets. See, e.g., Types of Bonds, How Big Is the Market, and Who Buys?, 

available at http://www.investinginbonds.com/learnmore.asp?catid=5&subcatid=18&id=174 (“[T]he vast 

majority of bond transactions, even those involving exchange-listed issues, take place in [OTC] market.”). 
161

commenters discuss, we agree that certain securities that are traditionally traded in OTC markets, 

such as corporate bonds, may not typically be designed to be traded frequently and instead are 

more often “bought and held,” but certain of these securities nevertheless may be readily saleable

without the conversion to cash (or in some cases, sale or disposition) significantly changing their

market value.

519 Additionally, securities issued (or guaranteed as to principal and interest) by the 

U.S. government do not trade on exchanges, but are typically considered to be quite liquid.520 

In assessing the effect that being traded on an exchange could have on an asset class’s or

investment’s liquidity, a fund generally should evaluate how this consideration informs the 

liquidity characteristics of any ETF shares in which it invests. We understand that certain funds, 

particularly funds with investment strategies involving relatively less liquid portfolio securities 

(such as micro-cap equity funds, high-yield bond funds, and bank loan funds), may invest a 

portion of their assets in ETFs with strategies similar to the fund’s investment strategy because 

they view ETF shares as having characteristics that enhance the liquidity of the fund’s 

portfolio.

521 Specifically, in discussions with Commission staff, funds that invest in ETF shares 

 519 See id.

520 See rule 15c3-1(c)(2)(vi)(A)(1) under the Exchange Act (describing securities haircuts for securities issued 

or guaranteed as to principal or interest by the United States or any agency thereof); see also Liquidity 

Coverage Ratio: Liquidity Risk Measurement Standards (Sept. 9, 2014) [79 FR 61440 (Oct. 10, 2014)] 

(“Liquidity Coverage Ratio Release”) (in liquidity coverage ratio rule adopted by the Office of the 

Comptroller of the Currency, Board of Governors of the Federal Reserve System, and the Federal Deposit 

Insurance Corporation, “Level 1 Liquid Assets” are described as securities issued or unconditionally 

guaranteed as to timely payment of principal and interest by the U.S. Department of the Treasury, and 

liquid and readily-marketable securities issued or unconditionally guaranteed as to the timely payment of 

principal and interest by any other U.S. government agency (provided that its obligations are fully and 

explicitly guaranteed by the full faith and credit of the U.S. government)). 

521 See, e.g., Katy Burne, Institutions Pour Cash Into Bond ETFs, Wall Street Journal (Mar. 1, 2015), available 

at http://www.wsj.com/articles/institutions-pour-cash-into-bond-etfs-1425250969. Funds’ investments in 

ETFs are subject to the Investment Company Act’s limitations on investments in shares issued by other 

registered investment companies. See section 12(d)(1)(A) of the Act. Currently, these practices do not 

concern ETMFs. 

The Commission’s 2015 Request for Comment on Exchange-Traded Products requested comment on 

whether investors’ expectations of the nature of the liquidity of an exchange-traded product (including an 
162

have suggested that they find that these shares are more readily tradable, are less expensive to 

trade, and have shorter settlement periods than other types of portfolio investments.

522 In 

addition, unlike investments in cash, cash equivalents, and other highly liquid instruments, funds 

also have suggested to Commission staff that investing in ETFs with the same (or a similar) 

strategy as the fund’s investment strategy permits the fund to remain fully invested in assets that 

reflect the fund’s investment concentrations, risks, and performance potential.523

While we appreciate that ETFs’ exchange-traded nature could make these instruments 

useful to funds in managing purchases and redemptions under certain conditions (for example, 

ETFs’ settlement times could more closely reflect the time in which a fund has disclosed that it 

will typically redeem fund shares), funds should consider the extent to which relying 

substantially on ETFs to manage liquidity risk is appropriate. The liquidity of an ETF, 

particularly in times of declining market liquidity, is limited by the liquidity of the market for the 

ETF’s underlying securities and, in fact, may be impaired based on factors not directly related to 

the liquidity of the underlying securities.

524 Thus, shares of an ETF whose underlying securities 

 ETF) holding relatively less liquid portfolio securities differ from their expectations of the liquidity of the 

underlying portfolio securities. See 2015 ETP Request for Comment, supra footnote 29, at Question 49. 

Commenters expressed a range of views on the question. See, e.g., Comment Letter of Vanguard on the 

2015 ETP Request for Comment (Aug. 17, 2015) (stating that the disclosures made by ETFs in 

prospectuses, shareholder reports, and Web sites “ensures that investors and market participants have the 

necessary information to make informed investment decisions”); Comment Letter of ETF Radar on the 

2015 ETP Request for Comment (Aug. 8, 2015) (stating that investor expectations of liquidity depend on 

the skill of the investor); Comment Letter of Danny Reich on the 2015 ETP Request for Comment (July 2, 

2015) (stating that there is a “false assumption” that underlying assets have the same liquidity as the ETP, 

particularly with respect to bond ETPs).

522 See Proposing Release, supra footnote 9, at section III.C.6.b.

523 See id. 

524 See ETF Proposing Release, supra footnote 27, at section III.A.1; see also Tyler Durden, What Would 

Happen if ETF Holders Sold All at Once? Howard Marks Explains, Zero Hedge (Mar. 26, 2015), available

at http://www.zerohedge.com/news/2015-03-26/what-would-happen-if-etf-holders-sold-all-once-howardmarks-explains (“Thus we can’t get away from depending on the liquidity of the underlying high yield 

bonds. The ETF can’t be more liquid than the underlying, and we know the underlying can become highly 

illiquid.”). But see, e.g., Shelly Antoniewicz, Plenty of Players Provide Liquidity for ETFs, ICI Viewpoints
163

are relatively less liquid may not be able to be counted on to provide liquidity to a fund investing 

in these shares during times of stress. In the case of a significant decline in market liquidity, if 

authorized participants were unwilling or unable to trade ETF shares in the primary market, and 

the majority of trading took place among investors in the secondary market, the ETF’s shares 

could trade continuously at a premium or a discount to the value of the ETF’s underlying 

portfolio securities. This could frustrate the expectations of secondary market participants who 

count on the creation and redemption process to align the prices of ETF shares and their 

underlying portfolio securities. We therefore encourage funds to assess the liquidity 

characteristics of an ETF’s underlying securities, as well as the characteristics of the ETF shares 

themselves, in classifying the liquidity of ETF shares under rule 22e-4(b)(1)(ii).

Other Trading Mechanism Considerations

The means of trading a particular asset class or investment can affect its liquidity 

regardless of whether the investment is a security traded on an exchange. For example, whether 

an asset class or investment is generally traded in a bilateral transaction with a single dealer, or 

through an electronic auction mechanism where a trader can simultaneously contact multiple 

counterparties, can have different effects on its liquidity.525 The liquidity effects associated with 

choice of trading mechanism may differ depending on the asset class or investment being traded 

and other market conditions, and therefore it is difficult to make general statements regarding the 

correlation between a particular trading mechanism and the liquidity of the asset class or 

 (Dec. 2, 2014), available at http://www.ici.org/viewpoints/view_14_ft_etf_liquidity (stating that most of 

the trading activity in bond ETF shares is done in the secondary market and not through creations and 

redemptions with authorized participants).

525 See, e.g., Terrence Hendershott & Ananth Madhavan, Click or Call? Auction versus Search in the 

Over-the-Counter Market., 70 J. OF FIN. 419 (Feb. 2015), available at

http://faculty.haas.berkeley.edu/hender/Click_Call_OTC.pdf.
164

investment being traded. For this reason, a fund may wish to consider past experience in using

different trading mechanisms to sell a certain asset class or investment.

Diversity and Quality of Market Participants

In addition, the diversity and quality of market participants for a particular asset class or 

investment also could contribute to the liquidity of that asset class or investment. A fund may 

wish to consider the number of market makers on both the buying and selling sides of 

transactions. A fund also may wish to consider the quality of market participants purchasing and 

selling a particular asset class or investment, and may wish to assess, in particular: the market 

participant’s capitalization; the reliability of the market participant’s trading platform(s); and the 

market participant’s experience and reputation transacting in various types of assets. We believe 

that the diversity and quality of market participants may be meaningful in assessing a portfolio 

investment’s liquidity because it is common for relatively liquid asset classes and investments to

have active sale or repurchase markets at all times with diverse market participants.526 The 

presence of multiple active market makers may be a sign that a market is liquid.527 Diversity of

market participants, on both the buying and selling sides of transactions, may also be a 

significant point for a fund to consider because it tends to reduce market concentration and may 

facilitate a market remaining liquid during periods of stress.528

 526 See, e.g., Abdourahmane Sarr & Tonny Lybek, Measuring Liquidity in Financial Markets, IMF Working 

Paper (Dec. 2002), available at http://www.imf.org/external/pubs/ft/wp/2002/wp02232.pdf (“Liquid 

markets tend to exhibit five characteristics: (i) tightness (ii) immediacy, (iii) depth, (iv) breadth, and (v) 

resiliency.”).

527 See, e.g., Sunil Wahal, Entry, Exit, Market Makers, and the Bid-Ask Spread, 10 REV. OF FIN. STUD. 871 

(1997), available at https://www.acsu.buffalo.edu/~keechung/MGF743/Readings/H1.pdf (“Large-scale 

entry (exit) is associated with substantial declines (increases) in quoted end-of-day inside spreads, even 

after controlling for the effects of changes in volume and volatility. The spread changes are larger in 

magnitude for issues with few market makers; however, even for issues with a large number of market 

makers, substantial changes in quoted spreads take place.”).

528 See, e.g., Amir Rubin, Ownership Level, Ownership Concentration, and Liquidity, 10 J. FIN. MARKETS 219 
165

b. Frequency of Trades or Quotes; Average Daily Trading Volume

In general, we continue to believe that a high frequency of trades or quotes for a 

particular asset class or investment tends to indicate that a particular asset class or investment has 

relatively high liquidity.529 However, as many commenters raised and as discussed below, low 

trading frequency and trading volume does not necessarily indicate low liquidity, particularly for 

asset classes and investments that are not exchange-traded.530 Also, we note that the frequency of 

trades or quotes for a particular asset class or investment is not a perfect or complete measure of 

liquidity, and a fund may wish to also consider trade size in assessing the relationship between 

trade frequency and liquidity.531 In evaluating the frequency of trades (and bid and ask quotes) 

for an asset class or investment, a fund may wish to generally consider, among other relevant 

factors, the number of dealers quoting prices for that asset class or investment, the number of 

other potential purchasers and sellers, and dealer undertakings to make a market in the asset class

or investment. 

High average trading volume also tends to be correlated with greater liquidity, 

particularly for exchange-traded asset classes and investment. In general, high average daily 

trading volume for a particular asset class or investment indicates a deep market for that asset 

 

(Aug. 2007), available at http://www.sciencedirect.com/science/article/pii/S1386418107000134 (“We 

examine the link between the liquidity of a firm’s stock and its ownership structure, specifically, how much 

of the firm’s stock is owned by insiders and institutions, and how concentrated is their ownership. We find 

that the liquidity-ownership relation is mostly driven by institutional ownership rather than insider 

ownership. Importantly, liquidity is positively related to total institutional holdings but negatively related 

to institutional block holdings.”).

529 See Proposing Release, supra footnote 9, at section III.B.2.b (discussing the proposed requirement for a 

fund to consider, to the extent applicable, the frequency of trades or quotes for a particular asset, as well as 

the asset’s average daily trading volume (regardless of whether the asset is a security traded on an 

exchange), in classifying the liquidity of each portfolio position in a particular asset).

530 See infra footnotes 536-538 and accompanying text.

531 For example, 100 trades at $100 might or might not signify greater liquidity than 50 trades at $200, 

although they are likely to suggest better liquidity than one trade at $10,000. See Erik Banks, Liquidity 

Risk: Managing Funding and Asset Risk (2nd ed. 2013), at 169.
166

class or investment, which in turn indicates that a fund may be able to convert its holdings in that 

asset class or investment to cash without the conversion (or in some cases, sale or disposition)

significantly changing the market value.532 Especially for exchange-traded asset classes or 

investments, a fund may wish to consider the number of days of zero or very low trading volume 

during the prior month, year, or other relevant period, as this could indicate particularly limited 

liquidity. As one commenter suggested, and we agree, a fund may wish to consider not only the 

historical average trading volume of the asset class or assets in which its invests, but also 

whether trading volume is likely to change under different or stressed market conditions.533 High

trading volume is not always indicative of available liquidity for a particular asset class or 

investment, however. For example, high trading volumes might be associated with high selling 

pressure on the asset class or investment, and trades at that time may have a high value impact.534 

Also, as one commenter suggested, even if a particular asset class or investment were to exhibit 

high trading volume, the ability to convert the asset class or investment to cash without the 

 532 See id.; see also Fidelity FSOC Notice Comment Letter, supra footnote 69 (“Liquidity management is 

linked to portfolio managers’ attention to market risks indicated by . . . shrinking transaction volumes 

which exacerbate the impact cost for additional trading”). 

We note that double-counting of trades is a potential issue to consider when assessing average trading 

volume. Double-counting occurs because of differences between dealer and auction markets. In a dealer 

market, trades are “double-counted” because the dealer buys from person A and then sells to person B. In 

an auction market, person A and B trade directly. See, e.g., Anne M. Anderson & Edward A. Dyl, Trading 

Volume: NASDAQ and the NYSE, 63 FIN. ANALYSTS J. 79 (May/June 2007), available at

http://www.cfapubs.org/doi/abs/10.2469/faj.v63.n3.4693. 

533 See Interactive Data Comment Letter (suggesting that the Commission consider requiring a fund to 

consider the potential daily trading volume of its portfolio assets instead of, as proposed, the average daily 

trading volume of its assets).

534 See, e.g., HSBC Comment Letter; see also e.g., Jennifer Huang & Jiang Wang, Liquidity and Market 

Crashes, 22 REV. OF FIN. STUD. 2607 (2009), available at

http://rfs.oxfordjournals.org/content/22/7/2607.full (discussing how there can be high selling pressure (and 

high volume) along with low liquidity and how this can create market crashes); Mark Carlson, A Brief 

History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response, Federal 

Reserve Board Working Paper 2007–13 (Nov. 2006), available at

http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf (discussing how the 1987 stock 

market crash had both high volume and low liquidity).
167

conversion (or in some cases, sale or disposition) significantly changing the market value may 

also depend on other factors such as investors’ appetite for risk and the perceived “safety” of 

specific securities in “risk-off” flight-to-quality market conditions.535 

Multiple commenters stressed that, particularly for fixed income and other typically OTC 

asset classes and assets, relatively low trading volume does not necessarily correlate with low 

liquidity. For example, many commenters discussed the low turnover of the corporate bond 

market, which is driven by factors such as the buy-and-hold nature of bond investing, the 

distribution of an issuer’s borrowing across many different bond issues, and the fact that 

portfolio managers may deem many bonds to be substitutes for one another based on common 

characteristics such as issuer, sector, credit quality, and maturity.536 Commenters argued that, 

despite the relatively low turnover that is typical in the corporate bond market, these assets are 

commonly considered to be readily tradable at market-clearing prices.

537 Commenters made 

similar arguments about the dynamics of the municipal bond market, noting that municipal 

securities’ trading volume is not normally high, particularly during stable financial periods, but 

municipal securities (especially those that are investment grade) are commonly considered to be 

easily saleable.538 We generally agree with commenters’ concerns that the consideration of 

trading volume as a liquidity indicator should not by itself imply that low trading volume 

necessarily indicates low liquidity. Rather, it may indicate that other information needs to be 

assessed to make a liquidity determination. For asset classes and investments that typically 

demonstrate low trading volume, funds may wish to consider how the other liquidity 

 535 See HSBC Comment Letter.

536 See, e.g., Nuveen Comment Letter; Vanguard Comment Letter.

537 See, e.g., Nuveen Comment Letter; Vanguard Comment Letter.

538 See, e.g., GFOA Comment Letter; Nuveen Comment Letter.
168

characteristics of those asset classes and investments, including but not limited to other guidance 

factors discussed in this Release, may affect the time period and value impact associated with the 

class’s or investment’s ability to be converted to cash. Analysis of capital structure and credit 

quality of a particular asset class or investment, as well as bid-ask spreads and maturity/date of 

issue, may be particularly useful in considering the liquidity of investments whose trading 

volume is normally low. 

c. Volatility of Trading Prices

We continue to believe that trading price volatility is potentially a valuable metric to 

consider in evaluating an asset class’s or investment’s liquidity.539 In general, there is an inverse 

relationship between liquidity and volatility,540 as lack of liquidity in a particular investment

tends to amplify price volatility for that asset.541 Additionally, the Commission understands that 

certain funds and fund groups have historically experienced liquidity disruptions during periods 

of extreme market volatility, such as the June 2013 “taper tantrum”542 and the October 2014 

 539 See Proposing Release, supra footnote 9, at section III.B.2.c (discussing the proposed requirement for a 

fund to consider, to the extent applicable, the volatility of trading prices for its portfolio assets, in 

classifying the liquidity of each portfolio asset).

540 See, e.g., Tarun Chordia, Asani Sarkar & Avanidhar Subrahmanyam, An Empirical Analysis of Stock and 

Bond Market Liquidity, Federal Reserve Bank of New York Staff Reports, No. 164 (Mar. 2003), available 

at http://www.newyorkfed.org/research/staff_reports/sr164.pdf (finding that unexpected liquidity and 

volatility shocks are positively and significantly correlated across stock and bond markets).

541 See, e.g., Prachi Deuskar, Extrapolative Expectation: Implications for Volatility and Liquidity (Aug. 2007), 

available at https://business.illinois.edu/pdeuskar/Deuskar_Extrapolative_Liquidity_Volatility.pdf

(“Illiquidity amplifies supply shocks, increasing realized volatility of prices, which feeds into subsequent 

volatility forecasts.”); see also Fidelity FSOC Notice Comment Letter, supra footnote 69, at 21 (“Liquidity 

management is linked to portfolio managers’ attention to market risks indicated by ... increasing marketand security-specific volatility.”).

542 In May 2013, Ben Bernanke, then Chairman of the Federal Reserve Board, announced that the Federal 

Reserve may start scaling back its asset purchase program—in which the Federal Reserve purchased 

approximately $85 billion worth of bonds and mortgage-backed securities each month—sooner than 

investors expected. This caused interests rates on fixed income products to spike, and bond prices to fall 

dramatically. This market dislocation came to be known as the “taper tantrum. See Christopher Condon & 

Jeff Kearns, Fed Worried About Triggering Another ‘Taper Tantrum’, Bloomberg (Oct. 8, 2014), available 

at http://www.bloomberg.com/news/articles/2014-10-08/fed-worried-about-triggering-another-taper-
169

“flash crash.”543 As one commenter suggested, and we agree, if a fund holds asset classes or 

investments that are thinly traded, the fund may wish to consider volatility of evaluated pricing 

information in assessing the liquidity of those asset classes or investments.

544

d. Bid-Ask Spreads

Bid-ask spreads—the difference between bid and offer prices for a particular 

investment—have historically been viewed as a useful measure for assessing the liquidity of 

assets,

545 and we continue to believe that a fund may consider this factor useful in classifying the

liquidity of a particular asset class or investment.

546 The bid-ask spread of a particular 

investment is related to the riskiness of that investment, as well as the length of time that a 

broker-dealer believes it will have to hold the investment before selling it.547 In general, high 

bid-ask spreads for a particular asset class or investment correlate with a lack of liquidity in that 

 

tantrum-.

543 See Joint Staff Report: The U.S. Treasury Market on October 15, 2014 (July, 13, 2015), available at 

https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-

2015.pdf (“On October 15, 2014, the market for U.S. Treasury securities, futures, and other closely related 

financial markets experienced an unusually high level of volatility and a very rapid round-trip in prices. 

Although trading volumes were high and the market continued to function, liquidity conditions became 

significantly strained.”).

544 See Interactive Data Comment Letter (suggesting that the Commission consider replacing the proposed 

“volatility of trading prices for the asset” classification factor with “volatility of traded or evaluated pricing 

information,” to make this proposed factor more applicable to fixed income assets and other asset classes 

that may be thinly traded).

545 See, e.g., Michael J. Fleming, Measuring Treasury Market Liquidity, Federal Reserve Bank of New York 

Economic Policy Review (Sept. 2003), available at

https://www.newyorkfed.org/medialibrary/media/research/epr/03v09n3/0309flempdf.pdf (providing a 

literature review of studies analyzing bid-ask spreads in relation to Treasury market liquidity); see also

Fidelity FSOC Notice Comment Letter, supra footnote 69, at 21 (“Liquidity management is linked to 

portfolio managers’ attention to market risks indicated by. . .heightened market impact costs (as indicated 

by widening bid/ask spreads)”).

546 See Proposing Release, supra footnote 9, at section III.B.2.d (discussing the proposed requirement for a 

fund to consider, to the extent applicable, its portfolio assets’ bid-ask spreads when assessing its portfolio 

assets’ liquidity).

547 See MarketAxess, The MarketAxess Bid-Ask Spread Index (BASI): A More Informed Picture of Market 

Liquidity in the U.S. Corporate Bond Market (2013), available at

http://www.marketaxess.com/pdfs/research/marketaxess-bid-ask-spread-index-BASI.pdf (discussing 

methodology for developing an index that tracks bid-ask spreads of U.S. corporate bonds).
170

asset class or investment. For example, when liquidity was significantly constricted during the 

2007–2009 financial crisis, bid-ask spreads on U.S. investment grade bonds were notably

elevated.548 However, bid-ask spreads alone do not necessarily provide a comprehensive 

understanding of an investment’s liquidity. For instance, bid-ask spreads are often constrained 

by the increments in which prices are quoted.549 Additionally, as one commenter noted, bid-ask 

spreads do not take into account the volume and scale of a portfolio manager’s intended buy and 

sell transactions.550

e. Standardization and Simplicity of Asset Class’s or Investment’s Structure

We continue to believe that whether an asset class or investment has a relatively 

standardized and simple structure is generally relevant to a fund’s evaluation of an asset class’s

or investment’s liquidity.

551 Investments that trade OTC with terms set at issuance such as sizes,

maturities, coupons, and payment dates may be relatively more liquid compared to similarly 

 548 See, e.g., Got Liquidity?, supra footnote 452, at 7; see also Rich Estabrook, Diminished Liquidity in the 

Corporate Bond Market: Implications for Fixed Income Investors, Oppenheimer (Mar. 16, 2015), at 1, 

available at http://www.opco.com/trend-analysis/final_liquidity_report-031615.pdf.

549 See, e.g., Michael A. Goldstein & Kenneth A. Kavajecz, Eighths, Sixteenths, and Market Depth: Changes 

in Tick Size and Liquidity Provision on the NYSE, 56 J. FIN. ECON. 125 (2000), available at 

https://www.researchgate.net/publication/4978467_Eighths_Sixteenths_and_Market_Depth_Changes_in_T

ick_Size_and_Liquidity_Provision_on_the_Nyse (“Using limit order data provided by the NYSE, we 

investigate the impact of reducing the minimum tick size on the liquidity of the market. While both spreads 

and depths (quoted and on the limit order book) declined after the NYSE’s change from eighths to 

sixteenths, depth declined throughout the entire limit order book as well. The combined effect of smaller 

spreads and reduced cumulative limit order book depth has made liquidity demanders trading small orders 

better off; however, traders who submitted larger orders in lower volume stocks did not benefit, especially 

if those stocks were low priced.”); Hendrik Bessembinder, Tick Size, Spreads, and Liquidity: An Analysis of 

Nasdaq Securities Trading Near Ten Dollars, 9 J. OF FIN. INTERMEDIATION 213 (July 2000), available at

http://www.acsu.buffalo.edu/~keechung/MGF743/Readings/G4.pdf (“There is no evidence of a reduction 

in liquidity with the smaller tick size. The largest spread reductions occur for stocks whose market makers 

avoid odd-eighth quotes. This finding provides support for models implying that changes in the tick size 

can affect equilibrium spreads on a dealer market and indicates that the relation between tick size and 

market quality is more complex than the imposition of a constraint on minimum spread widths.”).

550 See HSBC Comment Letter.

551 See Proposing Release, supra footnote 9, at section III.B.2.e (discussing the proposed requirement for a 

fund to consider, to the extent applicable, the standardization and simplicity of structure of its portfolio 

assets when assessing its portfolio assets’ liquidity).
171

situated investments without standardized terms. Standardization can increase liquidity by 

simplifying the ability to quote and trade securities, enhancing operational efficiency to execute 

and settle trades, and improving secondary market transparency. Some types of OTC-traded 

securities exhibit a relatively high level of standardization, such as government and agency 

bonds, futures contracts, and certain swap contracts. Central clearing of certain OTC-traded 

securities, which generally requires the terms of these securities to be highly standardized, has 

been associated with an increase in these investments’ liquidity, as measured by factors such as 

the bid-ask spreads for these investments and the number of dealers providing quotes for these 

investments.

552 However, standardization alone may not be indicative of an investment’s

liquidity. For example, corporate bond issuers commonly have large numbers of bonds

outstanding, and trading can be fragmented among that universe of bonds.553 However, as 

discussed above, we understand that market participants may consider many corporate bonds to 

be highly comparable and substitutable from a liquidity perspective, to the extent that they share 

 552 See, e.g., Yee Cheng Loon & Zhaodong (Ken) Zhong, The Impact of Central Clearing on Counterparty 

Risk, Liquidity, and Trading: Evidence from the Credit Default Swap Market, 112 J. OF FIN. ECON. 91 

(Apr. 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2176561 (analyzing the 

impact of central clearing on credit default swaps and finding that cleared reference entities experience an 

improvement in both liquidity and trading activity relative to non-cleared entities); Joshua Slive, Jonathan 

Witmer & Elizabeth Woodman, Liquidity and Central Clearing: Evidence from the CDS Market, Bank of 

Canada Working Paper 2012–38 (Dec. 2012), available at http://www.bankofcanada.ca/wpcontent/uploads/2012/12/wp2012-38.pdf (analyzing “the relationship between liquidity and central clearing 

using information on credit default swap clearing at ICE Trust and ICE Clear Europe,” and finding that 

“the introduction of central clearing is associated with a slight increase in the liquidity of a contract” (but 

noting that the effects of central clearing on liquidity must be viewed in light of the fact that the central 

counterparty chooses the most liquid contracts for central clearing, consistent with liquidity characteristics 

being important in determining the safety and efficiency of clearing)). But see Manmohan Singh, 

Collateral, Netting and Systemic Risk in the OTC Derivatives Market, IMF Working Paper 10/99 (Apr. 1, 

2010), available at https://www.imf.org/external/pubs/cat/longres.cfm?sk=23741.0 (arguing that large 

increases in collateral posted for the centrally cleared trades negatively affect market liquidity given that 

most large banks will be reluctant to offload their positions to central counterparties).

553 For example, while each of the top ten largest issuers in the United States had one common equity security 

outstanding as of April 2014, these issuers collectively had more than 9,000 bonds outstanding. See

BlackRock, Corporate Bond Market Structure: The Time for Reform Is Now, Viewpoint (Sept. 2014), at 7,

available at https://www.blackrock.com/corporate/en-mx/literature/whitepaper/viewpoint-corporate-bondmarket-structure-september-2014.pdf. 
172

common characteristics such as issuer, sector, credit quality, and maturity.554

f. Maturity and Date of Issue of Fixed Income Securities

We continue to believe that, with respect to the fixed income investments a fund holds in 

its portfolio, those investments’ maturity, as well as their date of issue, are significant indicators

of their liquidity.555 In general, a fixed income asset trades most frequently in the time directly 

following issuance, and its trading volume decreases in the asset’s remaining time to maturity.556

Thus “on-the-run” securities (that is, bonds or notes of a particular maturity that were most 

recently issued) tend to trade significantly more frequently than their “off-the-run” counterparts 

(that is, bonds or notes issued before the most recently issued bond or note of a particular 

maturity).557 Because high trading volume generally suggests relatively high liquidity,558 a fixed

income asset’s date of issuance and maturity, which in turn are generally correlated with the 

trading volume of a fixed income asset, together are important liquidity indicators. We

 554 See supra footnote 536 and accompanying text.

555 See Proposing Release, supra footnote 9, at section III.B.2.f (discussing the proposed requirement for a 

fund to consider, with respect to fixed income assets, these assets’ maturity and date of issue when 

assessing their liquidity).

556 See, e.g., Sugato Chakravarty & Asani Sarkar, Liquidity in U.S. Fixed Income Markets: A Comparison of 

the Bid-Ask Spread in Corporate, Government and Municipal Bond Markets, Federal Reserve Board of 

New York Staff Report No. 73 (Mar. 1999), available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=163139.

557 The on-the-run phenomenon refers to the fact that, in fixed income markets, securities with nearly identical 

cash flows trade at different yields and with different liquidity. In particular, most recently issued (i.e., 

on-the-run) government bonds of a certain maturity are generally more liquid than previously issued (i.e., 

off-the-run or old) bonds maturing on similar dates. See, e.g., Paolo Pasquariello & Clara Vega, The onthe-run liquidity phenomenon, 92 J. OF FIN. ECON. 1-24 (Apr. 2009), available at

http://webuser.bus.umich.edu/ppasquar/onofftherun.pdf (analyzing the liquidity differentials of on-the-run 

and off-the-run U.S. Treasury bonds and finding, among other things, that on-the-run and off-the-run 

liquidity differentials are economically and statistically significant—showing that on-the-run bonds tend to 

be more liquid than their off-the-run counterparts—even after controlling for certain intrinsic 

characteristics of the bonds); Michael Barclay, Terrence Hendershott & Kenneth Kotz, Automation versus 

Intermediation: Evidence from Treasuries Going Off the Run, 61 J. OF FIN. 2395 (Oct. 2006), available at

http://faculty.haas.berkeley.edu/hender/on-off.pdf (discussing how “when Treasury securities go ‘off the 

run’ their trading volume drops by more than 90%”).

558 See supra section III.C.4.b.
173

understand, based on staff outreach and industry knowledge, that remaining time to maturity is a 

key factor that fixed income funds commonly consider in assessing the liquidity of their portfolio 

positions.

g. Restrictions on Trading; Limitations on Transfer

We continue to believe that restrictions on trading certain investments, as well as 

limitations on an investment’s transfer, may adversely affect those investments’ liquidity.559 For 

example, although we are replacing existing Commission guidance on identifying illiquid assets 

(including the specific factors listed in the Rule 144A Release regarding the liquidity of a rule 

144A security)560 with new regulatory requirements regarding the process for determining that 

certain investments are illiquid, we believe that the restricted nature of a rule 144A security is 

one factor that generally should be considered by a fund in evaluating the liquidity of a rule 

144A security.561 Regardless of whether a portfolio investment is a restricted security, it may

nevertheless be subject to other limitations on transfer. For example, for securities that are 

traded in certain foreign markets, government approval may be required for the repatriation of

investment income, capital, or the proceeds of sales of securities by foreign investors.562

 559 See Proposing Release, supra footnote 9, at section III.B.2.g (discussing the proposed requirement for a 

fund to consider restrictions on trading and limitations on transfer in classifying the liquidity of each

portfolio asset).

560 See Rule 144A Release, supra footnote 37, at text following n.62.

561 See id. While we are withdrawing the guidance in the Rule 144A Release, including the guidance that 

boards are responsible for determining if a security is liquid or illiquid, we note that the guidance factors 

discussed in the Rule 144A Release are consistent with certain of the guidance factors discussed in this 

Release. 

562 See, e.g., HSBC Comment Letter; HSBC Global Research, Emerging Markets Currency Guide 2012 (Dec. 

2011), available at https://www.hsbcnet.com/gbm/attachments/rise-of-the-rmb/currency-guide2012.pdf?WT.ac=CIBM_gbm_pro_rmbrise_pbx01_On; see also Liquidity Coverage Ratio Release, supra

footnote 520, at section II.B.3.iv (discouraging banking entities from holding a disproportionate amount of 

their eligible highly qualified liquid assets in locations outside the United States where unforeseen 

impediments may prevent timely repatriation of such assets during a liquidity crisis).
174

Portfolio investments furthermore may be subject to certain contractual limitations on transfer.563

Securities subject to transfer limitations in general are less liquid than securities without such 

limitations. 

5. Liquidity Classification Review Requirement

Under rule 22e-4 as adopted today, a fund would be required to review its portfolio 

investments’ classifications at least monthly in connection with reporting the liquidity 

classification for each portfolio investment on Form N-PORT, as well as more frequently if 

changes in relevant market, trading, and investment-specific considerations are reasonably 

expected to materially affect one or more of its investments’ classifications.564 A fund generally

could classify and review the liquidity classifications of its portfolio investments according to 

their asset class; however, the fund must separately classify and review any investment within an 

asset class if the fund or its adviser, after reasonable inquiry, has information about any market, 

trading, or investment-specific considerations that are reasonably expected to significantly affect 

the liquidity characteristics of that investment as compared to other securities within that asset 

class.565

 563 See, e.g., Stephen H. Bier, Julien Bourgeois & Joseph McClain, Mutual Funds and Loan Investments, THE 

INVESTMENT LAWYER: COVERING LEGAL AND REGULATORY ISSUES OF ASSET MANAGEMENT, Vol. 22, No. 

3 (Mar. 2015), at 2, available at

http://www.dechert.com/files/Uploads/Documents/FSG/Mutual%20Funds%20and%20Loan%20Investment

s%20-%20The%20Investment%20Lawyer.pdf (“[M]any loans and assignment trades remain bespoke 

transactions that require consents from borrowers or key syndicate members, and loan documents are still 

negotiated written documents that require human review. As a result. . .the mechanics of loan trades and 

certain trade settlement times cause funds to carefully monitor liquidity considerations surrounding loan 

investments . . . . [In making such determinations, funds] typically consider factors common to general 

liquidity determinations, as well as factors specific to the loan markets, which can include: (i) the legal 

limitations on the transferability or sale of a loan including the requirement to obtain consents from 

borrowers or syndicate agents and members prior to assignment; (ii) the existence of a trading market for 

the loans and the estimated depth of the market; (iii) the frequency of trades or quotes for the loan; (iv) the 

estimated length of the settlement period; and (v) the borrower’s health.”).

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

565 See rule 22e-4(b)(1)(ii)(A).
175

As discussed in the Proposing Release, the Commission has previously stated that it 

“expects funds to monitor portfolio liquidity on an ongoing basis to determine whether, in light 

of current circumstances, an adequate level of liquidity is being maintained.”566 Some have 

interpreted this statement to mean that the Commission does not intend for a fund to reassess the 

liquidity status of individual securities on an ongoing basis, but instead to monitor whether a 

fund portfolio’s overall liquidity profile is appropriate in light of its redemption obligations.567 

While we agree that a fund should monitor the liquidity of its portfolio holistically, we note that 

the decreased liquidity of individual portfolio components can directly affect the ability of a fund 

to meet its redemption obligations without significant dilution of remaining investors’ interests in 

the fund.

568 We thus believe that specifically requiring a fund to review the classifications of its 

portfolio investments made under rule 22e-4 would reduce the risk that a fund would be unable 

to meet its redemption obligations without significant investor dilution. 

As proposed, rule 22e-4 would have required a fund to review its liquidity classifications 

on an ongoing basis.

569 Also, like the proposed classification requirement, the proposed review 

requirement would have required a fund to take into account a list of specified factors, as the 

fund determines applicable, in reviewing its portfolio assets’ liquidity.570 In the Proposing 

Release, we stated that a fund may wish to determine the frequency of ongoing review of 

 566 See Proposing Release, supra footnote 9, at nn.246-248 and accompanying text (citing Guidelines Release, 

supra footnote 38, at section II).

567 See id., at n.247 (citing Investment Company Institute, Valuation and Liquidity Issues for Mutual Funds 

(Feb. 1997), at 45).

568 See, e.g., Third Avenue Temporary Order, supra footnote 12 (“On December 9, 2015, after considering the 

environment the Fund was in and the likelihood that incremental sales of portfolio securities to satisfy 

additional redemptions would have to be made at prices that would unfairly disadvantage all remaining 

shareholders, the Board determined that the fairest action on behalf of all shareholders would be to adopt a 

plan of liquidation.”); see also Heartland Release, supra footnote 80.

569 Proposed rule 22e-4(b)(2)(i).

570 Proposed rule 22e-4(b)(2)(ii).
176

portfolio positions’ liquidity classifications based in part on the liquidity of its portfolio holdings, 

as well as the timing of its portfolio acquisitions and turnover.571 In addition, we noted in the 

Proposing Release that, at a minimum, a fund would review its liquidity classifications at least 

monthly in order to accurately report this information on proposed Form N-PORT.572 Proposed 

rule 22e-4 did not include provisions that would permit a fund to review its portfolio assets’ 

liquidity on an asset-class basis.

We sought comment in the Proposing Release about the proposed ongoing review 

requirement. Several commenters suggested that the Commission adopt a general liquidity 

classification review requirement, without incorporating specific factors that a fund would be 

required to consider during the course of its review.573 One commenter argued that the frequency 

of the proposed review requirement was unclear and recommended that the Commission adopt 

more specific standards associated with review frequency.574 Multiple commenters expressed 

concerns about the potential burden associated with an “ongoing” review requirement575 and 

suggested that these concerns could be mitigated by replacing the proposed requirement to 

classify the liquidity of each portfolio position with a “top-down” requirement permitting funds 

to classify their portfolio assets’ liquidity on an asset-class basis.576

We believe that the review requirement we are adopting, together with the rule provision 

specifying that a fund would generally be permitted to review its liquidity classifications with 

 571 See Proposing Release, supra footnote 9, at text accompanying n.252.

572 See id., at n.253.

573 See, e.g., CFA Comment Letter; Vanguard Comment Letter.

574 See Better Markets Comment Letter.

575 See, e.g., Dechert Comment Letter; ICI Comment Letter I; LSTA Comment Letter; T. Rowe Comment 

Letter.

576 See, e.g., LSTA Comment Letter.
177

reference to its holdings’ asset classes, advances our goal of requiring funds to appropriately reevaluate the liquidity of their portfolio holdings, while responding to commenters’ concerns. As 

discussed in the Proposing Release, we understand that some funds currently may not review the 

liquidity of their portfolio investments on a continuing basis after they are acquired.577 In 

particular, we understand that certain funds may initially determine that certain investments are 

liquid or illiquid but will not regularly re-evaluate these initial classifications, even in light of 

changing market conditions. We understand that some funds, on the other hand, currently 

reassess the liquidity of their portfolio investment regularly based on market-wide developments, 

as well as events affecting particular securities or asset classes.578 

Rule 22e-4 as adopted requires a fund to review its liquidity classifications at least 

monthly, in connection with reporting its liquidity classifications monthly on Form N-PORT.579 

This requirement responds to the recommendation that the Commission adopt more specific 

standards associated with review frequency. Moreover, in order to determine whether its 

holdings are consistent with the fund’s highly liquid investment minimum, as well as the rule 

22e-4 limitation on illiquid investments, a fund would have to determine whether its initial 

classification determinations have changed based on market conditions or other developments. 

Therefore, rule 22e-4 also includes the requirement for a fund to review its liquidity 

classifications more frequently than monthly if changes in relevant market, trading, and 

investment-specific considerations are reasonably expected to materially affect one or more of its 

 577 See Proposing Release, supra footnote 9, at paragraph accompanying n.250.

578 See id., at n.250 and accompanying text; see also ICI Comment Letter I.

579 See rule 22e-4(b)(1)(ii).
178

investment classifications.580 For example, relevant market-wide developments could include 

changes in interest rates or other macroeconomic events, market-wide volatility, market-wide 

flow changes, dealer inventory or capacity changes, and extraordinary events such as natural 

disasters or political upheaval.581 Asset-class and investment-specific developments that a fund 

may wish to consider include, among others, regulatory changes affecting certain asset classes 

and corporate events (such as bankruptcy, default, pending restructuring, or delisting, as well as 

reputational events). We believe that the rule’s requirement that a fund review its liquidity 

classifications at least monthly, as well as more frequently in light of market-related and other 

changes that could materially affect a fund’s investment classifications, will provide funds with 

more direction as to the frequency of their classification reviews, as well as circumstances that 

could lead to a classification review, than the proposed ongoing review requirement. 

We believe that the review requirement we are adopting, as opposed to the proposed 

ongoing review requirement, permits funds to tailor their review of liquidity classifications in 

light of the liquidity character of a fund’s portfolio investments. The modifications to rule 22e-4 

clarify that we do not expect a fund to constantly reassess all of its portfolio investments’

liquidity. Also, the review requirement that we are adopting would not require a fund to consider 

a detailed list of specific factors in the course of conducting its liquidity classification reviews. 

Instead, as discussed above, it would require a fund to take into account “relevant market, 

trading, and investment-specific considerations” in reviewing its investments’ liquidity.582 

Finally, the review requirement that we are adopting, like the rule 22e-4 classification 

 580 See id.

581 See, e.g., 2014 Fixed Income Guidance Update, supra footnote 94.

582 See rule 22e-4(b)(1)(ii).
179

requirement, would permit a fund to generally review its portfolio investments’ liquidity 

according to their asset class (provided that the fund must identify, and separately review, any 

investment within an asset class that the fund determines should be reviewed separately based on 

its liquidity characteristics).583 We believe that this approach will permit funds to increase their 

efficiency in classifying and reviewing portfolio investments’ liquidity. 

6. Liquidity Classification Reporting and Disclosure Requirements

In connection with the liquidity classification requirement of rule 22e-4, we are requiring, 

largely as proposed and with certain modifications in response to comments, a fund to report the 

liquidity classification assigned to each of the fund’s portfolio investments on Form N-PORT.

584 

Position-level liquidity classification information will be reported to the Commission in a 

structured data format on a confidential basis rather than released every three months to the 

public.585 Under the final rules, a fund will also be required to publicly report on Form N-PORT 

the aggregated percentage of its portfolio investments that falls into each of the four liquidity 

classification categories outlined above.586 This aggregate information will be disclosed to the 

public only for the third month of each fiscal quarter with a 60-day delay. While we 

acknowledge that liquidity classification determinations may be to some extent subjective and 

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

584 Rather than report the liquidity classification among six categories as under the proposal, funds will be 

required to report liquidity classifications among four liquidity categories, which may be based on asset 

type to the extent discussed above. See Item C.7. of Form N-PORT. We have modified the numbering

convention for items within Form N-PORT from the proposal to be consistent with Form N-PORT as 

adopted in the Investment Company Reporting Modernization Adopting Release.

585 See General Instruction F of Form N-PORT.

586 Item B.8.a. of Form N-PORT. We note that such reporting is designed to serve as a snapshot of a fund’s 

liquidity on the last business or calendar day of the month. See rule 30b1-9 under the Investment Company 

Act (requiring reporting on Form N-PORT to be current as of the last business day, or last calendar day, of 

the month). Accordingly, the aggregate percentage of portfolio investments in each of the four liquidity 

classification categories need not reflect pending transactions, but instead should reflect the balance of 

investments in each category on the last business or calendar day of the month.
180

that such information reported on Form N-PORT may be non-standardized, we believe that, on 

balance, our staff, investors, and other potential users would benefit from the information that 

will be reported on Form N-PORT that currently may not be reported or disclosed by funds. We 

believe that this greater transparency about liquidity at the fund-level will provide our staff,

investors, and other potential users with a helpful picture of the general liquidity characteristics 

of funds and help them better understand the liquidity risks associated with a particular fund. 

We also believe that this information will help investors make more informed investment 

decisions. 

As part of this public disclosure, a fund would publicly disclose the percentages of its 

highly liquid investments that are segregated to cover, or pledged to satisfy margin requirements 

in connection with, the fund’s derivatives transactions that the fund has classified in the

moderately liquid, less liquid, and illiquid investments classification categories in light of the 

requirement in rule 22e-4 that the liquidity classification cover each of the fund’s derivatives 

transactions, discussed above.587 This derivatives transactions information will also be made 

public for the third month of each fiscal quarter with a 60-day delay. 

Most commenters opposed the proposed Form N-PORT reporting requirement, and 

particularly objected to having position-level liquidity information reported on Form N-PORT 

made public.588 We believe that the additions to Form N-PORT adopted today in this Release 

address many of these concerns. We discuss these additions, the comments we received on the 

proposal, as well as modifications we made to the proposal in response to comments, in more 

 587 Item B.8.b. of Form N-PORT. This derivatives transactions reporting requirement corresponds to the 

modification in rule 22e-4(b)(1)(ii)(C), discussed above. 

588 See, e.g., Cohen & Steers Comment Letter; NYC Bar Comment Letter; SIFMA Comment Letter I;

Wellington Comment Letter.
181

detail below.

a. Reporting Liquidity Classification of Portfolio Investments

We proposed to require a fund to report on Form N-PORT the liquidity classification of 

each of the fund’s positions (or portions of a position) in a portfolio asset using the proposed 

classification system of rule 22e-4.589 As discussed above, most commenters opposed the 

proposed classification regime, and many offered varied classification alternatives for fund 

liquidity risk management and reporting purposes. As discussed previously, we are today 

adopting a liquidity classification requirement under rule 22e-4 based on a “days-to-cash” 

framework as proposed, but with a number of modifications informed by commenter 

recommendations that we believe address many commenters’ concerns about the classification 

process itself. 

A number of commenters supported reporting liquidity classifications to the Commission

on Form N-PORT, provided that it was not publicly disclosed.

590 For example, one commenter 

expressed support for reporting position-level liquidity classifications to the Commission, noting 

that the Commission should have the data it needs to monitor fund holdings and liquidity 

determinations, examine potential outliers, and, if an unexpected market event occurs (e.g., the 

default of a significant institution), quickly assess the potential impact on mutual funds it 

supervises.591 Another commenter expressed the belief that the proposed liquidity classifications 

 589 See Proposing Release, supra footnote 9, at section III.G.2.a.

590 See, e.g., Dechert Comment Letter; Interactive Data Comment Letter; J.P. Morgan Comment Letter;

Nuveen Comment Letter. Some commenters suggested that the Commission evaluate reported 

classification data for a period of time to determine whether the information is appropriate for public 

disclosure. See BlackRock Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter III.

591 See J.P. Morgan Comment Letter.
182

data could be appropriate for Commission oversight purposes.

592 

On the other hand, a few commenters objected to reporting liquidity classifications, as 

proposed, even if such information is disclosed only to the Commission.593 Some commenters 

stated that there is limited utility in the proposed classification information for the Commission 

since the information would be subjective and methodology-specific, which would lead to results 

that would preclude comparisons across funds, limiting the utility of this information for the 

Commission’s monitoring of industry-wide data.594 In addition, one commenter expressed 

concerns about the security of sensitive information filed with the Commission due to recent 

high-profile cybersecurity breaches both in the governmental and private sectors.595 

We continue to believe that requiring funds to report the liquidity classification of their 

portfolio investments is vital to our ongoing monitoring and oversight efforts. A key goal of the 

rulemaking is to allow us to monitor funds’ liquidity profiles (both on a fund-by-fund basis and 

across funds) over time, and respond as appropriate. Absent the required reporting on Form 

N-PORT, our ability to engage in such efforts would be limited and less efficient. We believe 

that the changes made to the classification system discussed above should serve to mitigate 

commenters’ concerns about the difficulties of making comparisons across the industry, in light 

of the reduced number of categories for classification. We recognize that there is still likely to 

be variation between funds in how they classify certain asset classes and investments, and 

believe that despite any variations, this liquidity information will be useful and valuable to us. 

 592 See State Street Comment Letter.

593 See Federated Comment Letter; Fidelity Comment Letter; Invesco Comment Letter; SIFMA Comment 

Letter I.

594 See, e.g., BlackRock Comment Letter; Fidelity Comment Letter; Wellington Comment Letter.

595 See Invesco Comment Letter.
183

We will be able to identify different fund liquidity classification practices, and use that 

information to gain insight into how different funds view liquidity in the market, and whether 

there are any identifiable liquidity concerns. We also note that despite any concerns about 

variation of practices across funds limiting comparability, we expect that the reported 

information will allow us to generally monitor specific funds’ liquidity on a consistent basis 

across time, and identify how their views of the liquidity of their investments change.

We believe that such information will assist us in better assessing liquidity risk in the 

open-end fund industry, which can inform our policy and guidance. We also believe that this 

information will assist us in monitoring for compliance with rule 22e-4 and identifying potential 

outliers in fund liquidity classifications for further inquiry, as appropriate. We recognize that 

liquidity classifications, similar to valuation- and pricing-related matters, inherently involve 

judgment and estimations by funds. We also understand that the liquidity classification of an 

asset class or investments may vary across funds depending on the facts and circumstances 

relating to the funds and their trading practices.596 We do not believe that data based on 

estimations of market conditions on a fund-by-fund basis is uninformative or of limited utility 

because of the information’s sometimes fund-specific, subjective nature.

597 Rather, we believe 

that even with potential variances in determinations, the liquidity information reported will be 

informative to the Commission. Furthermore, we believe that members of the fund industry are

generally in the best position to provide current information on the conditions of fund liquidity 

 596 See, e.g., Comment Letter of the Investment Company Institute on Investment Company Reporting 

Modernization Release (Aug. 11, 2015) (“These [liquidity] judgments may differ among personnel and 

certainly among fund complexes.”); Comment Letter of Invesco Advisers, Inc. on Investment Company 

Reporting Modernization Release (Aug. 11, 2015) (“Invesco and other fund complexes could reasonably 

differ in their assessments of the liquidity of a particular security, even though both complexes have a 

sound method for determining liquidity and follow their own reasonable procedures.”).

597 See supra footnote 594 and accompanying text.
184

since they are in the markets every day trading securities and observe how markets are evolving 

and related liquidity characteristics are changing.

In sum, we believe that the modified reporting requirements on Form N-PORT will 

provide the Commission with meaningful data concerning the liquidity of portfolio investments 

across the fund industry and at the same time lessen burdens on funds classifying and reporting 

liquidity information (compared to the proposal). Accordingly, we are adopting the requirement 

for funds to report the liquidity classification of their portfolio investments to the Commission. 

b. Non-Public Disclosure of Liquidity Classification Information Reported on Form NPORT

We proposed that liquidity classification information reported on Form N-PORT at the 

portfolio position level be disclosed to the public for the third month of each fiscal quarter with a 

60-day delay. One commenter expressed general support for regulatory initiatives aimed at 

improving transparency.598 Several commenters expressed support for public disclosure of 

liquidity information if the framework for classification was modified from the proposed sixcategory liquidity classification framework to alternative frameworks proposed by commenters 

that generally measured the liquidity of portfolio positions based on asset type and included less 

classification categories.599

On the other hand, most commenters opposed the proposed public disclosure of the 

liquidity classification. Some commenters expressed concerns that the value to the public of the 

position-level liquidity classification information on Form N-PORT, as proposed, would be 

 598 See Interactive Data Comment Letter.

599 See, e.g., Charles Schwab Comment Letter; FSR Comment Letter; Nuveen Comment Letter; Vanguard 

Comment Letter. 
185

limited.

600 Many other commenters expressed concerns that the public disclosure of the positionlevel liquidity classification information could be potentially misleading to investors for various 

reasons. For example, many commenters contended that, while the position-by-position 

information reported would be subjective, the numeric days-to-settlement presentation proposed 

on Form N-PORT could imply a false sense of precision of the data to fund investors.

601 Many

of these commenters also argued that providing subjective, position-level liquidity classification

information to the public could potentially result in misleading comparisons across funds,

602 with 

some commenters noting that such comparisons could disadvantage certain funds over others.

603 

While reports on Form N-PORT would be submitted to the Commission within 30 days after 

month end, some commenters voiced concerns that the liquidity data presented on Form NPORT would be stale for the public given that the reports, as proposed, would be available every 

third month of a fund’s fiscal quarter with a 60-day delay, adding to the risk of misleading 

investors about the real-time state of a portfolio’s liquidity.604 

Many commenters also expressed concerns that public disclosure of the proposed 

position-level liquidity classification information would ultimately harm fund shareholders and 

 600 See, e.g., Better Markets Comment Letter (expressing concerns that the proposal’s three-day liquid asset 

minimum and 15% standard assets are determined by the fund and that the liquidity classifications reported 

on Form N-PORT would be stale information for the public); Morningstar Comment Letter (also stating 

concerns that the information available to the public under the proposal would be stale and expressing the 

belief that investors could find it difficult to compare the liquidity characteristics of portfolios from 

different funds).

601 See, e.g., Dechert Comment Letter; Eaton Vance Comment Letter I; Federated Comment Letter; LSTA 

Comment Letter; Morningstar Comment Letter.

602 See, e.g., BlackRock Comment Letter; IDC Comment Letter; J.P. Morgan Comment Letter; Voya 

Comment Letter.

603 See, e.g., BlackRock Comment Letter; IDC Comment Letter; ICI Comment Letter I; Wellington Comment 

Letter.

604 See, e.g., FSR Comment Letter; LSTA Comment Letter; Morningstar Comment Letter (noting that given 

public disclosure on N-PORT would be provided infrequently, the information might well be very out of 

date when an investor reviews it, thereby providing little benefit to investors); NYC Bar Comment Letter.
186

the fund market for a variety of reasons. Some commenters argued that public reporting would 

facilitate predatory trading practices, particularly during periods of liquidity stress, ultimately 

harming fund investors.605 Commenters expressed the belief that public reporting of liquidity 

classifications at the position-level exacerbates these concerns, noting, for example, that in the 

event a fund experiences a liquidity issue, public information about its portfolio-level liquidity 

classifications may expose the fund to predatory trading.606 In addition, several commenters 

expressed concern that public reporting of position-level liquidity classifications could be 

harmful to the fund market, arguing that such reporting would incentivize homogenized liquidity 

determinations and comparative liquidity “ratings” from third-party service providers,607 as well 

as “window dressing” at period ends prior to disclosure, increasing the potential for systemic 

risks in the fund industry. 608 Other commenters suggested that the Commission evaluate 

reported classification data for a period of time to determine whether the information is 

appropriate for public disclosure.609 

While many of these commenters objected to the proposed position-level public 

disclosure of liquidity classifications, several commenters did not object to making more 

aggregated portfolio-level disclosure of liquidity data available to the public.610 These 

 605 See BlackRock Comment Letter (stating that publicly available position-level data exacerbated Third 

Avenue’s troubles as other market participants knew of the holdings of the Focused Credit Fund and used 

that information to the detriment of the fund). See also e.g., Federated Comment Letter; ICI Comment 

Letter I; SIFMA Comment Letter I; Voya Comment Letter.

606 See, e.g., SIFMA Comment Letter I.

607 See, e.g., Charles Schwab Comment Letter; Wellington Comment Letter; Comment Letter of Wellington

Management Company LLP (June 10, 2016) (“Wellington Comment Letter II”); Wells Fargo Comment 

Letter.

608 See, e.g., Dechert Comment Letter; LSTA Comment Letter; NYC Bar Comment Letter; Oppenheimer 

Comment Letter.

609 See, e.g., BlackRock Comment Letter; Fidelity Comment Letter; SIFMA Comment Letter I.

610 See, e.g., Nuveen Comment Letter; T. Rowe Comment Letter. 
187

commenters suggested that, while position-level liquidity data may pose concerns as discussed 

above, providing the public a portfolio-level “roll up” of the liquidity levels of the fund may 

provide useful data and would be unlikely to raise the same kind of issues.611 

We recognize that the level of position-level detail necessary for the Commission and our 

staff to effectively monitor fund liquidity may not be necessary for other users. We understand 

that some data collectors would prefer to use information reported on Form N-PORT proposed 

under the Investment Company Reporting Modernization proposal (which we are adopting 

concurrently), such as monthly portfolio holdings data, rather than the classification information 

proposed in the liquidity proposal.612 Furthermore, we understand that for many investors, the 

proposed specific position-level liquidity data would be likely unnecessarily detailed, and that 

aggregated or “rolled up” portfolio-level information about fund liquidity may be more easily 

understandable and usable. As discussed below, such aggregated information will likely result in 

more user friendly and digestible portrayals of fund liquidity, and at the same time we expect 

will avoid many of the potential harms suggested by commenters that might result from positionlevel disclosure to the public. Such a layered reporting and disclosure regime should allow the 

Commission and investors each to access the liquidity information likely most useful for their 

purposes. 

We also appreciate the limitations and subjectivity of the liquidity classification process, 

and thus understand the risks of investors potentially giving too much weight to a fund 

manager’s individual liquidity classification choices. The classification of portfolio investments

at the position-level under the days-to-cash framework involves a number of assumptions and 

 611 See, e.g., Nuveen Comment Letter; T. Rowe Comment Letter.

612 See Morningstar Comment Letter.
188

methodologies that could result in classifications that vary from fund to fund. As a result, the 

liquidity classification information reported for the same or similar asset classes and investments

could vary because of complex differences in methodologies and assumptions that may not be

reported on Form N-PORT nor easily explained to investors but would be available to the 

Commission in inspections.

613

We appreciate the concerns raised by commenters that reporting publicly position-level 

data could imply a false sense of precision about the liquidity profile of a fund and that, given the 

delay in the public reporting of portfolio-level classification information (60 days after quarterend), the position-level information will likely be out of date when reviewed by investors. While 

we can take these potential variances in liquidity classifications of assets into account in 

evaluating and using the data for the Commission’s purposes in observing potential trends in 

liquidity profiles across the fund industry, it may be more difficult to explain them to investors. 

Furthermore, the Commission would receive portfolio-level classification information within 30 

days of month-end, thereby increasing the utility of the classification information for 

Commission purposes. We expect that providing only aggregated liquidity classification

information on the funds’ portfolio assets publicly may mitigate some of these concerns. This 

level of detail should appropriately focus investors on the fund’s general liquidity profile and 

general trends in fund liquidity rather than individual security-level liquidity decisions, in light of 

the concerns discussed above.

Some commenters also raised concerns that public reporting of liquidity classifications at 

the position level could potentially expose investors to harm, including, for example, potentially 

 613 A fund has the option of providing explanatory notes related to its filing to explain any of its 

methodologies, including related assumptions, in Part E of Form N-PORT. See Instruction G to Form NPORT.
189

exposing a fund to predatory trading, particularly during periods of liquidity stress.

614 We 

believe, however, that the aggregated public disclosure on Form N-PORT once each quarter with 

a 60-day lag would alleviate these predatory trading concerns given that those engaged in 

predatory trading would not have information about a fund’s own assessment of its liquidity 

characteristics in real-time and would not have the detailed position-level information in real 

time necessary to pursue such strategies. 

For these reasons, we find that it is neither necessary nor appropriate in the public interest 

or for the protection of investors to make liquidity classification information for each portfolio 

investment publicly available.

615 We also are adopting amendments to Form N-PORT to require 

a fund to publicly disclose the aggregated percentage of its portfolio assets representing each of 

the four classification categories outlined in Form N-PORT and related rule 22e-4,

616 as 

discussed in more detail below. We believe that providing liquidity classification data 

attributable to each portfolio investment to the Commission and fund-level data to investors is an

efficient approach to present liquidity information in a manner that both satisfies the 

Commission’s need for position-level liquidity data for its regulatory oversight purposes and 

provides useful fund liquidity information to investors.

In addition, the Commission recognizes the importance of sound data security practices 

and protocols for non-public information, including information that may be competitively 

sensitive. The Commission has substantial experience with storage and use of non-public 

 614 See, e.g., ICI Comment Letter; Cohen and Steers Comment Letter; Dechert Comment Letter; Nuveen 

Comment Letter.

615 See section 45(a) of the Investment Company Act, which requires information in investment company 

forms to be made available to the public, unless we find that public disclosure is neither necessary nor 

appropriate in the public interest or for the protection of investors. See also General Instruction F of Form 

N-PORT. 

616 See Item B.8. of Form N-PORT.
190

information reported on Form PF and delayed public disclosure of information on Form N-MFP

(although the Commission no longer delays public disclosure of reports on Form N-MFP), as 

well as other non-public information that the Commission handles in its ordinary course of 

business. Commission staff is carefully evaluating the data security protocols that will apply to 

non-public data reported on Form N-PORT in light of the specific recommendations and 

concerns raised by commenters. Drawing on its experience, the staff is working to design 

controls and systems for the use and handling of Form N-PORT data in a manner that reflects the 

sensitivity of the data and is consistent with the maintenance of its confidentiality.617 In advance 

of the compliance date, we expect that the staff will have reviewed the controls and systems in 

place for the use and handling of non-public information reported on Form N-PORT.

c. Public Fund-Level Aggregate Liquidity Profile Reporting

As previously discussed, we are adopting, with modifications, the proposed requirement 

that funds report to the Commission on a non-public basis the liquidity classification assigned to 

each portfolio position on Form N-PORT. Some commenters expressed concerns that the value 

to the public of the position-level liquidity classification information on Form N-PORT, as 

proposed, would be limited.

618 Other commenters recommended that, as an alternative to the 

proposal, the Commission make available to the public a general assessment of the liquidity of 

the portfolio at the fund level, rather than the individual security level,619 with more detailed 

 617 See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and 

Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. 3308 (Oct. 31, 2011) [76 

FR 71228 (Nov. 16, 2011)]. We recognize that there are differences between the N-PORT reporting 

requirements and the Form PF reporting requirements, such as frequency, granularity, and registration 

status, and our recognition of these differences guides our evaluation of appropriate measures for 

preservation of data security for reported information.

618 See, e.g., Better Markets Comment Letter; Morningstar Comment Letter.

619 See, e.g., Dechert Comment Letter; Federated Comment Letter; LSTA Comment Letter; NYC Bar 

Comment Letter.
191

information, including the fund’s assessment of the liquidity of each asset at the individual 

security level, provided to the Commission but kept confidential.620 

We appreciate these comments and recognize that position-level liquidity classification 

data, while valuable for Commission purposes, may be of limited use for everyday investors. 

We find persuasive commenters’ recommendations to provide the public with a general 

assessment of the liquidity of a portfolio at the fund level as an approach to provide everyday 

investors useful information on fund liquidity. As a result, we are adopting amendments to Form 

N-PORT to require a fund to publicly report for the third month of each fiscal quarter with a 60-

day delay the aggregate percentage of its portfolio representing each of the four classification 

categories outlined in Form N-PORT and related rule 22e-4.621 For purposes of this reporting 

item, a fund would report the aggregate percentage of investments that are assets in each

liquidity category compared to total portfolio investments that are assets (not including 

liabilities) of the fund.622 

In order to avoid misleading investors about the actual availability of highly liquid 

investments to meet redemptions, a fund also will be required to publicly report on Form NPORT the percentage of its highly liquid investments that it has segregated to cover, or pledged 

to satisfy margin requirements in connection with, derivatives transactions that are classified as 

moderately liquid, less liquid, or illiquid investments.

623 As discussed above, we proposed to 

require a fund to consider the relationship of an asset to another portfolio asset in classifying the 

liquidity of its portfolio assets reported on Form N-PORT and to consider guidance that a fund 

 620 See, e.g., SIFMA Comment Letter I; Charles Schwab Comment Letter. 

621 See Item B.8.a. of Form N-PORT.

622 See id. 

623 See Item B.8.b. of Form N-PORT; see also supra section III.C.3.c.
192

should classify the liquidity of assets segregated to cover derivatives obligations using the 

liquidity of the derivative instruments such assets are covering.624 One commenter suggested that 

the Commission add an item to the Schedule of Portfolio Investments on Form N-PORT that 

permits a fund to note whether an asset (or portion thereof) is encumbered or linked to other 

assets as of the reporting date.

625 Another commenter suggested that the Commission require 

funds to assign liquidity classifications to cover assets on an aggregate portfolio basis in amounts 

corresponding to the aggregate amount of derivatives exposure in each liquidity category.626 

In consideration of the commenters’ recommendations, we believe that our modification 

to the proposal to require a fund to report publicly the percentage of the fund’s highly liquid 

investments that are segregated to cover, or pledged to satisfy margin requirements in connection 

with, the fund’s derivatives transactions that are classified in each liquidity category strikes an 

appropriate balance between providing investors with useful information about the impact of 

derivatives coverage obligations on the percentage of a fund’s highly liquid investments and 

lessening operational burdens associated with classifying investments. Since the public will only 

receive asset liquidity classification information on an aggregate level and only the Commission 

will receive liquidity classifications on an investment-by-investment basis, we believe that the 

suggested alternative to add an item to the Schedule of Portfolio Investments on Form N-PORT 

linking an asset encumbered to other assets in connection with derivatives transactions would not 

be a helpful means to inform investors about the connection between derivatives obligations and 

the availability of highly liquid investments to meet redemptions. We believe that without public 

 624 See Proposing Release, supra footnote 9, at section III.B.2; see also supra section III.C.3.c.

625 See ICI Comment Letter I; see also supra section III.C.3.c.

626 See Dechert Comment Letter; see also supra section III.C.3.c.
193

reporting of the percentage of a fund’s highly liquid investments that are segregated to cover, or 

pledged to satisfy margin requirements in connection with, a fund’s derivatives transactions that 

are not themselves highly liquid investments, the reported percentage of a fund’s highly liquid 

investments could be potentially misleading to investors if a portion of highly liquid investments

are not available to meet redemptions due to derivatives transactions obligations.

Overall, we continue to believe that investors currently have limited information about 

the liquidity of fund investments and would benefit from enhanced information to evaluate funds 

and assess the potential for returns and risks of a particular fund. We expect that many investors 

will use liquidity reporting information to better understand the liquidity risks associated with a 

particular fund for purposes of making more informed investment decisions and will benefit 

from aggregate information about a fund’s overall liquidity. Moreover, we believe that requiring 

a fund to publicly disclose only the aggregate percentage of its portfolio assets representing each 

of the four classification categories balances commenters’ concerns about certain adverse effects 

that could arise from public reporting of detailed portfolio liquidity information with investors’ 

need for improved information about funds’ liquidity risk profiles.

d. Illiquid Investments

As discussed above, rule 22e-4, as adopted, combines a fund’s illiquid investment

determinations with the general liquidity classification framework reported on Form N-PORT.627 

In the Proposing Release, in connection with the codification of the 15% guideline that an openend fund may not invest in the aggregate more than 15% of its net assets in “illiquid securities,” 

we proposed to require funds to report on Form N-PORT whether each portfolio asset is a “15% 

 627 See supra section III.C.2.d.
194

standard asset,” as defined under the proposal,

628 in addition to reporting the liquidity of each of 

the fund’s positions (or portions of a position) in a portfolio asset using six proposed 

categories.

629 One commenter opposed requiring reporting of the 15% standard asset at the 

individual portfolio asset level, raising concerns that public disclosure could have adverse effects 

on funds.

630 Another commenter opposed reporting of the 15% standard asset at the individual 

portfolio asset level if publicly disclosed in addition to the proposed six liquidity classification 

categories, stating that the distinction between the two pieces of data would make sense to 

industry experts but would be confusing and potentially misleading to typical investors.631 

After considering these comments, we agree that presenting to the public liquidity 

classification information and the 15% standard asset designation separately could potentially 

confuse investors. As discussed in more detail in section III.C previously, we believe that it is 

more appropriate to harmonize the rule 22e-4 limit on illiquid investments, referred to as 15% 

standard assets under the proposal, with the rule’s broader liquidity classification requirement by 

incorporating an illiquid investment category into the classification requirement. Likewise, we 

believe that this harmonization should be reflected in reports on Form N-PORT. Thus, we are 

adopting, modified from the proposal, an illiquid investment category into Form N-PORT that 

corresponds with rule 22e-4’s broader classification requirement.

632 By doing this, a fund’s 

exposure to illiquid investments may be viewed as part of the fund’s overall liquidity profile in a 

more clear and concise manner. Furthermore, we are persuaded by some of the concerns raised 

 628 See Proposing Release, supra footnote 9, at section III.G.2.b.

629 See Proposing Release, supra footnote 9, at section III.G.2.a.

630 See Cohen & Steers Comment Letter.

631 See Federated Comment Letter.

632 See Item C.7. of Form N-PORT.
195

by commenters regarding the unintended adverse effects that public disclosure of illiquid 

investment information on the portfolio position level could have on funds and fund investors. 

As adopted, liquidity classification information reported on the portfolio position level will be 

non-public on Form N-PORT, as discussed in more detail above.

We expect to use this information to monitor fund compliance with the prohibition of

acquiring illiquid investments if the fund would have invested more than 15% of its net assets in 

illiquid investments that are assets and analyze liquidity trends in the fund industry. Overall, we 

believe that maintaining this information on illiquid investments as part of the liquidity 

classification information reported on Form N-PORT will provide the Commission with 

meaningful data, including information regarding exposure to illiquid investments across the 

fund industry. 

D. Highly Liquid Investment Minimum

Today we are adopting a requirement that each fund determine its “highly liquid 

investment minimum,” or the minimum amount of the fund’s net assets that the fund invests in 

highly liquid investments that are assets.

633 In determining its highly liquid investment

minimum, a fund will be required to consider the factors the fund also has to consider, as 

applicable, in assessing its liquidity risk under rule 22e-4.634 Additionally, in determining 

whether a fund is meeting its highly liquid investment minimum, the fund will look only to its 

 633 Rule 22e-4(a)(7). Rule 22e-4(a)(7) refers to highly liquid investments that are “assets” to make clear that 

when evaluating whether a fund is meeting its highly liquid investment minimum, the fund should look to 

its investments with positive values. Highly liquid investments that have negative values should not be 

netted against highly liquid investments that have positive values when calculating whether the fund is 

meeting its highly liquid investment minimum. Thus, only highly liquid investments that have positive 

values (i.e., “assets”) should be used in the numerator. Cf. infra footnote 744 (discussing the use of the 

term “assets” in the 15% limit on illiquid investments).

634 Rule 22e-4(b)(1)(iii)(A)(1).
196

investments that are assets of the fund.635 Rule 22e-4 as adopted today also requires a fund to 

adopt and implement policies and procedures for responding to a shortfall in a fund’s highly 

liquid investments below its highly liquid investment minimum.636 These policies and 

procedures must include reporting to the fund’s board of directors, no later than the board’s next 

regularly scheduled meeting, regarding any shortfall of the fund’s highly liquid investments

compared to its minimum. A fund is required to report to its board within one business day, and 

submit a non-public report to the Commission, if its highly liquid investment minimum shortfall 

lasts more than seven consecutive calendar days.637 A fund’s board of directors is not normally 

required to specifically approve the fund’s highly liquid investment minimum, although during a 

time that a fund’s highly liquid investments are below the fund’s determined minimum level, a 

fund’s highly liquid investment minimum can be changed only with board approval.

638 

Additionally, a discussion of the fund’s minimum must be included in the written annual report 

to the board on the adequacy and effectiveness of the fund’s liquidity risk management program. 

Funds whose portfolio assets consist primarily of highly liquid investments, as well as In-Kind

ETFs, are not subject to the highly liquid investment minimum requirement.639 

As described in more detail below, this requirement is a modification of the proposed 

“three-day liquid asset minimum,” which also would have required a fund to determine the 

percentage of the fund’s net assets to be invested in relatively liquid assets (under the proposal, 

“three-day liquid assets,” or cash and any asset convertible to cash within three business days at 

 635 Rule 22e-4(a)(7).

636 Rule 22e-4(b)(1)(iii)(A)(3).

637 Id. See also Item D.1 of new Form N-LIQUID.

638 Rule 22e-4(b)(1)(iii)(A)(1).

639 Rule 22e-4(b)(1)(iii)(A); see also rule 22e-4(a)(5) (excluding money market funds and In-Kind ETFs from 

the definition of “fund”).
197

a price that does not materially affect the value of that asset immediately prior to sale).640 In 

determining its three-day liquid asset minimum, the proposed rule would have required a fund to 

consider the factors the fund would have to consider, as applicable, in assessing its liquidity risk 

under rule 22e-4.641 Under the proposal, a fund would have been prohibited from acquiring any 

asset other than a three-day liquid asset if, after acquisition, the fund would hold fewer three-day 

liquid assets than the percentage specified under its three-day liquid asset minimum.642 Also 

under the proposal, a fund’s board would have had to approve the fund’s three-day liquid asset 

minimum and any changes thereto.643

The goal of the proposed three-day liquid asset minimum requirement was to increase the 

likelihood that a fund would hold adequate liquid assets to meet redemption requests without 

materially affecting the fund’s NAV.644 The proposed three-day liquid asset minimum also was 

intended to be structured in a way that would foster consistency in funds’ consideration of 

relevant liquidity risk factors, while permitting flexibility in implementing this liquidity risk 

management tool as appropriate given the diverse range of funds it would cover.645 It was 

intended to work together with other aspects of the proposed liquidity risk management program 

designed to help ensure that while funds would consider the spectrum of liquidity in their 

portfolios (in part through the proposed classification requirement), they would pay particular 

attention to the most liquid and least liquid ends of this spectrum.646 

 640 Proposed rule 22e-4(a)(8); proposed rule 22e-4(b)(2)(iv)(A)-(C).

641 Proposed rule 22e-4(b)(2)(iv)(A).

642 Proposed rule 22e-4(b)(2)(iv)(C).

643 Proposed rule 22e-4(b)(3)(i).

644 See Proposing Release, supra footnote 9, at section III.C.3.

645 Id.

646 See id., at sections III.B.1, III.C and III.C.3.
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Many commenters agreed that a requirement for a fund to determine a minimum—or, per 

some commenters’ suggestions, a target—amount of relatively liquid assets would assist funds in 

effectively meeting redemption requests under a variety of market conditions.647 Some, on the 

other hand, suggested that a minimum or target requirement would not necessarily enhance a 

fund’s ability to meet shareholder redemptions because the amount of liquid assets a fund may 

need is dynamic and unpredictable, and in extraordinary stressed market conditions no particular 

amount of liquid assets may end up being sufficient to meet redemptions.648 Commenters also 

objected to the structure of the proposed minimum requirement, particularly the fact that the 

requirement would not permit a fund to acquire relatively less liquid assets if the fund were to 

fall below its minimum, arguing that the requirement could actually increase shareholder 

redemptions during times of stress.649 In addition, commenters expressed concerns that the 

proposed requirement could prevent funds from meeting their principal investment strategies650

and that it could effectively prevent funds from holding or acquiring favorable, but relatively less 

liquid, assets under certain circumstances, which could intensify market stress as well as 

adversely affect a fund’s NAV.651 Finally, some commenters expressed concerns about the 

potential operational burdens associated with the proposed three-day liquid asset minimum 

requirement.652 

 647 See, e.g., AFR Comment Letter; Charles Schwab Comment Letter; CRMC Comment Letter; Wells Fargo

Comment Letter.

648 See, e.g., Dechert Comment Letter; HSBC Comment Letter; Invesco Comment Letter; MFS Comment 

Letter.

649 See, e.g., BlackRock Comment Letter; SIFMA Comment Letter I.

650 See, e.g., Invesco Comment Letter; Oppenheimer Comment Letter; Cohen & Steers Comment Letter; ICI 

Comment Letter I.

651 See, e.g., BlackRock Comment Letter; Credit Suisse Comment Letter; ICI Comment Letter I; NYC Bar

Comment Letter.

652 See, e.g., Federated Comment Letter; ICI Comment Letter I.
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Some commenters also suggested alternatives to the proposed three-day liquid asset 

minimum. As discussed further below, a number of commenters suggested requiring funds to 

maintain a “target” or threshold amount of certain liquid assets.

653 Other commenters suggested 

requiring funds to consider whether to maintain a target amount of liquid assets654 or to adopt 

policies and procedures to address shareholder redemptions, which could include targets or 

ranges.

655 As discussed below, we believe the highly liquid investment minimum requirement we 

are adopting strikes an appropriate balance in promoting the benefits intended by the proposed 

three-day liquid asset minimum requirement, including consistency in funds’ consideration of 

certain factors relevant to their liquidity risk management procedures, while at the same time 

lessening the likelihood of certain adverse consequences identified by commenters. 

1. Anticipated Benefits of Highly Liquid Investment Minimum

Like the proposed three-day liquid asset requirement, we believe that the highly liquid 

investment minimum requirement will increase the likelihood that a fund would be prepared to 

meet redemption requests without significant dilution of remaining investors’ interests in the 

fund. Some commenters noted that it is common for funds to assess how much liquidity they 

may need under various market conditions in order to meet redemptions over a relatively short 

time horizon and suggested that targeting a certain level of relatively liquid assets is an 

appropriate way for a fund to manage its liquidity risk.656 To the extent that a fund already aims 

 653 See, e.g., Invesco Comment Letter (suggesting that funds be required to maintain a “target” range of threeday and/or seven-day liquid assets); PIMCO Comment Letter (suggesting that a minimum cash target could 

be established by the investment manager); BlackRock Comment Letter (suggesting that funds could be 

required to take several steps to ensure an appropriate level of Tier 1 and Tier 2 assets, which could be 

articulated as a range or target); Credit Suisse Comment Letter.

654 See, e.g., SIFMA Comment Letter I; Oppenheimer Comment Letter.

655 See, e.g., Dechert Comment Letter; IDC Comment Letter.

656 See, e.g., supra footnote 653.
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to invest a specified portion of its portfolio in relatively liquid assets, we anticipate that such 

funds may already be substantially in compliance with the highly liquid investment minimum 

requirement we are adopting today. More importantly, it would require those funds that do not 

currently consider what an appropriate baseline level of liquidity might be to do so. 

As with the proposal, we believe that the final highly liquid investment minimum 

requirement will help encourage consistency in funds’ consideration of certain factors relevant to 

their liquidity risk management procedures. This is an important benefit compared to some 

commenters’ suggestions that funds simply be required to have policies and procedures to 

address shareholder redemptions (which could include liquid asset minimums or targets), but not 

to specify any particular procedures within this general requirement.657 As with the proposal, we 

believe that the approach we are adopting appropriately encourages regularity and thoroughness 

in funds’ consideration of certain risk factors, while at the same time promoting flexibility in 

funds’ management of this risk. Under rule 22e-4 as adopted, a fund will be able to determine its 

own highly liquid investment minimum, as well as (within a fairly broad range) the assets it will 

hold to satisfy its minimum.658 We believe that the requirement we are adopting provides 

important additional flexibility to funds’ liquidity risk management practices in that a fund will

be required to adopt policies and procedures, but would be permitted to design them as

appropriate to respond to shortfalls in highly liquid investments relative to the fund’s minimum. 

As noted above, some commenters suggested that a minimum requirement would not 

necessarily enhance funds’ ability to meet shareholder redemptions. We agree that the highly 

liquid investment minimum requirement we are adopting, standing alone, may not be a sufficient 

 657 See supra footnote 655; see also infra section IV (discussing other reasonable alternatives to the highly 

liquid investment minimum requirement).

658 See rule 22e-4(b)(1)(iii)(A)(1).
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safeguard for funds to manage liquidity risk under all market conditions. However, we believe 

that, together with the rest of the liquidity risk management program requirements we are 

adopting, it is a central tool to help put a fund in a solid position to meet redemption requests 

without significant dilution of remaining investors’ interests. The highly liquid investment

minimum requirement, together with the classification requirement and the 15% limitation on a 

fund’s investments in illiquid investments that are assets, is meant to be a primary component of 

a fund’s overall approach to liquidity risk management. While the classification requirement 

would illustrate the spectrum of a fund’s portfolio liquidity, the highly liquid investment

minimum requirement and the 15% limitation on illiquid investments would focus the fund’s 

attention on each end of that liquidity spectrum—the fund’s most liquid and least liquid 

investments, respectively. 

Based on a fund’s liquidity risk assessment, the fund could determine what additional 

liquidity risk management tools, if any, together with the highly liquid investment minimum 

requirement and the 15% limitation on illiquid investments, would best permit the fund to meet 

redemptions and help prevent significant investor dilution. We also believe that the highly liquid 

investment minimum requirement will be a useful liquidity risk management tool because we 

understand, based on staff outreach and comments that we received on the proposal, that the 

requirement we are adopting is similar to liquidity risk management strategies that many funds 

currently use.659 

While certain commenters expressed concern that the proposed three-day liquid asset 

minimum requirement could unduly encourage funds to use only their most liquid assets in 

meeting redemptions (which commenters argued could lead to additional redemptions from 

 659 See supra footnote 656 and accompanying text.
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funds in stressed periods),660 we note that the minimum requirement—both as proposed and as 

adopted—was never meant to suggest that a fund should only, or primarily, use its most liquid 

investments to meet shareholder redemptions.661 Nor is it meant, as commenters argued, to 

suggest that funds should hold cash-like buffers that investors may inappropriately assume will 

eliminate funds’ liquidity risk.662 Indeed, we noted in the Proposing Release that assets eligible 

for inclusion in a fund’s three-day liquid asset minimum holdings could include a broad variety 

of securities, as well as cash and cash equivalents.663 Moreover, because the final highly liquid 

investment minimum requirement would not prohibit a fund from acquiring investments other 

than highly liquid investments if a fund were to fall below its minimum, we believe that the final 

requirement may convey more effectively than the proposal that a fund is not guaranteed to hold 

a certain level of cash or highly liquid investments at all times. 

As with the proposed three-day liquid asset minimum requirement, we believe an 

important feature of the highly liquid investment minimum requirement we are adopting is the 

flexibility it provides for a fund to determine an appropriate highly liquid investment minimum 

considering its particular risk factors, as well as (within a fairly broad range) the assets it will 

hold to satisfy its minimum. We acknowledge that, for certain funds that currently have 

relatively less liquid portfolios, the highly liquid investment minimum requirement could cause a 

fund to modify its investment strategy if, after consideration of the required factors, the fund 

were to determine it is appropriate to invest in higher amounts of highly liquid investments. In 

 660 See, e.g., BlackRock Comment Letter.

661 See, e.g., Proposing Release, supra footnote 9, at section II.B.2 (discussing how funds may choose to sell 

assets in “strips” or in a range of liquidity).

662 See, e.g., CFA Comment Letter.

663 See Proposing Release, supra footnote 9, at paragraph following n.343.
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these circumstances, we believe such a modification would be appropriate. We discuss the costs 

associated with any modifications to funds’ investment strategies that could result from the final 

highly liquid investment minimum requirement in the Economic Analysis section below. 

2. Consideration of Liquidity Risk Factors

Rule 22e-4 requires a fund to consider the liquidity risk factors set forth in the rule, as 

applicable, in determining its highly liquid investment minimum.664 Under the proposed rule, a 

fund likewise would have been required to consider the proposed rule’s liquidity risk assessment 

factors in determining its three-day liquid asset minimum.665 Several commenters suggested that 

these factors should be guidance that funds may consider in setting a minimum or target for 

relatively liquid assets, but should not be mandatory considerations a fund would be required to 

assess.666 Commenters also objected to the requirement that funds determine their three-day 

liquid asset minimum based on liquidity risk under both normal and reasonably foreseeable 

stressed conditions, arguing that this requirement would result in funds being forced to maintain 

artificially high levels of three-day liquid assets.667 Some commenters also discussed more 

granular objections to certain of the proposed factors to be used in determining a fund’s 

three-day liquid asset minimum, such as certain aspects of the proposed requirements to consider 

a fund’s shareholder concentration668 and borrowing arrangements.669 

We continue to believe it is appropriate for a fund to be required—not only permitted—to 

 664 Rule 22e-4(b)(1)(iii)(A)(1).

665 Proposed rule 22e-4(b)(2)(iv)(A)-(B).

666 See, e.g., Oppenheimer Comment Letter; Charles Schwab Comment Letter; SIFMA Comment Letter I.

667 See, e.g., NYC Bar Comment Letter; SIFMA Comment Letter I.

668 See SIFMA Comment Letter I.

669 See Cohen & Steers Comment Letter.
204

consider a specified set of liquidity risk factors in determining its highly liquid investment

minimum. We believe requiring every fund to consider multiple aspects of its history, policies, 

strategy, and operations in determining its highly liquid investment minimum will lead to a 

general industry-wide baseline for the minimum requirement. However, we are making certain 

modifications to the proposed liquidity risk factors, including only requiring funds to consider 

applicable factors, to respond to commenters’ concerns about this aspect of the requirement. 

a. Modifications to Proposed Requirement to Consider Liquidity Risk Factors

As discussed above, the liquidity risk factors we are adopting today incorporate certain 

modifications to the proposed factors,670 and thus these modifications flow through with respect 

to a fund’s consideration of these factors in determining its highly liquid investment minimum. 

We believe that the guidance that we provide in section III.B.2 regarding a fund’s consideration 

of these factors in assessing its liquidity risk also is appropriate for a fund to take into account 

when determining its highly liquid investment minimum. With the exception of the

recommendations about specific factors or guidance discussed below, we did not receive 

comments on the proposed factors or the guidance provided in the Proposing Release regarding 

these factors. 

Some commenters recommended that the Commission confirm that funds may consider 

and weigh the factors as they deem appropriate and relevant for purposes of the proposed 

minimum requirement,671 and we agree that a fund should give the most weight to the factors that 

it deems most relevant for determining its highly liquid investment minimum. Moreover, to the 

extent any liquidity risk assessment factor is not applicable to a particular fund, the fund would 

 670 See supra section III.B.2.

671 See, e.g., Oppenheimer Comment Letter; SIFMA Comment Letter I.
205

not be required to consider that factor in determining its highly liquid investment minimum. We 

have therefore added the words “as applicable” in the rule,

672 and we note that, in this context, 

the phrase “as applicable” is meant to refer to those factors that are relevant to a fund’s particular 

facts and circumstances. For example, a fund would not be required to consider the use of 

borrowings for investment purposes, as specified under rule 22e-4(b)(1)(i)(A), if that fund does 

not engage in borrowing.673 Conversely, however, a fund that maintains borrowing sources for 

investment purposes would be required to consider the use of borrowings for investment 

purposes as specified under the rule. The addition of “as applicable” should help respond to 

commenters’ concerns that codifying a list of required factors as a provision of the proposed 

minimum requirement would “create an overly rigid structure and a one-size-fits-all approach 

that may result in unnecessary focus on factors that are irrelevant to certain funds.”674 

We continue to believe that a fund should consider both normal and reasonably 

foreseeable stressed conditions in determining the amount of highly liquid investments it will 

hold, based on the liquidity risk assessment factors. However, in a change from the proposal, the 

rule specifies that only those stressed conditions that are reasonably foreseeable during the 

period until the next review of the highly liquid investment minimum (emphasis added) should be 

considered when a fund determines its highly liquid investment minimum.675 As discussed 

above, some commenters expressed concern that the requirement for funds to consider normal 

 672 See rule 22e-4(b)(1)(iii)(A)(1); see also supra footnote 192 and accompanying text.

673 See supra section III.B.2.

674 See SIFMA Comment Letter I; see also e.g., Charles Schwab Comment Letter; Oppenheimer Comment 

Letter (suggesting that it is critically important that funds be afforded a certain amount of flexibility in 

setting the fund’s three-day liquid asset minimum).

675 See rule 22e-4(b)(1)(iii)(A)(1); see also rule 22e-4( b)(1)(iii)(A)(2) (requiring funds to periodically review, 

no less frequently than annually, the highly liquid investment minimum).
206

and reasonably foreseeable stressed conditions in determining their three-day liquid asset 

minimum could suggest that all funds should hold a high level of cash or other highly liquid 

assets at all times, which could in turn encourage funds to maintain portfolio liquidity levels that 

are disproportionate relative to their liquidity risk.676 We believe that requiring consideration of 

only those stressed conditions that are reasonably foreseeable during the period until the next 

review of the highly liquid investment minimum should address commenters’ concerns and 

should help ensure that the highly liquid investment minimum requirement leads funds to hold 

levels of portfolio liquidity that are appropriate in light of their reasonably anticipated liquidity 

risk. 

This change also responds to commenters’ concerns about perceived ambiguity in the 

length of time over which the proposed rule would have required funds to forecast the effect of 

stressed conditions on the liquidity risk factors.677 Under the final rule, funds are required to 

periodically review, no less frequently than annually, their highly liquid investment minimum. 

Thus, the requirement to consider stressed conditions only to the extent they are reasonably 

foreseeable during the period until the next review of the highly liquid investment minimum, 

limits consideration of stressed conditions to whatever time frame the fund has determined for 

review of its highly liquid investment minimum, but no longer than one year. We note that if a 

fund encounters extremely stressed market conditions, beyond those that were reasonably 

 676 See supra footnote 667 and accompanying text. Commenters argued that this, in turn, could lead to 

declines in fund performance, which shareholders would experience in the form of lower returns. See, e.g., 

Fidelity Comment Letter; Invesco Comment Letter; J.P. Morgan Comment Letter; Wells Fargo Comment 

Letter.

677 See, e.g., MFS Comment Letter (noting that the proposal fails to indicate the period of time over which the 

estimate of foreseeable redemptions is to be calculated); see also SIFMA Comment Letter I (“We do not 

agree, however, that in making their Highly Liquid Asset Target determinations, funds should be required 

to forecast the timing, severity or potential impact of stressed market conditions or other events affecting 

the fund that have occurred in the past but for which there is no reasonable way to accurately predict their 

recurrence.”).
207

foreseeable during the period until the next review of the highly liquid investment minimum, that 

could increase its liquidity risk to unusual levels, the fund should consider adjusting its highly 

liquid investment minimum at that time, and indeed a fund should generally review its highly 

liquid investment minimum more frequently than annually if circumstances warrant.

b. Role of Liquidity Risk Factors in Determining the Highly Liquid Investment Minimum

As noted above, rule 22e-4 requires a fund to consider the liquidity risk factors set forth 

in the rule, as applicable, in determining its highly liquid investment minimum. In summary, a 

fund must consider, as applicable, its: (i) investment strategy and portfolio liquidity during 

normal conditions, and during stressed conditions to the extent such conditions are reasonably 

foreseeable during the period until the next review of the highly liquid investment minimum; (ii) 

short-term and long-term cash flow projections during normal conditions, and during stressed 

conditions to the extent such conditions are reasonably foreseeable during the period until the 

next review of the highly liquid investment minimum; and (iii) holdings of cash and cash 

equivalents, as well as borrowing arrangements and other funding sources.678 In addition to these 

factors, an ETF also must consider, as applicable: (i) the relationship between the ETF’s

portfolio liquidity and the way in which, and the prices and spreads at which, ETF shares trade, 

including the efficiency of the arbitrage function and the level of active participation by market 

participants (including authorized participants); and (ii) the effect of the composition of baskets 

on the overall liquidity of the ETF’s portfolio.

679 

With respect to a fund’s consideration of its investment strategy and portfolio liquidity in 

determining its highly liquid investment minimum, we continue to believe that the less liquid a 

 678 Rule 22e-4(b)(1)(i)(A)-(C); rule 22e-4(b)(1)(iii)(A)(1).

679 Rule 22e-4(b)(1)(i)(D)-(E); rule 22e-4(b)(1)(iii)(A)(1); see also infra section III.J. (discussing liquidity risk 

management program elements tailored to ETFs).
208

fund’s overall portfolio investments are, the higher a fund may want to establish its highly liquid 

investment minimum. Similarly, funds with certain investment strategies that typically have had

greater volatility of flows than other investment strategies — such as alternative funds and 

emerging market debt funds — would generally need highly liquid investment minimums that 

are higher than funds whose strategies tend to entail less flow volatility. For funds that use 

borrowings for investment purposes and derivatives, we continue to believe that, all else equal, a 

fund with a leveraged strategy (e.g., a fund with leverage through bank borrowings or that has 

significant fixed obligations to derivatives counterparties) generally would need a highly liquid 

investment minimum that is higher than a fund that does not.680 Similarly, when setting the 

fund’s highly liquid investment minimum, we believe a fund that has or expects to have a 

significant amount of highly liquid investments segregated to cover derivatives transactions or 

pledged to satisfy margin requirements in connection with derivatives transactions should take 

into account the fact that such segregated or pledged highly liquid investments may not be 

available to meet redemptions. However, this guidance is not meant to suggest that a fund 

should only, or primarily, use highly liquid investments to meet shareholder redemptions. 

Rather, in the examples provided in this paragraph, we believe that holding a relatively high 

level of assets that are highly liquid investments would both support a fund in meeting 

 680 See Proposing Release, supra footnote 9, at paragraphs accompanying n.339. As discussed in the 

Proposing Release, we believe that a leveraged fund has an increased risk that it will be unable to meet 

redemptions and an increased risk of investor dilution compared to an equivalent fund with no leverage. 

For example, a fund with leverage through bank borrowings may have to meet margin calls if a security the 

fund provided to the bank to secure the loan declines in value. Such margin calls can render highly liquid 

portfolio assets unavailable to meet investor redemptions, which can increase dilution and the risk the fund 

will be unable to meet redemptions.

Similarly, a fund that has significant fixed obligations to derivatives counterparties (for example, from a 

total return swap or writing credit default swaps) must pay out on these obligations when due, even if it 

means selling the fund’s more liquid, high quality assets to raise cash. See, e.g., OppenheimerFunds 

Release, supra footnote 223.
209

redemption requests in a manner that does not dilute non-redeeming shareholders, and assist the 

fund in readjusting its portfolio as necessary to handle stressed conditions, weathering periods of 

heightened volatility, and managing its obligations to derivatives counterparties.

Regarding a fund’s cash flow projections, we continue to believe that the Commission’s 

cash flow guidance considerations could be useful to a fund in setting its highly liquid 

investment minimum.681 We generally expect that a fund would evaluate the Commission’s 

guidance on these considerations and determine whether each would be useful and relevant in 

setting the fund’s highly liquid investment minimum. In addition, a fund may wish to consider 

employing some form of stress testing682 or consider specific historical redemption scenarios in 

determining its highly liquid investment minimum. 

Each of the cash flow guidance considerations—either standing alone, but especially 

viewed in combination with one another—are potentially significant features that could 

materially affect the risk of significant redemptions and thus could influence a fund’s 

determination of its highly liquid investment minimum. For example, a fund with a concentrated

shareholder base has a high risk that only one or two shareholders deciding to redeem can cause 

the fund to sell a significant amount of assets, which depending on the liquidity of the fund’s

portfolio and how it meets those redemptions, can dilute remaining shareholders. Similarly, a 

fund whose redemption policy is to satisfy all redemptions on a next business day basis (T+1) or 

that is sold through distribution channels that historically attract investors with more volatile 

 681 See supra section III.B.2.b. These five guidance considerations include: (i) the size, frequency, and 

volatility of historical purchases and redemptions of fund shares during normal and reasonably foreseeable 

stressed periods; (ii) the fund’s redemption policies; (iii) the fund’s shareholder ownership concentration;

(iv) the fund’s distribution channels; and (v) the degree of certainty associated with the fund’s short-term 

and long-term cash flow projections.

682 See supra footnote 196 and accompanying text.
210

and/or unpredictable flows also should consider setting a higher minimum level for its assets that 

are highly liquid investments than a fund that, all else equal, does not face these risks. 

In setting a highly liquid investment minimum, a fund should consider the degree of 

certainty associated with the fund’s short-term and long-term cash flow projections. Projections 

may only be as good as the extent and quality of information that informs them. For example, if 

a fund does not have substantial visibility into its shareholder base (e.g., because the fund’s 

shares are principally sold through intermediaries that do not provide shareholder transparency) 

or if a fund is uncertain about changing market conditions which are likely to materially affect 

the fund’s level of net redemptions, it may make projections but be quite uncertain about the 

reliability of those projections. In these circumstances, a fund should consider setting its highly 

liquid investment minimum to reflect this uncertainty, for example, by providing a cushion or 

multiple of its cash flow projections in the event realized net redemptions are significantly 

higher. 

One commenter objected that shareholder ownership concentration, which is discussed in 

this Release as a guidance factor that could be used in evaluating cash flows (but in the proposal 

would have been required to be considered in analyzing a fund’s cash flow projections), should 

not be a determinative consideration for a fund in establishing its appropriate level of relatively 

liquid assets.683 This commenter expressed concern that “accentuating the significance of this 

sub-factor in the context of new or recently launched funds, which may have a small number of 

shareholders relative to more established funds, could have a severe anti-competitive effect and 

create an unwarranted barrier to the introduction of new funds.” We agree that emphasizing 

shareholder concentration could lead new funds to increase their holdings of relatively liquid 

 683 See SIFMA Comment Letter I.
211

investments. However, we note that substantial shareholder concentration, even for new or 

recently launched funds, could give rise to significant liquidity risk, and thus this consideration 

should not be discounted when a fund whose investor base is significantly concentrated 

determines its highly liquid investment minimum.684 New or recently launched funds that have a 

concentrated shareholder base should consider disclosing the risk of redemption by one or more 

such shareholders in the fund’s prospectus.

685 To the extent that a new fund’s shareholder base 

becomes significantly less concentrated as the fund matures, the fund may wish to take this into 

consideration in reviewing its highly liquid investment minimum and adjusting it as it determines 

appropriate. 

With respect to a fund’s consideration of its holdings of cash and cash equivalents in 

determining its highly liquid investment minimum, we continue to believe that these holdings 

may provide funds with important flexibility to manage their liquidity risks. Our staff has 

observed that it is relatively common for fund complexes to target a minimum amount of cash or 

cash equivalent holdings in the fund, with the assumption that cash and cash equivalent holdings 

would allow the fund to meet redemptions in a stressed period without realizing significant 

discounts to its holdings’ carrying values when they are sold. Holding cash or cash equivalents 

also could readily permit funds to rebalance or otherwise adjust a portfolio’s composition in 

order to manage liquidity risk. Similarly, the availability of a line of credit or other funding 

sources to meet redemptions could assist a fund in managing liquidity risk, although as discussed 

 684 As discussed above, a fund may also take into account the types of shareholders in the fund and whether 

those shareholders share common investment goals affecting redemption frequency and timing. 

Additionally, a fund may take into account other liquidity risk management tools available to it, such as 

redemption fees, when determining its highly liquid investment minimum.

685 See SIFMA Comment Letter I (suggesting that the Commission encourage such prospectus disclosure). 

We recognize that other factors, such as the size of a fund’s positions and the liquidity of those positions, 

could impact the extent to which this risk could affect the fund.
212

below, depending on the nature of use, the use of a line of credit could raise other issues.686 To 

the extent that a fund determines that any of these considerations could indicate decreased 

liquidity risk, these considerations could provide important inputs regarding the level that the 

fund deems appropriate for its highly liquid investment minimum. 

Certain commenters indicated that the Commission should permit a fund to reduce its 

required holdings of relatively liquid assets by the amount of other sources of liquidity available 

to the fund, such as a committed line of credit.687 Under these commenters’ views, if a fund were 

to determine that its highly liquid investment minimum would typically be x% of the fund’s net 

assets, a fund with a committed line of credit representing y% of the fund’s net assets should be 

able to reduce its highly liquid investment minimum to x% minus y% of the fund’s net assets. 

We disagree with this approach for several reasons. First, we believe that a mechanical 

subtraction of the amount of a credit line available to a fund from the fund’s highly liquid 

investment minimum is inappropriate under circumstances in which all or part of the line of 

credit is not guaranteed to be available to a fund—for example, because it is a committed line of 

credit that may be shared among other members of the fund family. Even if the credit facility 

was committed just to the fund, the amount ultimately available could depend on the financial 

health of the institution providing the facility, as well as the terms and conditions of the facility. 

Finally, as discussed in the Proposing Release, while a line of credit can facilitate a fund’s ability 

to meet unexpected redemptions and can be taken into consideration when determining its highly 

liquid investment minimum, we continue to believe that liquidity risk management is better 

 686 See infra footnote 688 and accompanying text.

687 See, e.g., Cohen & Steers Comment Letter; Oppenheimer Comment Letter.
213

conducted primarily through construction of a fund’s portfolio.688 

As with the proposed three-day liquid asset minimum requirement, a fund would be 

required to maintain a written record of how its highly liquid investment minimum was 

determined, including an assessment of each of the factors.689 This would permit our 

examination staff to ascertain that funds are indeed considering the required factors, as 

applicable. As discussed in the Proposing Release, we continue to generally believe that it 

would be extremely difficult to conclude, based on the factors that a fund would be required to 

consider, that a highly liquid investment minimum of zero would be appropriate.690 

3. Highly Liquid Investment Minimum Shortfall Policies and Procedures

Under rule 22e-4, a fund will be required to adopt specific policies and procedures for 

responding to a shortfall in the fund’s assets that are highly liquid investments below its highly 

liquid investment minimum (for purposes of this section, a fund’s “shortfall policies and 

procedures”). A fund’s shortfall policies and procedures, as described in more detail below, 

must include reporting to the fund’s board of directors no later than the board’s next regularly 

scheduled meeting with a brief explanation of the causes of the shortfall, the extent of the 

 688 See Proposing Release, supra footnote 9, at section III.C.3; see also, e.g., HSBC Comment Letter (“The 

degree to which a fund employs leverage can have a material impact on its liquidity demands, particularly 

during periods of market stress. As such, attempts to model liquidity risk should incorporate an assessment 

of leverage and the extent to which this might intensify liquidity demands for a given fund during different 

scenarios compared to unleveraged funds.”); Nuveen FSOC Notice Comment Letter, supra footnote 85

(“Funds without credit lines face the possibility of not being able to sell sufficient assets to raise cash to 

fund redemption requests, or having to sell assets at significantly discounted values. To the extent that a 

fund draws on a credit line to meet net redemptions (and thus temporarily leverages itself), it increases its 

market risk at a time when markets are stressed. While this can be potentially beneficial to long-term 

performance if the asset class recovers, it increases the risk of loss to remaining shareholders if markets 

continue to weaken.”).

689 See rule 22e-4(b)(3)(iii); see also infra section III.I.

690 See Proposing Release, supra footnote 9, at paragraphs accompanying and following n.341.
214

shortfall, and any actions taken in response.691 Also, a fund’s shortfall policies and procedures 

must include reporting within one business day to the fund’s board if a shortfall lasts more than 

seven consecutive calendar days, including an explanation of how the fund plans to restore its 

minimum within a reasonable period of time.692 

a. Shortfall Policies and Procedures Requirement

Rule 22e-4 as proposed did not include the requirement for a fund to adopt shortfall 

policies and procedures. This requirement replaces the proposed prohibition against acquiring 

any asset other than a three-day liquid asset if a fund’s holdings of three-day liquid assets were to 

drop below its three-day liquid asset minimum (for purposes of this section, the “proposed

acquisition limit”).

693 As discussed above, commenters expressed concerns that the proposed 

acquisition limit could have adverse effects on funds, their shareholders, and the markets in 

which funds operate. Specifically, commenters cautioned that shareholder redemptions could 

increase if shareholders observe that a large redemption has taken place and assume that the fund 

will not be able to effectively employ its investment strategy due to the proposed prohibition on 

acquiring any assets that are not three-day liquid assets.694 Commenters suggested that this, in 

turn, could incentivize shareholders to redeem quickly in times of stress, which could spark 

additional redemptions from funds in stressed periods. Some commenters also argued that the 

proposed acquisition limit could lead index funds to hold a level of relatively liquid assets that 

causes them to deviate from the construction of their indices695 and could cause funds that are 

 691 See rule 22e-4(b)(1)(iii)(A)(3).

692 See id.

693 See proposed rule 22e-4(b)(2)(iv)(C).

694 See, e.g., BlackRock Comment Letter.

695 See, e.g., Invesco Comment Letter; Dechert Comment Letter; Oppenheimer Comment Letter.
215

managed relative to a benchmark to experience higher tracking error.696 Commenters also 

maintained that the proposed acquisition limit could impair actively managed funds to the extent 

that it could limit portfolio managers’ discretion to purchase assets that they believe would 

maximize funds’ returns.697 

In addition, commenters argued that the proposed acquisition limit could effectively 

prevent funds from holding or acquiring favorable, but relatively less liquid, assets under certain 

circumstances, which could intensify market stress as well as adversely affect a fund’s NAV.698 

For example, some commenters suggested that a fund whose three-day liquid asset holdings were 

to fall below its minimum could feel pressure to sell less liquid assets in order to replenish its 

three-day liquid assets, which could lead to excessive sales of less liquid assets during times of 

market stress that could adversely affect the fund’s NAV.699 Relatedly, commenters suggested 

that the proposed acquisition limit could produce harmful market effects if it were to 

significantly increase the demand for relatively liquid assets, which could conversely decrease 

demand for other asset types (making them less liquid) and exacerbate market volatility.700 

Commenters expressed concern that any “herding” behavior that could result from the proposed 

acquisition limit could become especially pronounced during stressed periods.701 Commenters 

also argued that the proposed acquisition limit could prevent a fund manager from purchasing 

certain investments that it views as undervalued in a downturn, when the fund’s holdings of 

 696 See, e.g., HSBC Comment Letter; ICI I Comment Letter.

697 See, e.g., PIMCO Comment Letter; ICI I Comment Letter; Federated Comment Letter.

698 See, e.g., BlackRock Comment Letter; SIFMA I Comment Letter; Wells Fargo Comment Letter.

699 See, e.g., Oppenheimer Comment Letter.

700 See, e.g., Invesco Comment Letter; Cohen & Steers Comment Letter; ICI Comment Letter I; Wells Fargo 

Comment Letter.

701 See, e.g., ICI Comment Letter I; Wellington Comment Letter II.
216

three-day liquid assets are at or below the fund’s minimum.702 They contended that this in turn 

could reduce the fund’s universe of potential investments and ability to invest in contrarian and 

countercyclical ways,

703 which could eliminate a potential pool of buyers and thus could 

exacerbate an already stressed environment.704 

A significant number of commenters suggested that the Commission adopt a liquid asset 

target in lieu of the proposed three-day liquid asset minimum requirement—indeed, this was the

most common alternative suggestion to the proposed three-day liquid asset minimum 

requirement.705 One primary distinction between the target requirements that commenters 

recommended and the proposed three-day liquid asset minimum requirement is that a target 

requirement would not prohibit a fund from acquiring certain assets if a fund’s holdings of 

relatively liquid assets were to fall below the target. Instead, some commenters stated that a fund 

should have a reasonable period to respond to a shortfall of relatively liquid assets below the 

fund’s target, and/or that any such shortfalls must be reported to the fund’s board.706 

We continue to believe that fund shareholders’ interests are generally best served when 

the percentage of a fund’s assets invested in relatively liquid investments is at (or above) the 

level deemed appropriate by the fund.707 The highly liquid investment minimum requirement we 

are adopting would not prohibit a fund from acquiring assets other than highly liquid investments

when a fund’s highly liquid investments fall below its minimum. However, we believe that the 

 702 See, e.g., ICI Comment Letter I.

703 See, e.g., BlackRock Comment Letter; ICI Comment Letter I; Wells Fargo Comment Letter.

704 See, e.g., SIFMA Comment Letter I; Invesco Comment Letter

705 See, e.g., supra footnote 653 and accompanying text; see also infra section IV.C (discussing other 

reasonable alternatives to the highly liquid investment minimum requirement).

706 See, e.g., Invesco Comment Letter; PIMCO Comment Letter; Federated Comment Letter; J.P. Morgan 

Comment Letter.

707 See Proposing Release, supra footnote 9, at n.346 and accompanying text.
217

shortfall policies and procedures requirement we are adopting—which replaces the proposed 

acquisition limit—provides flexibility while also promoting effective liquidity management 

practices. We believe this requirement also responds to concerns about a flat prohibition against 

purchasing certain assets when the fund’s assets that are highly liquid investments drop below a 

certain level.

Additionally, we believe that the shortfall policies and procedures requirement responds 

appropriately to commenters’ concerns that there could be appropriate reasons for a fund to 

acquire an investment other than a highly liquid investment if a fund were to fall below its 

minimum. The final highly liquid investment minimum requirement will require that funds 

determine a level of assets that are highly liquid investments designed to help them manage the 

fund through stressed conditions or opportunistically readjust their portfolios, while permitting a 

fund’s portfolio liquidity to fall below this level when determined appropriate from a risk 

management perspective or on account of extenuating circumstances. The shortfall policies and 

procedures requirement, including the reporting requirement, is meant to foster discussion 

among the fund’s management (and board) if its assets that are highly liquid investments fall

below the level the fund determined to be an appropriate minimum. We further believe that the 

final highly liquid investment minimum requirement appropriately responds to commenters’ 

concerns that the proposed acquisition limit could restrict funds’ ability to meet their principal 

investment strategies, to the detriment of fund investors. The final requirement provides fund 

managers more leeway than the proposed requirement to structure and modify their portfolios 

because—as would be the case in the target requirement commenters suggested—fund managers 

would not be prevented from purchasing certain assets when a fund’s holdings of assets that are 

highly liquid investments drop below its highly liquid investment minimum.
218

The highly liquid investment minimum requirement we are adopting, together with the 

shortfall policies and procedures requirement, also responds to commenters’ concerns that the 

proposed acquisition limit could exacerbate potential market stresses and lead to other harmful 

market effects. Under the final rule, a fund that falls below its highly liquid investment

minimum would not be restricted to acquiring only highly liquid investments, if acquiring other 

investments were consistent with the fund’s shortfall policies and procedures. Also, as discussed 

above, the requirement that a fund determine its highly liquid investment minimum taking into 

account only those stressed conditions that are reasonably foreseeable during the period until the 

next review of the highly liquid investment minimum should decrease the probability that a fund 

could overweight its assets that are highly liquid investments relative to its liquidity risk. This 

also, in turn, should lessen demand for highly liquid investments compared to the possible 

market effects of the proposed requirement. 

Finally, we believe that the final highly liquid investment minimum requirement, in 

conjunction with the shortfall policies and procedures requirement, will help to mitigate some of 

the operational burdens that commenters argued would accompany the proposal,708 while 

continuing to advance the Commission’s goals. We note that the highly liquid investment

minimum requirement will involve monitoring a fund’s portfolio investments’ liquidity for

compliance. We recognize that this monitoring may result in operational costs, which could be 

greater for funds with multiple sub-advisers to the extent that these funds would need to build or 

 708 See, e.g., Federated Comment Letter (suggesting that the proposed requirement could present significant 

operational and technological challenges because a fund’s trade order management system would need to 

maintain the liquidity classification for each security in order to accurately monitor compliance with the 

fund’s three-day liquid asset minimum); ICI Comment Letter I (noting that the proposed requirement 

would raise operational difficulties for funds with multiple sub-advisers because compliance would 

necessitate consideration of portfolio assets’ liquidity at the fund level, and thus the proposal would require 

a significant amount of coordination among sub-advisers).
219

otherwise implement systems to coordinate portfolio liquidity information provided by each 

sub-adviser.709 However, we expect that the operational costs associated with the final highly 

liquid investment minimum requirement would be significantly less compared to the proposal, 

which would have entailed the additional costs of building systems that would bar the purchase 

of less liquid investments if the fund were to fall below its minimum. We understand that some 

fund complexes today already track a liquid asset minimum or target, and for these funds, 

operational costs associated with the final minimum requirement would only entail adjustments 

to their current processes and not the costs of an entirely new systems build-out. 

b. Operation of Shortfall Policies and Procedures Requirement

Rule 22e-4 provides flexibility as to the particular shortfall policies and procedures a 

fund may adopt because we believe that different facts and circumstances could result in 

different funds taking different approaches to address a decline in assets that are highly liquid 

investments.

710 We also recognize that it may be difficult to contemplate or specify all

appropriate factors to consider (or their weighting) in advance of a shortfall, and that part of the 

decision process requires an evaluation of the current stress event and a determination of whether 

it is likely to persist (and for how long). Nonetheless, a fund’s shortfall policies and procedures 

could specify some of the actions that a fund could consider taking to respond to a highly liquid 

investment minimum shortfall under different conditions, as well as market- and fund-specific 

circumstances that could shape a fund’s response to a particular shortfall occasion. For example, 

the policies and procedures could outline some of the circumstances under which it could be 

 709 See also infra paragraph accompanying footnote 818 (discussing the coordination of liquidity risk 

management efforts undertaken by various service providers, including a fund’s sub-adviser(s)).

710 For example, a fund may handle a shortfall due to changes in market conditions differently than a shortfall 

due to increased redemptions.
220

appropriate for a fund to purchase assets that are not highly liquid investments, despite being 

below its minimum. If, for example, the fund reasonably expected inflows in the near future

(e.g., from a retirement plan platform), it may determine it is acceptable to pursue an attractive 

buying opportunity despite a decline below the fund’s highly liquid investment minimum that it 

expects to be short-term. It also could be appropriate, for example, for a fund to consider selling 

certain relatively less liquid holdings over a period of time and investing some of the proceeds in 

highly liquid investments. 

Similarly, as part of its shortfall policies and procedures, a fund could set forth how it 

would set out a time frame by which it plans to bring its assets that are highly liquid investments

back up to the level of its highly liquid investment minimum.711 If a fund encounters highly 

liquid investment minimum shortfalls regularly, a fund’s liquidity risk management program 

administrator, potentially together with the fund’s broader risk management function, should 

consider whether the fund’s risk management policies and procedures should be modified. We

note that a fund’s shortfall policies and procedures could, but will not be required to, specify the 

persons who will typically determine how, if at all, to respond to a shortfall (for example, the 

person designated by the board to administer the fund’s liquidity risk management program, in 

conjunction with the fund’s risk managers and portfolio managers). 

As discussed below, although we are not requiring a fund’s board to specifically approve 

its highly liquid investment minimum, we continue to believe that the board should play an 

oversight role with respect to the minimum.

712 A requirement to inform the board when a fund 

 711 If a fund’s highly liquid investment minimum shortfall lasts more than seven consecutive calendar days, 

reporting to the fund’s board within one business day is required, including an explanation of how the fund 

plans to restore its minimum within a reasonable period of time. See rule 22e-4(b)(1)(iii)(A)(3).

712 See infra section III.H.3.
221

drops below its highly liquid investment minimum, as well as the circumstances leading to the 

fund’s highly liquid investment minimum shortfall and actions taken in response, will permit the 

board better to understand circumstances that may give rise to heightened liquidity risk. It also 

will provide important context for the board in evaluating the effectiveness of the fund’s highly 

liquid investment minimum and the fund’s liquidity risk management program generally. Many 

commenters suggested that the Commission should adopt a board reporting requirement when a 

fund’s holdings of relatively liquid assets drop below the level that the fund has generally 

targeted as appropriate.713 Rule 22e-4 as adopted generally reflects these suggestions. 

As fund boards are charged with oversight and not day-to-day management of funds’ 

liquidity risk, we believe that it is appropriate not to require that the fund’s board be informed 

that the fund has dropped below its highly liquid investment minimum immediately when this 

occurs. Thus, rule 22e-4 requires that a fund’s board be informed of a highly liquid investment

minimum shortfall at the board’s next regularly scheduled meeting.714 If a fund were to drop 

below its highly liquid investment minimum multiple times prior to the next regularly scheduled 

board meeting, fund management could provide a single report to the board at that meeting 

discussing each of these occurrences. 

However, we believe that when a fund’s assets that are highly liquid investments are 

below its minimum for an extended period of time, this could indicate especially heightened 

liquidity risk, and thus under these circumstances it is appropriate to report a highly liquid 

 713 See, e.g., J.P. Morgan Comment Letter (suggesting a breach would necessitate a report to the board); 

SIFMA I Comment Letter (suggesting a “highly liquid asset target” and noting that “[i]nstances where a 

fund dipped below its target percentage [could] be reported to the fund board with an explanation from 

management as to why the fund dipped below its target and any resulting impact on the fund’s liquidity risk 

profile”); Invesco Comment Letter; Dechert Comment Letter.

714 See rule 22e-4(b)(1)(iii)(A)(3).
222

investment minimum shortfall to the board within a shorter time frame. We are therefore 

adopting the requirement for a fund to report to its board of directors within one business day if 

its shortfall lasts longer than seven consecutive calendar days. Rule 22e-4 requires that this 

accelerated reporting include an explanation of how the fund plans to restore the fund’s highly 

liquid investment minimum within a “reasonable” period of time. Fund management generally 

should take into account the fund’s level of liquidity risk, as well as the facts and circumstances 

leading to the highly liquid investment minimum shortfall, in determining a reasonable time for 

returning the fund’s assets that are highly liquid investments to the fund’s minimum level.

4. Periodic Review of Highly Liquid Investment Minimum

Rule 22e-4 requires a fund to periodically review, no less frequently than annually, the 

fund’s highly liquid investment minimum.715 The proposed rule also included a periodic review 

requirement with respect to the proposed three-day liquid asset minimum, but instead of an 

annual minimum review requirement, the proposed rule would have required that the periodic 

review be conducted at least semi-annually.716 We requested comment on this proposed review 

requirement generally, including the proposed minimum frequency of a fund’s review. We 

received few comments on the proposed review requirement separate from general comments on 

the proposed three-day liquid asset minimum, although we received general support for a review 

requirement concerning a fund’s target level of liquid assets.717

We continue to believe, as discussed in the Proposing Release, that a periodic review is a 

 715 See rule 22e-4(b)(1)(iii)(A)(2).

716 See proposed rule 22e-4(b)(2)(iv)(B).

717 See, e.g., Oppenheimer Comment Letter.
223

central component of the highly liquid investment minimum requirement we are adopting.718 

Although we proposed a minimum semi-annual review requirement, we are adopting a minimum

annual review requirement primarily in order to correlate the minimum period for a fund’s highly 

liquid investment minimum review with the minimum period in which a fund’s board would be 

required to review a written report describing the adequacy of the fund’s liquidity risk 

management program, as described in more detail below.719 The minimum annual review period 

also would correlate with the requirement for a fund to review its liquidity risk periodically, but 

no less frequently than annually.720 We believe that correlating the time periods for each review 

requirement in rule 22e-4 will reduce compliance burdens and mitigate potential confusion that 

could arise from disparate review periods. 

We also do not believe that extending the highly liquid investment minimum review 

period from a minimum of semi-annually to annually will adversely affect funds or investors as a 

fund generally should review its highly liquid investment minimum more frequently if 

circumstances warrant. Additionally, as discussed above, a fund’s board will be regularly 

informed of any highly liquid investment minimum shortfalls. Thus, the board will be aware of 

any liquidity risk management issues that might warrant reconsideration of the fund’s risk 

management procedures or its highly liquid investment minimum. 

Like the requirement for a fund to periodically review its liquidity risk, the highly liquid 

investment minimum review requirement will permit each fund to develop and adopt its own 

procedures for conducting this review, taking into account the fund’s particular facts and 

 718 See Proposing Release, supra footnote 9, at paragraph following n.352.

719 See infra section III.H.2.

720 See supra section III.B.3. 
224

circumstances. Additionally, we believe that in developing comprehensive review procedures, a 

fund should generally consider including procedures for evaluating regulatory, market-wide, and

fund-specific developments affecting the fund’s liquidity risk. A fund also may wish to adopt 

procedures specifying any circumstances that would prompt more frequent review of the fund’s 

highly liquid investment minimum in addition to the annual minimum review required by the 

rule (as well as the process for conducting more frequent reviews).721

5. Exclusion for Funds Primarily Holding Assets that are Highly Liquid Investments

Rule 22e-4, as adopted, excludes a fund that primarily holds assets that are highly liquid 

investments (a “primarily highly liquid fund”) from the requirements to determine and review a 

highly liquid investment minimum, and to adopt shortfall policies and procedures.722 We sought 

comment in the Proposing Release about whether we should exclude certain funds from the 

proposed three-day liquid asset minimum, such as funds that only invest in three-day liquid 

assets. Commenters argued that a requirement for a fund to determine a minimum portion of 

assets that it will invest in relatively liquid assets is not suitable for funds that primarily invest in 

highly liquid investment classes, given that a significant portion of the fund’s portfolio would be 

composed of such assets, and thus the benefits associated with the three-day liquid asset 

minimum requirement would not justify the burdens.723 After considering these comments and 

 721 See, e.g., supra footnote 273 and accompanying paragraph; see also supra section III.D.2.a.

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

723 See, e.g., FSR Comment Letter (“[T]he Commission should consider alternative regulatory approaches for 

index funds that seek to track the performance of indices that are comprised of highly liquid assets....”); 

Dechert Comment Letter (citing Statement on Open-End Fund Liquidity Risk Management Programs and 

Swing Pricing, Commissioner Daniel M. Gallagher, Securities and Exchange Commission (Sept. 22, 2015) 

(“Furthermore, for funds that invest solely in assets that can be settled in three days or less – for example, a 

fund that limits its investments to equity securities of S&P 500 companies – the ‘three-day bucket’ has no 

functional value. Requiring such a fund to set its three-day bucket – whether it be at 1%, or 20% or even 

90% – would be a meaningless exercise given that the entire portfolio would be comprised of assets settled 

in three days or less.”)).
225

reevaluating the costs and benefits of the proposal, we agree that a primarily highly liquid fund 

should not be required to determine and review a highly liquid investment minimum, or adopt 

shortfall policies and procedures. We agree with commenters that the benefits associated with 

these requirements as applied to primarily highly liquid funds would not justify the associated 

burdens.

724 

Under rule 22e-4, a fund whose portfolio consists primarily of assets that are highly 

liquid investments would be excluded from the highly liquid investment minimum 

requirement.725 Thus, we anticipate that a primarily highly liquid fund would address in its 

liquidity risk management program how it determines that it primarily holds assets that are 

highly liquid investments, including, for example, how it defines “primarily.”726 If a fund were 

to modify its investment strategy or encounter strategy “drift” such that it no longer primarily 

held assets that were highly liquid investments, it would be required to adopt and review a highly 

liquid investment minimum, as well as adopt and implement policies and procedures for 

responding to a shortfall of the fund’s assets that are highly liquid investments below its 

minimum. We therefore believe that if a fund’s investment strategy is such that it cannot 

generally be predicted whether the fund would primarily hold assets that are highly liquid 

investments (for example, if the strategy were to entail a significant amount of volatility in terms 

of the fund’s portfolio liquidity), it would be difficult for the fund’s management to conclude that 

 724 For more discussion about the costs and burdens associated with the highly liquid investment minimum

requirement, see infra section IV.C.

725 See rule 22e-4(b)(1)(iii)(A). Money market funds and In-Kind ETFs also would be excluded from the 

highly liquid investment minimum requirement. See rule 22e-4(a)(5) (defining “fund,” for purposes of the 

rule as excluding money market funds and In-Kind ETFs). 

726 As noted by commenters, a highly liquid index fund would be one example of a fund whose portfolio 

consists primarily (in the case of these index funds, almost entirely) of assets that are highly liquid 

investments. See supra footnote 723. In our view, if a fund held less than 50% of its assets in highly liquid 

investments it would be unlikely to qualify as “primarily” holding assets that are highly liquid investments. 
226

the fund should appropriately be excluded from the highly liquid investment minimum 

requirement. 

For purposes of determining whether a fund primarily holds assets that are highly liquid 

investments, a fund must exclude from its calculations the percentage of the fund’s assets that are 

highly liquid investments that it has segregated to cover derivatives transactions that the fund has 

classified as moderately liquid investments, less liquid investments, and illiquid investments, or 

pledged to satisfy margin requirements in connection with those derivatives transactions, as 

determined pursuant to rule 22e-4(b)(1)(ii)(C).

727 As discussed above, when a fund’s assets are 

segregated or pledged in connection with derivatives transactions, they may not be immediately 

available for liquidity risk management purposes.728 Thus, a fund whose assets that are highly 

liquid investments that are segregated or pledged in connection with derivatives transactions may 

not have the same level of liquidity risk management flexibility as a fund whose assets are highly 

liquid investments that are not similarly segregated or pledged. While we believe that the 

benefits associated with the highly liquid investment minimum requirements as applied to 

primarily highly liquid funds would not justify associated burdens,729 we believe that this 

consideration is appropriate only to the extent a fund primarily holds assets that are highly liquid 

investments that are not segregated or pledged in connection with derivatives transactions. As an 

extreme example, if a fund were to hold only assets that were highly liquid investments that were 

 727 Rule 22e-4(b)(1)(iii)(B). As described above, a fund would be permitted to exclude its derivatives 

transactions that are classified as highly liquid investments in determining the percentage of highly liquid 

investments that are segregated or pledged assets because, since the fund could dispose of or exit these 

derivatives transactions within three business days, the associated segregated or pledged assets also would 

be available to the fund for liquidity risk management purposes within three business days. See supra text 

following footnote 493.

728 See supra section III.C.3.c.

729 See supra footnote 724 and accompanying text.
227

segregated or pledged in connection with derivatives transactions and that were not themselves 

classified as highly liquid investments, none of its assets that were highly liquid investments

would be available to meet redemptions or otherwise manage liquidity risk. Thus, we believe 

that such fund’s assets that were highly liquid investments would likely not be commensurate 

with its liquidity risk profile as determined with reference to the liquidity risk factors it would be 

required to consider under rule 22e-4.730

6. Highly Liquid Investment Minimum Reporting and Disclosure Requirements

We proposed to amend Form N-PORT to add a new item that would require each fund to 

disclose its three-day liquid asset minimum, as such term was proposed to be defined in proposed 

rule 22e-4. One commenter supported reporting the three-day liquid asset minimum in a 

structured data format to the public as proposed.731 Certain other commenters supported 

reporting the three-day liquid asset minimum in a structured data format as proposed but to the 

Commission only.732 One commenter did not support public disclosure of a fund’s three-day 

liquid asset minimum, as proposed, but said it would support public disclosure of a fund’s threeday liquid asset minimum if the Commission adopted a recommended alternative to such 

definition.733

Some commenters, however, opposed public disclosure of both the three-day liquid asset 

minimum as proposed and recommended alternatives to the three-day liquid asset minimum. 

 730 See supra section III.D.2 (discussing the rule 22e-4 requirement for a fund to consider certain liquidity risk 

factors in determining its highly liquid investment minimum).

731 See Charles Schwab Comment Letter (noting that information about the fund’s liquidity risk management 

program will be particularly helpful to investors, as will disclosure of a fund’s overall liquidity picture and 

a fund’s three-day liquid asset minimum).

732 See, e.g., CFA Comment Letter; Voya Comment Letter.

733 See Vanguard Comment Letter.
228

Commenters expressed concerns that public disclosure could be misleading to investors, arguing 

that any minimum reported on Form N-PORT would be subjective, presented without context, 

and may not reflect a fund’s actual portfolio management approach at the time the data is being 

relied upon by investors.734 Other commenters contended that public disclosure could interfere 

with a fund’s investment strategy and promote unwarranted, and potentially destabilizing, 

redemption activity by fund shareholders, especially during times of stress.735 One commenter 

stated that public disclosure of a liquidity minimum would also give undue emphasis to a single 

element of a fund’s liquidity risk management program and could potentially encourage third 

parties to use a single numerical figure as a basis for comparing funds, further encouraging 

undue reliance on the liquidity minimum figure by investors.736 Certain other commenters 

expressed concern that public disclosure could potentially expose a fund to predatory trading 

activity if the fund is seen as vulnerable to liquidity risks or is under stress.737 In addition, one 

commenter contended that comparisons of three-day liquid asset minimums could result in 

competitive pressures for relatively uniform minimums among funds with similar investment 

strategies, ultimately harming fund investors.738

We are persuaded by some of the concerns expressed by commenters regarding the 

potential risks to funds and fund investors of public reporting of a fund’s three-day liquid asset 

minimum, as proposed, or any alternative formulation, including a fund’s highly liquid 

investment minimum, as adopted today. In response to comments, we are adopting amendments 

 734 See, e.g., Eaton Vance Comment Letter I; J.P. Morgan Comment Letter; NYC Bar Comment Letter; Voya 

Comment Letter.

735 See, e.g., Eaton Vance Comment Letter I; J.P. Morgan Comment Letter; Wells Fargo Comment Letter.

736 See SIFMA Comment Letter I.

737 See, e.g., Eaton Vance Comment Letter I; SIFMA Comment Letter.

738 See NYC Bar Comment Letter.
229

to require a fund to report its highly liquid investment minimum on Form N-PORT to the 

Commission on a non-public basis.739 We believe that the requirement that a fund report to its 

board when the fund’s assets that are highly liquid investments fall below the fund’s highly 

liquid investment minimum, discussed above, is a more appropriate tool to assist fund boards in 

their oversight of fund liquidity risks, thereby ultimately protecting shareholder interests in the 

fund.740 

In light of the changes we are making to the way the highly liquid investment minimum 

is established, the final modifications to Form N-PORT require that if a fund’s minimum has

changed during the reporting period, any prior minimums established by the fund during the 

reporting period also be reported.741 Because, as discussed previously, we are not requiring the 

fund’s board to approve changes to the highly liquid asset minimum, we believe it is important 

that any changes to the minimum during a reporting period be included in Form N-PORT to help 

mitigate the possibility of window dressing a fund’s highly liquid asset minimum at the end of 

the reporting period, and allow us to monitor for changes to a fund’s minimum. In addition, 

considering the changes we have made to the way the minimum works from the proposal, and 

consistent with the board and Commission reporting requirements we are adopting relating to

shortfalls of a fund’s minimum, the final amendments to Form N-PORT also require that if a 

fund is below its minimum during the reporting period, a fund needs to report the number of days 

it is below its minimum during the reporting period.

742 We believe that this reporting 

requirement will enhance our monitoring of fund’s compliance with the minimum and the board 

 739 See General Instruction F of Form N-PORT.

740 See supra section III.D.3.

741 See Item B.7.c. of Form N-PORT. 

742 See Item B.7.b. of Form N-PORT.
230

and Commission reporting requirements contained elsewhere in rule 22e-4. These additional 

reporting requirements also would be non-public, for the same reasons discussed above. 

Overall, we believe that such board oversight together with confidential reporting to the 

Commission is a regulatory approach that balances commenters’ concerns about certain adverse 

effects that could arise from public reporting of liquid investment minimums with the need for 

enhanced investor protections and meaningful information for Commission regulatory oversight 

responsibilities. We believe that it is neither necessary nor appropriate in the public interest or 

for the protection of investors to make information regarding a fund’s highly liquid investment

minimum publicly available at this time.743 

E. Limitation on Funds’ Illiquid Investments

Rule 22e-4 includes a limit on a fund’s ability to acquire illiquid investments. 

Specifically, the rule prohibits a fund from acquiring any illiquid investment if, immediately 

after the acquisition, the fund would have invested more than 15% of its net assets in illiquid 

investments that are assets.

744 The rule’s 15% limit on funds’ illiquid investments applies to all 

funds (including In-Kind ETFs).745 Additionally, as discussed below, a fund will be required to 

notify its board, and confidentially the Commission, when its illiquid investments that are assets

exceed 15% of its net assets. Moreover, the person(s) designated to administer the liquidity risk 

 743 See section 45 of the Act, which provides, in summary, that the information contained in any report or other 

document filed with the Commission pursuant to the Act shall be made available to the public, unless by 

rules and regulations upon its own motion, or by order upon application, the Commission finds that public 

disclosure is “neither necessary nor appropriate in the public interest or for the protection of investors.”

744 Rule 22e-4(b)(1)(iv). Rule 22e-4(b)(1)(iv) refers to investments that are “assets” to make clear that the 

15% limit on illiquid investments applies to investments with positive values. Illiquid investments that 

have negative values should not be netted against illiquid investments that have positive values when 

calculating compliance with the 15% limit. Thus, only illiquid investments that have positive values (i.e.,

“assets”) should be used in the numerator. 

745 See id.; see also rule 22e-4(a)(5) and (9) (defining the terms “fund” and “In-Kind ETF” for purposes of the 

rule).
231

management program must explain in a report to the board the extent and causes of the 

occurrence, and how the fund plans to bring its illiquid investments that are assets to or below 

15% of its net assets within a reasonable period of time.746 If the amount of the fund’s illiquid 

investments that are assets is still above 15% of its net assets 30 days from the occurrence (and at 

each consecutive 30 day period thereafter), the board of directors, including a majority of its 

independent directors,747 must assess whether the plan presented to it continues to be in the best 

interest of the fund. 

The limitation on funds’ illiquid investments is similar to the limitation on “15% standard 

assets” in proposed rule 22e-4,748 in that both requirements would limit the acquisition of assets 

that cannot be sold or disposed of within seven days. However, there are several key differences 

between the proposed and adopted requirements. Specifically, the proposed rule would have had 

a fund identify 15% standard assets in a process separate from the requirement to classify 

portfolio assets’ liquidity, whereas rule 22e-4 as adopted today generally incorporates 

classification of portfolio investments as illiquid into the process for classifying the liquidity of a 

fund’s portfolio investments generally. As discussed in sections III.C.1.b and III.C.3.b above, a 

 746 Rule 22e-4(b)(1)(iv)(A).

747 “Independent directors” as used herein refers to directors who are not “interested persons” of a fund or InKind ETF, as applicable, as that term is defined in section 2(a)(19) of the Investment Company Act.

748 See Proposing Release, supra footnote 9, at section III.C.4. Under the proposed rule, “15% standard asset” 

was defined as “an asset that may not be sold or disposed of in the ordinary course of business within seven 

calendar days at approximately the value ascribed to it by the fund.” Proposed rule 22e-4(a)(4). For 

purposes of this definition, a fund would not have needed to consider the size of the fund’s position in the 

asset or the number of days associated with receipt of proceeds of sale or disposition of the asset. Id.

We note that, as proposed, the text of rule 22e-4 would have limited the acquisition of 15% standard assets 

if, immediately after the acquisition, the fund would have invested more than 15% of its total assets (as 

opposed to net assets) in 15% standard assets. See proposed rule 22e-4(b)(2)(iv)(D). This reference to 

“total assets” in the proposed rule text was intended to read “net assets,” as was evident in the discussion of 

this rule provision in Proposing Release, section III.C.4 (and elsewhere in the Proposing Release), which 

consistently discussed the provision as limiting a fund’s acquisition of 15% standard assets if, immediately 

after the acquisition, the fund would have invested more than 15% of its net assets in 15% standard assets. 

Rule 22e-4 as adopted refers to “net assets” instead of “total assets.” 
232

fund is required to take into account “relevant market, trading, and investment-specific 

considerations,” and also is required to consider market depth, in classifying an investment as 

illiquid. Also as discussed above in section III.C.2.d, rule 22e-4 incorporates a modified value

impact standard in the definition of “illiquid investment” from the value impact standard 

reflected in the proposed definition of “15% standard asset.” 

The majority of commenters supported the codification of the Commission’s 15% 

guideline as proposed. Many commenters stated that the 15% guideline is an important investor 

protection measure and posited that the guideline has proven to be a highly effective safeguard 

against liquidity risk.749 One commenter specifically noted that assets of open-end funds should 

be predominantly liquid and replacing the guideline with a formal regulatory mandate would 

promote investor protection.750 Another commenter viewed the 15% guideline as a clear 

safeguard against liquidity risk that has the benefits of simplicity, clarity, and easy 

administration.751 One commenter stated that setting reasonable controls on, and monitoring the 

use of, illiquid asset classes to ensure that they do not compromise the liquidity offered to 

investors within the fund is an important element of properly managing open-end funds.752 

Finally, one commenter suggested that the proposed codification of the 15% guideline would 

both increase the likelihood that funds hold adequate liquid assets to meet redemption requests 

without significant dilution and increase the likelihood that a fund’s portfolio is not concentrated 

 749 See, e.g., Cohen & Steers Comment Letter; Eaton Vance Comment Letter I; FSR Comment Letter; LSTA 

Comment Letter.

750 See State Street Comment Letter.

751 See Better Markets Comment Letter.

752 See BlackRock Comment Letter.
233

in assets whose liquidity is limited.753

In addition, several commenters supported a limit on the amount of illiquid assets that 

can be held by a fund generally, but suggested alternatives to how the 15% standard would 

operate or the proposed definition of 15% standard assets.754 In fact, most commenters who 

expressed concerns regarding the proposed 15% limit did so in the context of suggesting 

alternatives to the proposal or the proposed definition of “15% standard asset.” Multiple 

commenters who discussed the proposed limit suggested that the Commission should harmonize 

its codification of the existing 15% guideline with the proposed requirement for a fund to 

classify the liquidity of its portfolio assets generally (i.e., they suggested that illiquid assets be 

the least liquid classification category).755 Some commenters suggested that any limit on illiquid 

assets should not just limit the acquisition of illiquid assets, but also should require the fund to 

adjust its portfolio if it exceeds the 15% limit.756 Finally, some commenters suggested that a 

fund be required to notify its board and the Commission if it exceeds the 15% limit.

757 All other 

comments on the proposed limit were comments regarding the definition of “15% standard 

asset” and are discussed above in section III.C.2.d.

We agree with commenters who stated that codifying a limit on funds’ illiquid 

investments should be a central element of managing open-end funds’ liquidity risk, which in 

 753 See CRMC Comment Letter.

754 See, e.g., AFR Comment Letter; Blackrock Comment Letter; Keefer Comment Letter; Wahh Comment 

Letter. In general, the comments we received on the 15% standard did not specifically address the amount 

of the limit; cf. footnote 761 and accompanying text.

755 See, e.g., Eaton Vance Comment Letter I; Federated Comment Letter; SIFMA Comment Letter I; Markit 

Comment Letter.

756 See, e.g., Fidelity Comment Letter; Keefer Comment Letter; Wahh Comment Letter. But see HSBC 

Comment Letter (arguing that imposing a fixed time period in which holdings above the 15% threshold 

must be divested would not be appropriate because it may force sales at depressed prices to the detriment of 

investors).

757 See BlackRock Comment Letter; ICI Comment Letter I; SIFMA Comment Letter III.
234

turn would further the protection of investors. While we believe that the highly liquid 

investment minimum requirement will increase the likelihood that each fund holds adequate 

liquid assets to meet redemption requests without significant dilution of remaining investors’ 

interests in the fund, the limit on illiquid investments also should increase the likelihood that a 

fund’s portfolio is not concentrated in investments whose liquidity is extremely limited, and thus 

will serve as an across-the-board limit on fund illiquidity. As discussed above, the Commission 

and staff have in the past provided guidance in connection with the 15% guideline. Today we 

are withdrawing this guidance along with the 15% guideline and replacing it with new 

requirements for determining that an investment is illiquid, as well as new guidance in this 

Release regarding these requirements. We believe that the limit on illiquid investments that are 

assets that we are adopting, together with the new definition of “illiquid investments” that 

encompasses additional elements for determining that an investment is illiquid,758 provides a 

more comprehensive framework for funds to evaluate the liquidity of their investments. 

We also agree, as discussed in more detail in section III.C.2.d above, that it is appropriate 

to harmonize the rule 22e-4 limit on illiquid investments with the rule’s broader liquidity 

classification requirement by incorporating an illiquid investment category into the classification 

requirement. We believe that this harmonization will reduce confusion that could arise if we 

were to adopt requirements for identifying illiquid investments that differed from the 

requirements for classifying the liquidity of investments that are not illiquid.759 Additionally, we

believe the harmonization responds to commenter concerns that, in practice, many funds believe 

very few of their portfolio investments are subject to the 15% limit on illiquid securities, since

 758 See supra section III.C.2.d.

759 See supra footnotes 392-395 and accompanying text.
235

funds will be required to take into account “relevant market, trading, and investment-specific 

considerations” in identifying illiquid investments and incorporate market depth considerations 

as part of the rule’s liquidity classification requirement.760 A fund also will be required to 

consider a modified value impact standard in determining if an investment is illiquid, which as 

discussed above, we believe will help funds make more accurate liquidity assessments, 

particularly for asset classes or investments that are subject to intra-day price volatility. 

One commenter suggested that, if the Commission adopts requirements that would 

expand the set of assets that is subject to the 15% limit on illiquid assets, it could consider 

extending the limit beyond 15%, or extending the time-to-sale period associated with the 

definition of “illiquid asset” beyond seven days, in order to limit market disruptions.761 We have 

considered this suggestion and have decided that it is not necessary.762 We continue to believe 

that 15% is an appropriate limit on illiquid investments that are assets. The compliance period 

we are adopting for rule 22e-4 will permit funds to come into compliance with the revised 15% 

illiquid investment limit while minimizing market disruptions.763 

In the proposal, we requested comment as to whether we should require a fund to divest 

its assets in excess of the 15% limit or whether we should limit the time period in which a fund 

can exceed the 15% limit. As noted above, some commenters suggested that the 15% limit 

should be a maintenance test, rather than an acquisition test, requiring the fund to adjust its 

portfolio if it exceeds the 15% limit.

764 Another commenter argued that imposing a fixed time 

 760 See supra footnotes 399-401 and accompanying text.

761 See AFR Comment Letter.

762 As noted above, no other commenters specifically addressed the amount of the limit. 

763 See infra section III.M.1.

764 See supra footnote 756 and accompanying text.
236

period in which holdings above the 15% threshold must be divested would not be appropriate 

because it may force sales at depressed prices to the detriment of investors.

765 In addition, one 

commenter noted the importance of ensuring oversight once a fund breaches the 15% limit and 

that efforts are made to reduce the fund’s illiquid asset holdings (when possible).766 

We believe that requiring a fund to divest illiquid investments if the fund’s holdings of 

illiquid investments that are assets exceed 15% of net assets—which, as suggested by a 

commenter, could result in the fund needing to sell the illiquid investments at prices that 

incorporate a significant discount to the investments’ stated value, or even at fire sale prices—

could adversely affect shareholders and could potentially negate the liquidity risk management 

benefits of the illiquid investment limit. Therefore, under the final rule, a fund will be prohibited 

from acquiring any illiquid investment if, immediately after the acquisition, its illiquid 

investments that are assets would exceed 15% of its net assets.767 

We further believe, however, that a fund should not be permitted to exceed the 15% limit 

on illiquid investments for an extended period of time without board oversight. Therefore, 

because we believe that if a fund’s illiquid investments that are assets exceed the 15% limit it

could indicate that the fund is encountering harmful liquidity pressures, the final rule requires, as 

suggested by commenters,

768 that a fund promptly report such occurrence to its board and the 

 765 See HSBC Comment Letter.

766 See BlackRock Comment Letter; cf. PIMCO Comment Letter (suggesting that, with respect to the proposed 

three day liquid asset minimum, if a fund breaches the minimum, its manager should be afforded a 

reasonable period of time to reposition the portfolio).

767 We recognize that some index funds currently implement their strategies by using a full replication 

technique – i.e., by investing in all of the component securities of an index. To the extent an index tracked 

by an index fund would require a fund using a full replication technique to invest more than 15% of its net 

assets in illiquid investments that are assets, such fund could not make those investments and would need to 

consider whether it should continue to seek to track the performance of such index or whether it should use 

a different investment technique, such as sampling, to track the index.

768 See supra footnote 757. 
237

Commission.

769 Specifically, the final rule requires funds that hold more than 15% of their net 

assets in illiquid investments that are assets to report such an occurrence to their boards of 

directors within one business day, including an explanation of the extent and causes of the 

occurrence and how they plan to bring their illiquid investments that are assets to or below 15% 

of their net assets within a reasonable period of time.

770 We also anticipate that if a fund exceeds 

the 15% limit on illiquid investments that are assets at any point during the year, the written 

report to the board of directors regarding the adequacy and effectiveness of the liquidity risk 

management program would discuss the breach of the limit and, if the fund is still breaching the 

15% limit at the time of the report, the plan to bring the fund’s illiquid investments that are assets 

to or below 15% of its net assets within a reasonable period of time.

771 In addition, if the amount 

of the fund’s illiquid investments that are assets is still above 15% of its net assets 30 days from 

the occurrence (and at each consecutive 30 day period thereafter), the fund’s board of directors, 

including a majority of directors who are not interested persons of the fund, must assess whether 

the plan presented to it, as described above, continues to be in the best interest of the fund or in 

kind ETF.

772 We believe these requirements appropriately balance our concerns regarding the 

overall liquidity of the fund’s portfolio with the potential adverse effects that the forced sale of 

illiquid investments could have on a fund and its shareholders. These requirements should not 

result in funds selling their illiquid investments at fire sale prices or at inopportune times because 

such a sale would likely not be in the best interests of a fund and its shareholders. However, we 

 769 See infra section III.H.4 (discussing board oversight of the illiquid investment limit).

770 Rule 22e-4(b)(1)(iv)(A); see also infra section III.H.4.

771 See infra section III.H.2 (discussing the written report to the board on the adequacy and effectiveness of the 

liquidity risk management program); see also rule 22e-4(b)(2)(iii). 

772 See rule 22e-4(b)(1)(iv)(A) and (B).
238

believe that board oversight is important when a fund’s illiquid investments exceed 15% of its 

net assets for an extended period of time.

We acknowledge that requiring a board assessment of the appropriateness of the fund’s 

plan to decrease its level of illiquid investments every 30 days a fund holds illiquid assets in 

excess of 15% of its net assets may impose burdens on boards and funds. Nonetheless, we 

believe that such a requirement is appropriate in light of the serious consequences that can result 

when a fund’s liquidity becomes impaired or further deteriorates, particularly for extended 

periods of time.773 We expect that this requirement will appropriately focus boards and funds on 

resolving liquidity impairments in a reasonable period of time and in the best interests of the 

fund and its shareholders. In light of the risks attendant in holding larger proportions of illiquid 

investments, we believe it is important that the board is provided sufficient information and 

regular updates so that it can make an informed judgment. Accordingly, we believe this periodic 

reassessment requirement in the rule is appropriate. 

Additionally, as discussed in section III.M.2 below, a fund will be required to 

confidentially notify the Commission when its illiquid investments that are assets exceed 15% of 

its net assets. As discussed below, reporting of this information will assist Commission staff in 

its monitoring efforts of liquidity, including monitoring not only the reporting fund but also 

funds that may have comparable characteristics to the reporting fund and may be similarly 

affected by market events. The percentage of the fund’s holdings invested in illiquid 

investments that are assets also will be disclosed on Form N-PORT to the public on a quarterly 

basis, with a 60-day delay, as discussed in section III.C.6 above, which will lead to increased 

transparency of the fund’s profile regarding holdings of illiquid investments at particular points 

 773 See, e.g., Discussion of liquidity issues associated with the Third Avenue Focused Credit fund at n. 81.
239

in time.

F. Policies and Procedures Regarding Redemptions in Kind

Many funds reserve the right to redeem their shares in-kind instead of with cash.774 

Mutual funds that reserve the right to redeem in kind may use such redemptions to manage 

liquidity risk under exceptional circumstances.775 While many funds disclose that they have 

reserved the right to redeem in kind, most funds often consider redemptions in kind to be a last 

resort or emergency measure, and thus many do not have specific policies or procedures in place 

governing such in-kind redemptions.776 Like the proposal, the final rule requires a fund that 

engages in or reserves the right to engage in in-kind redemptions to adopt and implement written 

policies and procedures regarding in-kind redemptions as part of the management of its liquidity 

risk.777 These policies and procedures generally should address the process for redeeming in

kind, as well as the circumstances under which the fund would consider redeeming in kind. 

Multiple commenters welcomed efforts by the Commission to facilitate funds’ ability to 

use redemptions in kind and stated that they considered redemptions in kind an important 

 774 See, e.g., Rule 18f-1 and Form N-18F-1 Adopting Release, supra footnote 24 (stating that the definition of 

“redeemable security” in section 2(a)(32) of the Investment Company Act “has traditionally been 

interpreted as giving the issuer the option of redeeming its securities in cash or in kind.”). 

775 See Karen Damato, ‘Redemptions in Kind’ Become Effective for Tax Management, Wall Street Journal

(Mar. 10, 1999), available at http://www.wsj.com/articles/SB921028092685519084 (“‘Redemptions in 

kind’ are typically viewed by fund managers as an emergency measure, a step they could take to meet 

massive redemptions in the midst of a market meltdown.”). Besides using in-kind redemptions as an 

emergency measure to manage liquidity risk, funds may also use in-kind redemptions for other reasons. 

For example, funds may wish to redeem certain investors (particularly, large, institutional investors) in 

kind, because in-kind redemptions could have a lower tax impact on the fund than selling portfolio 

securities in order to pay redemptions in cash. This, in turn, could benefit the remaining shareholders in the 

fund. See, e.g., id. (“If a fund has to sell appreciated stocks to pay a redeeming shareholder, it realizes 

capital gains. Unless the fund has offsetting capital losses, those gains are distributed as taxable income to 

all remaining fund holders. By contrast, when funds distribute stocks from their portfolios, there is no tax 

event for the continuing holders.”).

776 See Proposing Release, supra footnote 9, at section III.C.5

777 Rule 22e-4(b)(v). This requirement also applies to In-Kind ETFs that are subject to the tailored regime 

discussed below. Id.
240

liquidity risk management tool for allocating the cost of selling securities to meet redemptions to 

redeeming investors.778 These commenters also generally agreed that as part of a fund’s 

management of its liquidity risk, a fund should adopt and implement written policies and 

procedures regarding in-kind redemptions.779 Commenters noted that there are often logistical 

issues associated with paying in-kind redemptions, and that this limits the availability of in-kind 

redemptions under many circumstances.

780 Commenters also noted that some shareholders are 

generally unable or unwilling to receive in-kind redemptions, which may limit its utility.781 

These commenters agreed that requiring funds to implement policies and procedures on in-kind 

redemptions in advance would promote a focus on addressing any legal or operations issues 

before the fund’s use of redemptions in kind, thus making such redemptions a more practical and 

effective liquidity management tool.782 

Commenters also suggested that the Commission provide guidance on the appropriate use 

of in-kind redemptions for funds.783 We expect that effective fund policies and procedures on inkind redemptions would contemplate a variety of issues and circumstances. Well-designed 

policies and procedures would likely address the particular circumstances in which a fund might 

employ in-kind redemptions, for example, detailing whether a fund would use in-kind 

 778 BlackRock Comment Letter (noting that redemptions in kind allow costs to be externalized from the fund 

without the use of mechanisms such as swing pricing). 

779 See, e.g., BlackRock Comment Letter; Invesco Comment Letter.

780 See, e.g., Invesco FSOC Notice Comment Letter, supra footnote 248(noting that while “Invesco has on 

occasion exercised rights to redeem in kind, in practice such rights are exercised infrequently”). 

781 See Peter Fortune, Mutual Funds, Part I: Reshaping the American Financial System, NEW ENGLAND ECON.

REV. (July/Aug. 1997) (“Fortune”) at 47 (“A fund redeeming in kind does so at the risk of its reputation 

and future business . . .”), available at http://www.bostonfed.org/economic/neer/neer1997/neer497d.htm;

Invesco Comment Letter.

782 ICI Comment Letter I; BlackRock Comment Letter. 

783 See, e.g., BlackRock Comment Letter.
241

redemptions at all times, or only under stress, and what types of events may lead the fund to use 

them. Such policies and procedures would also likely address whether a fund would use in-kind 

redemptions for all redemption requests or only for requests over a certain size.784 

Funds may also wish to consider having policies and procedures that address the ability 

of investors to receive in-kind redemptions, potentially including different procedures for 

different shareholder types. For example, the policies and procedures might provide that retail 

shareholders (who may not be operationally equipped to receive in-kind redemptions) may be 

provided cash redemptions, but that institutional investors who may be able to receive such 

securities, would be paid out in-kind under certain circumstances. These procedures may also 

consider whether holdings through omnibus accounts pose any unique issues that should be 

addressed. Well-designed policies and procedures would likely also address potential 

operational issues with providing in-kind redemptions to various kinds of investors, and plan out 

methods for addressing such operational issues. These might include notifying large 

shareholders that may be subject to redemptions in kind and setting up securities transfer

processes for those shareholders in advance.

Effective policies and procedures would also likely address how the fund would 

determine which securities it would use in an in-kind redemption (for example would it use 

illiquid or restricted securities), or whether it plans to redeem securities in kind as a pro rata ratio 

of the fund’s securities holdings, or whether it would redeem in a non-pro rata manner. For a 

fund that redeems pro rata, policies and procedures might address how the fund plans in-kind 

redemptions of odd lots or small lots of securities, and if a fund were to do such odd lot 

 784 One commenter suggested that fund sponsors should consider redemptions in kind if withdrawal requests 

exceed a certain percentage of a fund’s total assets. See BlackRock Comment Letter. 
242

transactions, how to process such transactions. They may also consider how they would 

accomplish in-kind redemptions of illiquid securities or securities that have restrictions on their 

transferability, and the extent to which these securities would not be redeemed in kind. 

If a fund chooses not to redeem in a pro rata manner, effective policies and procedures 

would likely address that securities redeemed are selected and distributed in a manner that is fair 

and does not disadvantage either the redeeming shareholder or the remaining investors in the 

fund. We caution that if a fund redeems an investor’s interests in a fund by transferring an 

unrepresentative set of securities to the investor, this may raise questions of shareholder 

discrimination and unfairness (as well as potentially cherry picking and favoritism), which 

should be addressed in the fund’s policies and procedures. For example, policies and procedures 

could address how to ensure that any securities that are redeemed in kind in a non-pro rata

manner are valued properly, to ensure that the securities transferred represent the proportionate 

share of the fund NAV.785 They might also address how the fund would determine that 

shareholders are treated fairly, and are not redeemed with securities the fund deems undesirable

or securities that have significant tax consequences. Relatedly, the policies and procedures may 

also address how the fund evaluates the tax consequences to the fund and the redeeming 

shareholder of distributing certain securities, for example, whether distributing certain securities 

that have significant capital gains or losses built in would have inequitable results. 

Because the management and personnel capacity of funds facing heavy redemptions and 

other liquidity stresses will likely be strained as funds attempt to manage these pressures, the 

Commission believes that requiring funds to have policies and procedures dictating how fund’s 

 785 See section 2(a)(32) (definition of redeemable security). Such a transaction may have significant negative 

consequences to the redeeming recipient, particularly if the security provided was fair valued improperly, 

was restricted, or was in other ways impaired.
243

will implement in-kind redemptions will increase the likelihood that in-kind redemptions will be 

a feasible risk management tool, and may address any potential fund or shareholder inequities. 

Accordingly, we are adopting this requirement largely as proposed.786

G. Cross-Trades

Today, under rule 17a-7, funds may make certain affiliated securities transactions 

between funds and certain affiliates (“cross trades”), provided they meet certain protective 

conditions.787 _bookmark41 Rule 17a-7 includes conditions that limit the portfolio assets that 

may be cross-traded, and, as discussed below, cross-trades involving certain less liquid assets 

may not be eligible to rely on the rule. As discussed in the Proposing Release, some funds 

may consider engaging in cross-trades to be a useful liquidity risk management tool. Crosstrading can benefit funds and their shareholders by allowing funds that are mutually 

interested in a securities transaction that is consistent with the investment strategies of each 

fund to conduct the transaction without incurring transaction costs and without generating a 

market impact.788 However, cross-trades also have significant potential for abuse. For 

example, as the Commission has previously stated, “an unscrupulous investment adviser 

might ‘dump’ undesirable securities on a registered investment company or transfer desirable 

 786 The rule text has been slightly modified to make clear that redemption in kind policies and procedures must

address not just how the fund will engage in redemptions in kind, but also when it will do so. Rule 22e4(b)(1)(v). 

787 Section 17 of the Act restricts transactions between an “affiliated person of a registered investment 

company or an affiliated person of such affiliated person” and that investment company—for example, 

transactions between a fund and another fund managed by the same adviser. A fund must therefore obtain 

exemptive relief from the Commission before entering into purchase or sale transactions with an affiliated 

fund, or execute such transactions subject to the provisions of rule 17a-7 under the Investment Company

Act (permitting purchase and sale transactions among affiliated funds and other accounts, under certain

circumstances). 

788 As noted above, rule 17a-7 requires that each cross-trade be consistent with the policy of each fund

participating in the transaction and that no brokerage commissions, fees or other remuneration be paid in

connection with the transaction. Because cross-trades are conducted privately between funds, they are not

transparent to market trading reporting systems and thus are unlikely to generate a market impact.
244

securities from a registered investment company to another more favored advisory client in 

the complex. Moreover the transaction could be effected at a price which is disadvantageous 

to the registered investment company.”789 Cross-trade transactions also may be inconsistent 

with the investment objectives, investment strategies, or risk profiles of participating 

investment companies and other advisory clients.

790 

Accordingly, rule 17a-7 requires that any cross-trades satisfy certain conditions 

designed to prevent such abuses, including the requirement that market quotations be readily 

available for each traded security and that if the security is only traded over the counter, the 

cross-trade be conducted at the average of the highest current independent bid and lowest 

current independent offer determined on the basis of reasonable inquiry.791 _bookmark44 In 

requiring market quotations for cross-traded securities, the Commission has stated that 

“[r]eliance upon such market quotations provides an independent basis for determining that 

the terms of the transaction are fair and reasonable to each participating investment company

or other advisory client and do not involve overreaching.”792 Rule 17a-7 also requires that a 

cross-trade transaction be “consistent with the policy of each registered investment company 

 789 Exemption of Certain Purchase or Sale Transactions Between a Registered Investment Company and 

Certain Affiliated Persons Thereof, Investment Company Act Release No. 11136 (Apr. 21, 1980) [45 FR 

29067 (May 1, 1980)]. See also Evergreen Order, supra footnote 46 (fund’s adviser failed to seek best 

execution in trading fund securities and favored one client over another, thereby engaging in transactions 

that operated as a fraud or deceit upon its client in violation of section 206(2) of the Advisers Act).

790 A fund that provided a non-pro rata distribution of cash, securities or other property to a shareholder that 

owns 5% or more of the fund and/or gives any election to the shareholder about which assets to receive

may also raise affiliated transaction concerns under section 17(a) and rule 17a-5, as such a transaction 

would fall outside the exemption provided by rule 17a-5 and thus might be viewed as a sale to or purchase 

from the fund by an affiliated person.

791 See rule 17a-7(b).

792 Exemption of Certain Purchase or Sale Transactions Between a Registered Investment Company and 

Certain Affiliated Persons Thereof, Investment Company Act Release No. 11676 (Mar. 10, 1981) [45 FR 

17011 (Mar. 17, 1981)]. The Commission has historically declined to expand rule 17a-7 to cross-trades for 

which market quotations were not readily available and where independent current market prices were not 

available because these conditions increase the potential for abuse through cross-trades. See id.
245

and separate series of a registered investment company participating in the transaction, as 

recited in its registration statement and reports filed under the Act.”793_bookmark45

We noted in the Proposing Release that less liquid assets are less likely to satisfy 

rule 17a-7 than highly liquid investments.794 Some commenters expressed concern that this 

assertion would prohibit funds from, or create a presumption against, cross-trading any 

assets deemed less liquid,795 or directly incorporate liquidity classification decisions into rule 

17a-7 eligibility determinations.796 One commenter, disagreeing with the assertion that less 

liquid assets are less likely to satisfy rule 17a-7 than highly liquid assets, stated “a less 

actively traded security may be less liquid, but nonetheless have readily available market 

quotations, and a fund may determine that independent bid and offer prices are available in 

the market. The relative illiquidity of the security itself will not alone be determinative of 

whether prices are available for Rule 17a-7 purposes.”797

We note that less liquid assets, by definition, are less likely to trade in highly active 

markets that produce readily available market quotations, which may make it more difficult 

to ensure that the terms of a cross-trade transaction are fair and reasonable to each 

participating investment company or other advisory client and do not involve overreaching. 

As one commenter noted, “rule 17a-7 broadly requires the availability of accurate valuation 

information with respect to any security proposed to be traded from one adviser-directed 

 793 See rule 17a-7(c).

794 See Proposing Release, supra footnote 9, at n.396 and accompanying text.

795 See ICI Comment Letter I.

796 See Comment Letter of Simpson Thacher & Bartlett LLP (Jan. 14, 2016) (“Simpson Thacher Comment 

Letter”).

797 See Fidelity Comment Letter.
246

account to another. This effectively requires such securities to be relatively liquid.”798 

Moreover, the absence of highly active markets for less liquid assets may exacerbate the 

concern discussed above relating to “dumping” undesirable securities, because limited 

markets for such assets indicates that there are fewer alternate options for disposing of the 

assets. Similarly, the absence of highly active markets for less liquid assets may exacerbate 

the concern relating to a transfer of assets that is inconsistent with the investment objective, 

investment strategies, or risk profile of each participating investment company or other 

advisory client.

We agree that an assessment of an asset’s liquidity, without more, would not determine 

whether the asset is eligible for a cross-trade transaction under rule 17a-7. However, as noted 

above, we believe that any assets used in a cross-trade transaction should be scrutinized to 

ensure that they satisfy all of rule 17a-7’s requirements. Due to the particular risks associated 

with cross-trading less liquid assets, it may be prudent for advisers to subject less liquid assets 

to careful review (and potentially even a heightened review compared to other more liquid 

assets) before engaging in such transactions. 

We note that cross trading also implicates a fund’s adviser’s duty to seek best execution 

for each fund or other advisory client, as well as its duty of loyalty to each fund or other 

advisory client.

799_bookmark47 An adviser should not cause funds or other clients to enter 

into a cross-trade unless doing so would be in the best interests of each fund or other client 

 798 See id.

799 See, e.g., In re Western Asset Management Co., Investment Company Act Release No. 30893 (Jan. 27,

2014) (settled action) (stating that the adviser to funds and other advisory clients engaging in cross-trading

“has a fiduciary duty of loyalty to its clients and also must seek to obtain best execution for both its buying

and selling clients” and finding that the adviser aided and abetted and caused violations of section 17(a) and 

violated Advisers Act section 206). 
247

participating in the transaction. Advisers should be particularly sensitive to the possibility of 

heightened conflicts when one or both of the clients is experiencing stress at the time of 

consideration of a cross trade.

Under rule 38a-1, a fund’s compliance policies and procedures related to rule 17a-7 

generally should contemplate how the fund meets the rule’s requirements with regard to less 

liquid assets. For example, as part of these policies and procedures, a fund might consider 

conducting a review of less liquid assets before cross-trading them to ensure that “market 

quotations are readily available,” that a “current market price” is available, that the 

transaction is in line with each participating investment company’s or other advisory 

client’s investment objective, investment strategies and risk profile, and that the cross-trade 

satisfies all other requirements set forth in rule 17a-7. Reasonably designed policies and 

procedures thus would likely specifically address how a fund would determine that such 

less liquid securities are appropriately used when meeting the requirements of rule 17a-7. 

The specific review of a less liquid asset would likely vary depending on the characteristics 

of the market or markets in which the asset transacts, the characteristics of the asset itself, 

and the nature of the funds potentially involved in the cross trade. 

In crafting policies and procedures reasonably designed to address the particular risks 

of cross-trading less liquid assets, a fund could consider specifying the sources of the readily 

available market quotations to be used to value the assets and establish specific criteria for 

determining whether market quotations are current and readily available, and include potential 

back-up sources if the primary sources are not available. Funds should consider including in 

their policies and procedures periodic reviews of the continuing appropriateness of those

sources of readily available market quotations. 
248

In addition, a fund’s policies and procedures might also provide for assessing the 

quality of quotations provided by dealers. The quality of dealer quotations may vary 

depending upon, among other things, the extent to which a dealer makes a market in or retains 

an inventory in the particular security, or in similar securities, such that the dealer maintains 

an awareness of changes in market factors affecting the value of the security.800 “Indications 

of interest” and “accommodation quotes,” may not necessarily reflect the current market 

values of the securities and thus are not “market quotations” or “market values” for the 

purposes of rule 17a-7.801

In addition, reasonably designed policies and procedures likely would also include

compliance monitoring to help ensure that the investment objective, investment strategies and 

risk profile of each participating investment company or other advisory client are scrutinized 

in conjunction with the characteristics of any cross-traded asset to evaluate whether the asset 

transfer is not in line with any objective or strategy or inappropriately shifts risk from one 

investment company or other advisory client to another. Whether a cross-trade is in the best 

interest of an investment company or other client purchasing an asset may depend, in part, on 

the relative liquidity of the purchaser’s existing portfolio assets and the level of redemptions 

that may be reasonably anticipated by the purchaser.

 800 Dealers do not necessarily purport to provide quotations for securities that reflect their current market 

values. Some dealers may provide only “indications of interest,” i.e., non-firm expressions of interest to 

trade that do not constitute quotations or “accommodation quotes”. See, e.g., Regulation NMS, Securities 

Exchange Act Release No. 49325 (Feb. 26, 2004) [69 FR 11126 (Mar. 9, 2004)], at n.257. Cf. Rules 

600(b)(8) and (62) under Regulation NMS [17 CFR 242.600(b)(8) and 242.600(b)(62)] (defining “bid or 

offer” as “the bid price or the offer price communicated by a member of a national securities exchange or 

member of a national securities association to any broker or dealer, or to any customer, at which it is 

willing to buy or sell one or more round lots of an NMS security, as either principal or agent, but shall not 

include indications of interest,” and defining “quotation” as “a bid or an offer”).

801 Id. We also note that evaluated prices provided by pricing services are not, by themselves, readily

available market quotations. See 2014 Money Market Fund Reform Adopting Release, supra footnote 43, 

at n.895 and accompanying text. 
249

H. Board Approval and Designation of Program Administrative Responsibilities

Directors, and particularly independent directors, play a critical role in overseeing fund 

operations, although they generally may delegate day-to-day management to a fund’s adviser.802 

As discussed below, we are adopting as proposed the requirement for a fund’s board of directors 

to approve the investment adviser, officer, or officers who are responsible for administering the 

program and to approve the fund’s written liquidity risk management program. However, in a 

change from the proposal, the board will not be required to specifically approve the fund’s highly

liquid investment minimum (except in the limited circumstances that a fund below its minimum 

seeks to change it) or to approve material changes to the program. Instead, similar to rule 38a-1, 

the board will be required to review, no less than annually, a written report prepared by the 

investment adviser, officer, or officers designated to administer the liquidity risk management 

program that describes a review of the program’s adequacy and effectiveness, including, if 

applicable, the operation of the highly liquid investment minimum, and any material changes to 

the program.

803 As discussed in detail below, the final rule retains a role for the board in 

overseeing the fund’s liquidity risk management program, but in response to commenters, 

eliminates certain of the more specific and detailed approval requirements. 

We believe the role of the board under the rule is one of general oversight, and consistent 

with that obligation we expect that directors will exercise their reasonable business judgment in 

overseeing the program on behalf of the fund’s investors. As discussed in the Proposing 

 802 See Investment Trusts and Investment Companies: Hearings on H.R. 10065 Before a Subcomm. of the 

House Comm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 112 (1940) at 109 (describing the 

board as an “independent check” on management); Burks v. Lasker, 441 U.S. 471, 484 (1979) (citing 

Tannenbaum v. Zeller, 552 F.2d 402, 406 (2d. Cir. 1979)) (describing independent directors as 

“independent watchdogs”). 

803 See rule 22e-4(b)(2). 
250

Release, directors may satisfy their obligations with respect to this initial approval by reviewing 

summaries of the liquidity risk management program prepared by the fund’s investment adviser, 

officer, or officers administering the program, legal counsel, or other persons familiar with the 

liquidity risk management program.804 The summaries should familiarize directors with the 

salient features of the program and provide them with an understanding of how the liquidity risk 

management program addresses the required assessment of the fund’s liquidity risk. 

Many commenters expressed general support for board oversight of the liquidity risk 

management program, although several objected to certain of the board’s specific responsibilities

required under the rule, in particular their approval of the three-day highly liquid asset minimum 

and of material changes to the program.

805 Given the board of directors’ historical oversight role,

the Commission continues to believe it is appropriate to require a fund’s board to oversee the 

fund’s liquidity risk management program. The rule’s requirements are designed to facilitate the 

board’s oversight of the adequacy and effectiveness of the fund’s liquidity risk management 

program. 

Several commenters asked that the final rule include an express standard of care (i.e., the 

business judgment rule) to which the Commission would hold a fund’s board accountable in this 

area.

806 One commenter requested that the final rule provide fund boards with a safe harbor in 

approving specific elements of the program and clarification that a board is not required to 

 804 See Proposing Release, supra footnote 9, at section III.D.

805 See, e.g., ICI Comment Letter I; IDC Comment Letter; SIFMA Comment Letter I.

806 Fidelity Comment Letter; FSR Comment Letter; MFDF Comment Letter; T. Rowe Comment Letter. See 

also NYC Bar Comment Letter (suggesting codifying a good-faith, reasonable, business judgment 

standard). One commenter also suggested that the proposed requirement of keeping records of the board’s 

determination related to the factors considered when approving the three-day liquid asset minimum is not 

appropriate in light of the board’s historical role. T. Rowe Comment Letter. We note that as discussed 

below, the board will not specifically approve the highly liquid investment minimum, thereby addressing 

the commenters’ concerns about keeping records of the factors used in the board’s determination. 
251

consider all of the enumerated factors (specifically, any non-applicable factors) when setting and 

adjusting the three-day liquid asset minimum.807 We believe that the changes made to the board 

oversight role from the proposal should largely address the commenters’ concerns. In addition, 

we believe that the board oversight role here is substantially similar to its role and 

responsibilities in other contexts under the Investment Company Act, and that providing a 

different standard of care for board action here would not be appropriate.808

1. Designation of Administrative Responsibilities to Fund Investment Adviser, 

Officer, or Officers

We are adopting substantially as proposed the requirements that the fund’s board of 

directors approve the designation of the fund’s investment adviser, officer, or officers (which 

could not be solely portfolio managers of the fund) responsible for administering the fund’s 

liquidity risk management program.809 We are also adopting, substantially as proposed, the 

requirement that the administrator of the program provide the board with a written report on the 

adequacy of the fund’s liquidity risk management program, including the highly liquid 

investment minimum, and the effectiveness of its implementation, at least annually.810 The 

Commission continues to believe this approach properly tasks the person(s) who are in a position 

to manage the fund’s liquidity risks on a real-time basis with responsibility for administration of 

the liquidity risk management program. Designating the fund’s investment adviser, officer, or 

officers responsible for the administration of the fund’s liquidity risk management program, 

 807 T. Rowe Comment Letter.

808 See, e.g., 2014 Money Market Fund Reform Adopting Release, at text accompanying nn.266-267 

(discussing the board’s role under the Investment Company Act). 

809 See rule 22e-4(b)(2)(ii).

810 See rule 22e-4(b)(2)(iii). We note that a fund’s sub-adviser could be designated as the administrator of the 

program if appropriate. 
252

subject to board approval, is consistent with the way the Commission understands most funds 

manage liquidity.811 

We received little comment on this aspect of the proposal. A few commenters agreed 

with the proposal that the board’s responsibilities should include approval of the program’s 

administrator.

812 We continue to believe that requiring that the board approve the designation of 

the administrator of the liquidity risk program is an important step in board oversight of the 

program. We believe that having the board approve the administrator should help enhance board 

oversight of the program and allow for boards to better understand who is responsible for 

administering it. 

One commenter argued that portfolio managers should administer the program, 

contending that liquidity risk management requires investment skills and swiftness during stress 

to manage redemptions.813 This commenter believed that if a program administrator were 

independent from portfolio management, then liquidity assessment might become divorced from 

the investment process, which the commenter argued would be disadvantageous to the fund and 

investors. We agree that portfolio management provides valuable input into the liquidity risk 

management process. However, we are concerned that if only portfolio managers run the 

program, the program might not be administered with sufficient independence to accomplish the 

goal of managing the risk of the fund’s liquidity. We believe that a fund generally should 

consider the extent of influence portfolio managers may have on administration of the program, 

 811 See American Bar Association, Fund Director’s Guidebook, Federal Regulation Of Securities Committee, 

(4th ed. 2015), at 82 (“Determining the liquidity of a security is primarily an investment decision that is 

delegated to the investment adviser, but directors may establish guidelines and standards for determining 

liquidity.”).

812 IDC Comment Letter; Voya Comment Letter.

813 Invesco Comment Letter.
253

and seek to provide independent voices and administration of the program as a check on any 

potential conflicts of interest to the extent appropriate. However, as the proposal noted, although 

the fund’s portfolio managers cannot be solely responsible for administering the program, the 

administrator of the program might wish to consult with the fund’s portfolio manager, traders, 

risk managers, and others as necessary or appropriate in administering a fund’s liquidity risk 

management program.814 Portfolio managers may also be a part of any committee or group 

designated to administer the program, if more than one person is so designated. The 

Commission understands that some funds currently employ a dedicated risk management officer 

who consults with the fund’s portfolio management team. One commenter noted, and we agree,

that portfolio managers should provide day-to-day management of funds, with an additional 

layer of oversight provided by the risk and compliance framework.815 After review of the 

comments received, we continue to believe that requiring the officer or officers responsible for 

administering the fund’s liquidity risk management program not to be solely portfolio managers

strikes the appropriate balance between independence and expertise. 

The Commission recognizes that, in certain circumstances, a fund’s service providers 

might assist a fund and its investment adviser by providing information relevant to a fund’s 

assessing and managing liquidity risk.816 We note, however, that the primary parties responsible 

for a fund’s liquidity risk management are the fund itself and any parties to whom the fund has 

delegated responsibility for administering the fund’s liquidity risk management program. 

One commenter requested further guidance on what responsibilities the administrator 

 814 See Proposing Release, supra footnote 9, at section III.D.3.

815 BlackRock Comment Letter.

816 See Proposing Release, supra footnote 9, at section III.D.3. 
254

could delegate and to what extent the administrator could rely upon third parties.817 The 

Proposing Release provided two examples of when a fund’s service providers could assist a fund 

and its investment adviser in monitoring factors relevant to a fund’s liquidity risk and managing 

the fund’s liquidity risk: third parties could provide data relevant to assessing fund flows, and a 

sub-adviser necessarily would be responsible for investing a fund’s assets in accordance with the 

fund’s three-day liquid asset minimum and any other liquidity-related portfolio requirements 

adopted by the fund.818 As proposed, the final rules require a fund to oversee any liquidity risk 

monitoring or risk management activities undertaken by the fund’s service providers. We 

encourage the fund to communicate regularly with its service providers as a part of its oversight 

and to coordinate the liquidity risk management efforts undertaken by various parties. 

2. Oversight of the Liquidity Risk Management Program

Under the final rule, a fund will be required to obtain initial approval of its written 

liquidity risk management program from the fund’s board of directors, including a majority of its 

independent directors.819 Additionally, the fund’s board will be required to review a written 

report from the administrator of the fund’s liquidity risk management program, provided no less 

frequently than annually, that addresses the operation of the program and assesses its adequacy

and effectiveness of implementation.

820 In a change from the proposal, a fund will not be 

required to obtain approval of any material changes to the fund’s liquidity risk management 

program from the fund’s board of directors, but instead such material changes will be described 

 817 Voya Comment Letter.

818 See Proposing Release, supra footnote 9, at section III.D.3.

819 See rule 22e-4(b)(2)(i).

820 As noted above, more frequent reports to the board may be appropriate in certain circumstances. See supra

footnote 771.
255

in the report.

821 

Commenters raised concerns that the proposed rule imposed management responsibilities 

on the fund’s board of directors and suggested that the Commission clarify that the board’s role 

is to provide oversight through approval of policies and procedures, whereas management’s role 

is to devise the specific details of the program.822 Commenters contended that the final rule 

should mirror rule 38a-1, requiring fund managers to explain material changes to the program 

(including changes to the three-day liquid asset minimum) in an annual report to the board, not to 

submit those changes for prior board approval.823 These commenters felt that a requirement to 

discuss material changes to the liquidity risk management program in an annual update to the 

fund’s board would strike an appropriate balance between allowing the fund manager the 

flexibility to make changes to liquidity risk management as market conditions might require, 

while also keeping the fund’s board informed.824 

We agree with commenters that requiring funds to obtain approval from fund boards 

before making material changes to a liquidity risk management program risks the program 

becoming stale and outdated as market changes occur, and is not consistent with the approach 

taken under rule 38a-1. Accordingly, the final rule does not require prior approval of material 

changes to the fund’s liquidity risk management program from the fund’s board of directors. 

However, under the final rule, the board is still required to approve the program initially and to 

provide oversight of it, as well as review a report on the adequacy and effectiveness of the 

 821 See rule 22e-4(b)(2). 

822 See, e.g., Cohen & Steers Comment Letter; FSR Comment Letter; HSBC Comment Letter; NYC Bar 

Comment Letter. 

823 See, e.g., BlackRock Comment Letter; FSR Comment Letter; ICI Comment Letter I; Invesco Comment 

Letter.

824 See, e.g., BlackRock Comment Letter; Dechert Comment Letter; Voya Comment Letter.
256

program’s implementation, which must include a description of any material changes made to 

the program during the period. We believe that this oversight role is consistent with the board’s 

historical responsibilities with respect to overseeing fund operations. 

3. Oversight of the Highly Liquid Investment Minimum

In a change from the proposal, under the final rule, boards will not be required to approve 

the highly liquid investment minimum, nor approve changes to it, except in the limited 

circumstances where a fund seeks to change the minimum while the fund is below the preestablished minimum. Commenters argued that because liquidity risk management, including 

management of three day-liquid assets, is both technical and fact-intensive and often requires 

day-to-day judgments, fund managers should develop and administer the program, subject to 

board review.825 Commenters were concerned that the requirement for a fund to obtain board 

approval for setting and changing the three-day minimum may cause delay that might harm fund 

shareholders.826 For example, one commenter argued that requiring board approval, which might 

be difficult to obtain on a timely basis, could cause a fund to stand idle as market conditions 

changed, missing opportunities as board approval was sought.827 

We agree with commenters that requiring boards to approve the highly liquid investment

minimum may reduce its utility, as the minimum may need to be revised on a more timely basis 

so that it can best reflect the liquidity management needs of the fund under current market 

conditions. In addition, we understand commenters’ concerns that requiring mutual fund boards 

to make day-to-day determinations regarding the minimum amount of cash or liquid assets the 

 825 See, e.g., CRMC Comment Letter; FSR Comment Letter; State Street Comment Letter; Dodge & Cox 

Comment Letter. 

826 Id.

827 Dechert Comment Letter.
257

fund should hold may lead to a more detailed managerial role for the board. 

However, in the limited circumstances where the program administrator seeks to change 

the fund’s highly liquid investment minimum while the fund is below the pre-established 

minimum, the final rules require the board to approve such a change. In the absence of such a 

requirement, the administrator could simply change the minimum if the fund dropped below it, 

avoiding the accountability of the board approval requirements as well as reducing the 

minimum’s utility as a liquidity risk management tool. The final rule also requires the board to 

receive a report whenever the fund falls below its highly liquid investment minimum at its next 

regularly scheduled meeting and a report of such a shortfall if the fund is below its highly liquid 

investment minimum for more than 7 consecutive calendar days, within one business day 

thereafter. The Commission believes these requirements properly balance the ability of funds to 

move quickly in response to shifting environments with the boards’ oversight of the liquidity risk 

management program.

4. Oversight of Illiquid Investment Limit

In a change from the proposal, the final rule will also require that a fund board be 

informed within one business day if the fund’s holdings of illiquid investments exceed 15% of its 

net assets. In the proposal, we requested comment as to whether additional aspects of a fund’s 

liquidity management program should be reported to a fund’s board. For the reasons discussed 

in the section on Form N-LIQUID, if a fund’s holdings of illiquid investments exceed 15% for 

any reason (for example, if a fund experiences net redemptions leading to increased holdings of 

illiquid investments) it may raise significant concerns regarding the fund’s management of its 

liquidity and ability to continue to meet its redemption obligations. Accordingly, we believe that 

such an event should be reported to the board immediately, as it may have significant impacts on 
258

the ability of the fund to meet its redemption obligations, and may compromise its liquidity risk 

management.

As discussed in the section on Form N-LIQUID below, a number of commenters also

expressed support for the addition of an early warning notification provision, under which funds 

would be required to notify the Commission (or take other action) when illiquid investments held 

at the end of a business day exceed 15% of net assets and continue to exceed 15% of net assets 

three business days after the threshold was first exceeded.828 As discussed in the section on Form 

N-LIQUID, we are adopting a requirement that a fund report to the Commission within one 

business day if the fund’s holdings of illiquid investments exceed 15% percent of its net assets. 

One commenter suggested that such a requirement would impose greater discipline on the 

oversight of fund holdings of illiquid assets, and that a fund would likely consult with the fund 

board in developing how to proceed in response.829 We agree, and believe that if a fund were to 

file Form N-LIQUID because the fund’s holdings of illiquid investments exceeded 15% of its net 

assets, a fund board should be informed, and should be informed quickly, so that the board can 

provide oversight as the fund determines how to address the level of illiquidity in the fund’s 

portfolio. Accordingly, as a complement to this new N-LIQUID requirement, the final rules 

require that if a fund’s holdings of illiquid investments exceed 15% of its net assets, the fund 

board be informed of that fact within one business day after the occurrence, with an explanation 

of the extent and causes of the occurrence and how the fund plans to bring its illiquid 

investments that are assets to or below 15% of its net assets within a reasonable period of time. 

 828 See, e.g., ICI Comment Letter III; SIFMA Comment Letter III (noting that this early warning notification 

could respond to concerns raised by the Third Avenue Fund liquidation); see also Third Avenue Temporary 

Order, supra footnote 12.

829 See ICI Comment Letter III. 
259

I. Recordkeeping Requirements

Under the final rules, and as we proposed, each fund will be required to maintain a 

written copy of the policies and procedures adopted as part of its liquidity risk management 

program for five years, in an easily accessible place.830 Additionally, each fund will be required 

to maintain copies of any materials provided to its board in connection with the board’s initial 

approval of the fund’s liquidity risk management program, and copies of written reports provided 

to the board on the adequacy of the fund’s liquidity risk management program, including the 

fund’s highly liquid investment minimum, and the effectiveness of its implementation for at least 

five years after the end of the fiscal year in which the documents were provided to the board, the 

first two years in an easily accessible place.831 In a change from the proposal, funds would also 

need to keep records of any materials provided to the board related to the fund dropping below 

its highly liquid investment minimum. As with the proposal, the final rules also require each 

fund to keep a written record of how its highly liquid investment minimum, and any adjustments 

thereto, were determined, including the fund’s assessment and periodic review of its liquidity 

risk for a period of not less than five years, the first two years in an easily accessible place, 

following the determination of, and each change to, the fund’s highly liquid investment

minimum.832

One commenter found the recordkeeping requirements consistent with similar 

recordkeeping requirements that funds are currently required to maintain.833 The recordkeeping 

 830 See rule 22e-4(b)(3)(i). These policies and procedures would include any shortfall policies and procedures 

adopted by a fund. See id. 

831 See rule 22e-4(b)(3)(ii).

832 See rule 22e-4(b)(3)(iii). 

833 CFA Comment Letter.
260

requirement is designed to provide our examination staff with a basis to evaluate a fund’s 

compliance with the requirements of rule 22e-4. We also anticipate that these records would 

assist our staff in identifying weaknesses in a fund’s liquidity risk management. The five-year 

retention period is also consistent with the period provided in rule 38a-1(d) under the Act. We 

believe consistency in these retention periods is appropriate because funds currently have 

compliance program-related recordkeeping procedures in place incorporating a five-year 

retention period, which we believe lessen the compliance burden to funds, compared to choosing 

a different retention period, such as the six-year recordkeeping retention period under rule 31a-2 

of the Act.

The Commission continues to believe that the rule appropriately balances recordkeepingrelated burdens on funds and our examination staff’s ability to evaluate a fund’s liquidity risk 

management program in light of the requirements of rule 22e-4. We are therefore adopting this 

aspect of the rule substantially as proposed. 

J. ETFs 

We are adopting certain tailored liquidity risk management program requirements for 

ETFs.834 In assessing, managing, and periodically reviewing its liquidity risk, an ETF will be 

required to consider certain additional factors, as applicable, that take into account its unique 

operation, as discussed further below.835 Like all funds, each ETF also will be required to limit 

its investments in illiquid investments to no more than 15% of its net assets and obtain certain 

 834 References to ETFs in this section are to both in-kind and other open-end ETFs, but not UIT ETFs (which 

are not subject to the liquidity risk management program requirements), except where specifically indicated 

otherwise. See infra section III.K for a discussion of limited liquidity review requirements for principal 

underwriters and depositors of UITs.

835 See rule 22e-4(b)(1)(i).
261

board approvals regarding the program. Certain ETFs that qualify as “In-Kind ETFs,”836

(generally ETFs that redeem shares in kind except to a de minimis extent and that publish their 

holdings daily) however, will not be required to classify their portfolio investments or comply 

with the highly liquid investment minimum requirement.837 We believe these adjusted program 

requirements recognize and appropriately require management of the unique liquidity risks found 

in ETFs, and in particular In-Kind ETFs.

A number of commenters on the proposal highlighted how ETFs differ from mutual 

funds, and stated in particular that In-Kind ETFs do not present the same type of liquidity risks 

as other funds.838 These commenters suggested that the Commission: (i) exempt either ETFs or 

In-Kind ETFs entirely from proposed rule 22e-4;839 (ii) exempt either ETFs or In-Kind ETFs 

from certain requirements of proposed rule 22e-4 (notably the portfolio liquidity classification 

and three-day liquid asset requirements);840 or (iii) develop a more tailored liquidity risk 

 836 References to “In-Kind ETFs” include both ETFs and ETMFs that meet the requirements in rule 22e4(a)(9)) (defining an “In-Kind ETF”). See infra footnote 851 and accompanying text (discussing a 

requirement that ETFs report their status as an “In-Kind ETF,” when applicable, on Form N-CEN).

837 ETFs that redeem in cash, or that do not qualify otherwise as “In-Kind ETFs” (as defined in rule 22e4(a)(9)) will be subject to the full set of liquidity risk management program elements, including the 

classification and highly liquid investment minimum requirements. See rule 22e-4(b)(1)(i)-(iii). 

Throughout the discussion of liquidity risk management programs in this Release, references to “funds” 

include ETFs that redeem in cash, except where specifically indicated otherwise.

838 See, e.g., ICI Comment Letter; BlackRock Comment Letter; Invesco Comment Letter; SIFMA Comment 

Letter I.

839 See, e.g., Invesco Comment Letter (suggesting an exemption for all ETFs); FSR Comment Letter 

(suggesting an exemption for In-Kind ETFs); SIFMA Comment Letter I (suggesting an exemption for InKind ETFs).

840 See, e.g., State Street Comment Letter (suggesting an exemption for In-Kind ETFs from the portfolio 

liquidity classification and three-day liquid asset requirements); Dechert Comment Letter (suggesting an 

exemption for all ETFs from the three-day liquid asset requirements); ICI Comment Letter I (suggesting an 

exemption for In-Kind ETFs from the three-day liquid asset requirements); BlackRock Comment Letter 

(stating that the days-to-cash framework in the portfolio liquidity classification requirements is irrelevant 

for ETFs and suggesting an exemption for at least In-Kind ETFs from the three-day liquid asset

requirements).
262

management program applicable to ETFs.841

As noted above, we believe that ETFs, like mutual funds, face liquidity risks.

842 But we

agree that In-Kind ETFs have different liquidity risks than funds (including ETFs) that redeem in 

cash. This is particularly the case because the redeeming shareholder (i.e., authorized participant 

or its customer), rather than the ETF, typically will bear the direct costs associated with its 

liquidity needs, given that if that authorized participant (or its customer) wants cash, it must sell 

the in-kind assets and bear the costs of doing so. Therefore, after further analysis, including 

carefully considering the comments received, we are adopting tailored liquidity risk management 

program requirements for ETFs as discussed further below. 

We decline to exempt all ETFs from the rule entirely, because we believe ETFs that 

redeem more than a de minimis amount in cash can have substantially similar liquidity risks as

mutual funds, and we believe that all ETFs have certain unique additional risks discussed below. 

In addition, while we agree that the classification and highly liquid investment minimum 

components of the liquidity risk management program we are adopting for other funds are not 

necessary for In-Kind ETFs, we believe that In-Kind ETFs must maintain sufficient liquidity and 

assess liquidity-related risks that could affect their shareholders. In this regard, the liquidity of 

an ETF’s portfolio positions is a factor that may contribute to the bid-ask spread, the effective 

functioning of the ETF’s arbitrage mechanism and the ETF’s shares trading at a price that is at or 

close to NAV.

843 For example, if an ETF holds illiquid or less liquid investments, this will be 

 841 See BlackRock Comment Letter; FSR Comment Letter.

842 We note, as discussed previously, that ETFs will be subject to the requirement to implement an overall 

liquidity risk management program, including the requirement that the fund determine whether its 

investment strategy is appropriate for an open-end fund. 

843 By this we mean that, and we generally expect that, each day and over time an ETF’s shares will trade at or 

close to the ETF’s intraday value. See 2015 ETP Request for Comment, supra footnote 29 (“When 
263

reflected in the redemption basket transferred to a redeeming authorized participant (or its 

customer), which might result in a liquidity cost to the authorized participant (or its customer or 

other market participants). This increased cost could alter the authorized participant’s decisions 

regarding exactly when or whether to create or redeem the ETF’s creation units, possibly 

resulting in the ETF trading at increased spreads and/or a price that deviates significantly from 

its NAV and ultimately adversely impacting the ETF’s investors. 

Over the years, the Commission and staff have explored the structural and operational 

differences between ETFs (including those that redeem in kind) and other open-end funds (that 

redeem in cash), solicited public comment, including on issues related to the potential effects of 

illiquidity on the operation of ETFs and evaluated the trading of ETFs in times of market 

stress.

844 In 2015, the Commission solicited public comment on topics related to the listing and 

trading of exchange-traded investment products (“ETPs”) on national securities exchanges and 

sales of these products by broker-dealers.845 Of relevance here, the Commission sought comment 

on all aspects of the arbitrage mechanism for ETPs (including ETFs), including what 

characteristics of an ETP would facilitate or hinder the alignment of secondary market share 

 

providing exemptive or no-action relief under the Exchange Act, the Commission and its staff have 

analyzed and relied upon the representations from ETP issuers regarding the continuing existence of 

effective and efficient arbitrage to help ensure that the secondary market prices of ETP Securities do not 

vary substantially from the value of their underlying portfolio or reference assets.”); infra footnote 857. 

Because an ETF does not determine its NAV in real time throughout the trading day, in assessing whether 

this expectation is met, one looks to the difference between the ETF shares’ closing market price and the 

ETF’s end-of-day net asset value (i.e., its “premium” or “discount”). See 2015 ETP Request for Comment, 

supra footnote 29. With regard to ETMFs, as noted in the Proposing Release, ETMF market makers would 

not engage in the same kind of arbitrage as ETF market makers because all trading prices of ETMF shares 

are linked to NAV. See Proposing Release, supra footnote 9, at n.458. 

844 See, e.g., ETF Proposing Release, supra footnote 27; Staff of the Office of Analytics and Research, 

Division of Trading and Markets, Research Note: Equity Market Volatility on August 24, 2015 (Dec. 2015)

(“August 24 Staff Report”), available at 

https://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.

845 See 2015 ETP Request for Comment, supra footnote 29 at n.10. The 2015 ETP Request for Comment did 

not address ETMFs’ listing and trading given that, at the time, no ETMFs were listed or traded on an 

exchange.
264

prices with the value of the underlying portfolio reference assets and how arbitrage mechanisms 

work in the case of ETPs with less-liquid underlying or reference assets. The questions posed in 

this Release, as well as the comments received, demonstrate the importance of assessing liquidity 

risks and liquidity needs for all ETFs, including In-Kind ETFs. We considered the comments 

received on the 2015 ETP Request for Comment in formulating the proposed rule and the final 

rule we are adopting today. 

1. Definitions 

Under the final rule, all ETFs must consider certain additional liquidity risk assessment 

factors, if applicable, but only In-Kind ETFs will be excluded from the classification and highly 

liquid investment minimum requirements.846 We are defining an exchange-traded fund or “ETF” 

as “an open-end management investment company (or series or class thereof), the shares of 

which are listed and traded on a national securities exchange, and that has formed and operates 

under an exemptive order under the Act granted by the Commission or in reliance on an 

exemptive rule adopted by the Commission.”847 We are defining an “In-Kind ETF” to mean an 

ETF that meets redemptions through in-kind transfers of securities, positions, and assets other 

than a de minimis amount of cash and that publishes its portfolio holdings daily.848 The 

 846 We note that an in-kind ETF may not be able to avail itself of the tailored liquidity risk management 

program where the in-kind ETF operates as a class of a fund that also has mutual fund classes. In such a 

case, for example, the liquidity classification requirement would apply to the entire portfolio, thus applying 

to both in-kind ETFs and other funds (e.g., mutual funds). UITs, including ETFs structured as UITs, will 

not be subject to the majority of the liquidity risk management program requirements. See supra section 

III.A.2.d and infra section III.K (discussing rule 22e-4(c), that requires, on or before the date of initial 

deposit of portfolio securities into a registered UIT (including ETF UITs), the principal underwriter or 

depositor to determine that the portion of the illiquid investments that the UIT holds or will hold at the date 

of deposit that are assets is consistent with the redeemable nature of the securities it issues and maintain a 

record of that determination for the life of the UIT and for five years thereafter). 

847 See rule 22e-4(a)(4). We note that this definition is substantially the same as the definition of ETF that we 

had proposed as amendments to rule 22c-1. We also note that this definition is substantially the same as 

the definition in Form N-1A.

848 See rule 22e-4(a)(9). Cash means cash held in U.S. dollars, and would not include, for example, cash 
265

definition of “In-Kind ETF” is intended to distinguish this type of ETF, which, as described 

throughout this Release, has a unique structure and raises different liquidity risks than other 

open-end funds (that in most cases redeem shares in cash). As discussed below, we believe that 

this definition of an In-Kind ETF facilitates this distinction by limiting an ETF’s redemption 

basket to in-kind securities and other assets, and no more than a de minimis amount of cash. In 

addition, the definition requires that an In-Kind ETF publish the ETF’s holdings daily.

849 This 

daily publishing of ETF holdings (or “daily transparency”) is a condition of many of our ETF 

orders, and we understand that even for ETFs not subject to that condition, most provide this 

daily transparency as a matter of course.850 We believe that requiring this daily transparency will 

permit the sophisticated authorized participants that directly interact with the ETF to effectively 

evaluate the liquidity of the ETF’s holdings. We also note that we are requiring an ETF to report 

publicly to the Commission on Form N-CEN its designation as an In-Kind ETF as defined in the 

final rule so that there is clarity on which ETFs meet this definition and are thus subject to the 

tailored liquidity risk management program.851 

 

Consistent with our exemptive orders, we recognize that there may be circumstances 

 

equivalents or foreign currency.

849 Today, such daily publishing of ETF holdings involves posting on the ETF’s website on each day that the 

national securities exchange on which the fund’s shares are listed is open for business, before 

commencement of trading of fund shares on the exchange, the identities and quantities of the securities, 

assets or other positions held by the fund, or its respective master fund, that will form the basis for the 

fund’s calculation of net asset value at the end of the business day.

850 See, e.g., Foreside ETF Trust, et al., Investment Company Act Release No. 32284 (Sep. 26, 2016) [81 FR 

68079 (Oct. 3, 2016)] (notice of application). We note that ETMFs are not required to provide such daily 

transparency under their orders, and thus would need to choose to provide such daily transparency if they 

wished to take advantage if this provision. 

851 See Item E.5 of Form N-CEN (“Is the Fund an ‘In-Kind Exchange-Traded Fund’ as defined in rule 22e-4 

under the Act?”). In addition, ETFs (including In-Kind ETFs) will be required to report on Form N-CEN 

the average percentage value of creation units purchased and redeemed both with in-kind securities and 

assets and with cash, during the reporting period. See Investment Company Reporting Modernization 

Adopting Release, supra footnote 120.
266

under which an In-Kind ETF may use cash to meet redemptions (in addition to securities and 

other non-cash assets). For example, today an ETF that typically redeems in-kind may use cash 

to: (i) make up any difference between the NAV attributable to a creation unit and the aggregate 

market value of the creation basket exchanged for the creation unit (generally referred to as the 

“balancing amount” in an ETF’s exemptive order); (ii) correspond to uninvested cash in the 

fund’s portfolio (which, to the extent that this amount of cash equals the fund’s cash position in 

the portfolio, would be an “in-kind” redemption); or (iii) substitute for a portfolio position or 

asset that is not eligible to be transferred in kind (e.g., a derivative instrument that, pursuant to 

contract, is not transferrable).

852 By their nature, “balancing amounts” are small amounts and 

thus would be de minimis. Accordingly, there are a number of reasons, including those described 

above, why an In-Kind ETF may find it prudent or necessary to use a de minimis amount of cash 

to meet redemptions. However, if an In-Kind ETF were to use more than a de minimis amount 

of cash (as determined in accordance with its written policies and procedures) to meet 

redemptions (for any of the reasons discussed above or otherwise), it would not qualify as an InKind ETF and would need to comply with the liquidity risk management program requirements 

applicable to other ETFs.

853 By way of example, an ETF that normally redeems in-kind, but 

delivers all cash to a single authorized participant that elects to receive cash, would not be an 

ETF that uses a de minimis amount of cash. However, depending on the circumstances, an ETF 

 852 We note that depending on the size of the position being substituted for, such a transaction may not always 

be de minimis, and thus the ETF may no longer be eligible to qualify for this provision. 

853 In-Kind ETFs are subject to rule 22e-4, including the obligation to establish written policies and procedures 

for a liquidity risk management program. As part of these written policies and procedures, we would 

expect that an In-Kind ETF would determine the amount of cash and the types of transactions that it will 

treat as de minimis. If for any reason, an In-Kind ETF was not able to meet redemptions with more than a 

de minimis amount of cash consistent with those policies and procedures, such a fund would no longer 

qualify as an In-Kind ETF and would thus no longer be eligible to rely on this provision. See rule 22e4(b)(1)(ii). 
267

that delivers cash only on one occasion may be able to conclude that it qualifies as an In-Kind 

ETF in later years if such circumstances are not repeated. 

An In-Kind ETF generally should describe in its written policies and procedures for its 

liquidity risk management program,854 to the extent applicable, how the fund analyzes the ability 

of the ETF to redeem in-kind in all market conditions such that it is unlikely to suddenly fail to 

continue to qualify for this exception to the classification and highly liquid investment minimum 

requirements, the circumstances in which the In-Kind ETF may use a de minimis amount of cash 

to meet a redemption, and what amount of cash would qualify as such. As part of its policies and 

procedures, an In-Kind ETF generally should also describe how the ETF will manage and/or 

approve any portion of a redemption that is paid in cash and document the ETF’s determination 

that such a cash amount is de minimis. In making these determinations, an In-Kind ETF may 

consider, if applicable: (i) the amount (both in dollars and as a percentage of the entire 

redemption basket) and frequency with which cash is used to meet redemptions; and (ii) the 

circumstances and rationale for using cash to meet redemptions.

As discussed above, in-kind redemptions mitigate certain liquidity risks, but only to the 

extent that the fund can use in-kind redemptions. This factor is particularly important for an InKind ETF because such a fund may only include in its redemption basket a de minimis amount of 

cash if it wants to qualify for the exclusion from the classification and highly liquid investment

minimum requirements. If, for example, market conditions change and the fund can no longer 

meet redemptions without more than a de minimis amount of cash, the fund would no longer 

qualify as an In-Kind ETF. As a result, the ETF would be required to comply with additional 

 854 Rule 22e-4 requires that an In-Kind ETF adopt and implement a written liquidity risk management program 

reasonably designed to assess and manage the fund’s liquidity risk. See rule 22e-4(b).
268

requirements under its liquidity risk management program (including liquidity portfolio 

classifications and highly liquid investment minimum).

2. Tailored Program Elements for ETFs 

By adopting certain tailored liquidity risk management program requirements for ETFs, 

we recognize, consistent with comments received, that both ETFs that redeem in cash and InKind ETFs present unique liquidity risks as compared to other funds. Some of these unique risks 

were not specifically addressed in the generally applicable liquidity risk management program as 

proposed, while still other aspects of the general program were less applicable to the actual 

operation of In-Kind ETFs, particularly those that offer daily transparency of holdings. Our final 

rule is designed to address both issues. Accordingly, an ETF will be required to adopt and 

implement a tailored liquidity risk management program that has the unique elements discussed 

below, in addition to the elements discussed elsewhere in this Release.

Liquidity Risk Assessment

An ETF, like other open-end funds, will be required to assess and manage the fund’s 

“liquidity risk”—defined as the risk that a fund could not meet requests to redeem shares issued 

by the fund without significant dilution of remaining investors’ interests in the fund.855 As 

discussed above, we believe that this definition, modified from the proposal as informed by 

commenter input, is appropriate for all open-end funds, whether the fund redeems in cash or in

kind and whether the fund is a mutual fund or an ETF.856 

Illiquidity in an ETF’s portfolio or its basket assets can adversely impact investors by 

 855 See rule 22e-4(a)(11) (defining liquidity risk); rule 22e-4(b) (requiring each fund and in-kind ETF to adopt 

and implement a written liquidity risk management program).

856 See supra section III.B.1 for a discussion of the definition of liquidity risk, including comments received 

and modifications made from the proposal.
269

imposing costs on market participants that could then potentially be reflected in a widening of

the bid-ask spread of the ETF shares. This widening could result in shareholders transacting in 

an ETF’s shares at market prices that do not maintain a “close tie” to the NAV per share of the 

ETF. As we have previously stated, a close tie between ETF share market prices and the ETF’s 

NAV per share is important because section 22(d) and rule 22c-1 under the Act are designed to 

require that all fund shareholders be treated equitably.

857 In addition, declining liquidity in an 

ETF’s portfolio also could affect a market maker’s ability or willingness to make a market in the 

product because arbitrage opportunities would be more difficult to evaluate.858 This, in turn, 

could affect the liquidity of the ETF shares, making it difficult for market participants to price, 

trade and hedge. 

Under the final rule, ETFs will be required to assess, manage, and periodically review the 

fund’s liquidity risk and needs, taking into account, as applicable, the liquidity risk factors for all 

funds (as modified from the proposal) discussed previously.859 ETFs also must consider the 

following additional factors, as applicable, that are specific to the structure and operation of 

ETFs:

 857 See generally H.R. REP. NO. 2639, 76th Cong., 3d Sess., 8 (1940). See also Investment Trusts and 

Investment Companies: Report of the Securities and Exchange Commission, H.R. Doc. No. 279, 76th 

Cong., 1st Sess., pt. 3, at 860-874 (1939); Spruce ETF Trust, et al., Investment Company Act Release No. 

31301 (Oct. 21, 2014) [79 FR 63964 (Oct. 27, 2014)] (notice of application) (to the extent that investors 

would have to exit at a price substantially below the NAV of the ETF, this would be “contrary to the 

foundational principle underlying section 22(d) and rule 22c-1 under the Act that all shareholders be treated 

equitably when buying and selling their fund shares”); Precidian ETFs Trust, et al., Investment Company 

Act Release No. 31300 (Oct. 21, 2014) [79 FR 63971 (Oct. 27, 2014)] (notice of application) (“A close tie 

between market price and NAV per share of the ETF is the foundation for why the prices at which retail 

investors buy and sell ETF shares are similar to the prices at which Authorized Participants are able to buy 

and redeem shares directly from the ETF at NAV. This close tie between prices paid by retail investors and 

Authorized Participants is important because section 22(d) and rule 22c-1 under the Act are designed to 

require that all fund shareholders be treated equitably when buying and selling their fund shares.”). 

858 See supra footnote 843 and accompanying text.

859 See supra section III.B.2 (discussing the factors as proposed and how the factors have been amended in the 

final rule to address commenter concerns). We recognize that not all of these factors may be applicable to 

all ETFs (and that some mutual funds would not need to consider certain factors relevant only to ETFs). 
270

• The relationship between the ETF’s portfolio liquidity and the way in which, and the 

prices and spreads at which, ETF shares trade, including the efficiency of the 

arbitrage function and the level of active participation by market participants 

(including authorized participants);860 and

• The effect of the composition of baskets on the overall liquidity of the ETF’s 

portfolio.

We considered, in establishing these factors, comments received on the Proposing Release and 

the 2015 ETP Request for Comment, as well as the unique structure and operation of ETFs. We 

discuss these factors in more detail below. As we noted with regard to other open-end funds, the 

list of liquidity risk assessment factors for ETFs is not meant to be exhaustive. Rather, an ETF 

generally should incorporate other considerations in assessing its liquidity risk that it considers 

appropriate.

ETF Trading - Arbitrage Function and Level of Activity of Market Participants

As discussed above, the ETF structure permits only authorized participants to purchase or 

redeem shares from an ETF and to transact in the ETF’s shares at the NAV per share. The 

combination of the creation and redemption process with secondary market trading in ETF 

shares provides arbitrage opportunities that, if effective, keep the market price of the ETF’s 

shares at or close to the NAV per share of the ETF.861 If an ETF has a significant amount of 

illiquid securities in its portfolio, market participants may find it more difficult to evaluate 

 860 We note that this factor will not be applicable to ETMFs to the same extent it applies to ETFs. ETMF 

market makers will not engage in the same kind of arbitrage as ETF market makers and will assume no 

intraday market risk with their positions in ETMF shares as all trading prices are linked to NAV. See

ETMF Notice, supra at note 31 at n.21 and accompanying text. 

861 We recognize that an ETF is not as likely as a mutual fund to sell or in-kind transfer its portfolio holdings

in order to meet redemptions because an authorized participant generally will not seek to create or redeem a 

basket with the ETF until there is a sufficient deviation between the ETF shares’ market price and the 

ETF’s NAV. As discussed previously, ETMF market makers would not engage in the same kind of 

arbitrage as ETF market makers because all trading prices of ETMF shares are linked to NAV. See supra 

footnote 836. 
271

opportunities and ultimately participate in the arbitrage process (because of challenges in pricing, 

trading, and hedging their exposure to the ETF). If the arbitrage function fails to operate 

efficiently, investors could buy and sell the ETF shares at prices that are not at or close to the 

NAV per share of the ETF, which may raise concerns relating to section 22(d) of and rule 22c-1 

under the Act regarding whether all fund shareholders (authorized participants and retail 

investors) are being treated equitably.

862 We discussed in the Proposing Release how the 

effective functioning of this arbitrage mechanism has been pivotal to the operation of ETFs (and 

to the Commission’s approval of exemptions that allow their operation) and how the liquidity of 

the ETF’s portfolio positions is a factor that contributes to the effective functioning of this 

arbitrage mechanism.863

Commenters to the 2015 ETP Request for Comment also highlighted the importance of 

portfolio liquidity on the efficiency of the ETF arbitrage mechanism. During an extraordinary 

period of market volatility on August 24, 2015 (“the August 24th Market Events”), for example, 

many ETFs traded at prices materially different from the NAV of the funds’ underlying portfolio 

assets.864 One commenter on the 2015 ETP Request for Comment, in observing the August 24th 

Market Events, noted that there are many reasons an ETF may trade at a substantial difference 

from the NAV of its underlying constituent stocks, including a lack of liquidity in the ETF 

constituents and a lack of liquidity in the ETF shares themselves.

865 Another commenter 

suggested that, where the market for an underlying asset is illiquid, no amount of arbitrage will 

 862 See supra footnote 857.

863 See Proposing Release, supra footnote 9, at nn.23-30 and accompanying text.

864 August 24 Staff Report, supra footnote 844, at 5 (discussing large ETFs that traded at “substantial 

discounts” to the ETFs’ NAVs).

865 See Comment Letter of Modern Markets Initiative on 2015 ETP Request for Comment (Sept. 14, 2015), 

available at https://www.sec.gov/comments/s7-11-15/s71115-39.pdf. 
272

be sufficient to equalize market discrepancies between underlying assets and the fund’s price, 

especially during times of market stress.866 In addition, the level of active participation by 

market participants, including market makers and authorized participants, in the trading of ETF 

shares is important to the way in which, and the prices and spreads at which, shares trade. As 

one commenter on the 2015 ETP Request for Comment noted, the more authorized participants

that are active in the market, the more opportunities there are to trade and provide liquidity.867 

For these reasons, we are requiring that an ETF consider the relationship between the liquidity of 

its portfolio and the arbitrage function in assessing its liquidity risk (where applicable).

Basket Composition

In-Kind ETFs create and redeem using baskets of securities and other assets. These 

baskets may be highly correlated to the ETF’s overall portfolio. As we noted in the Proposing 

Release, the composition of the basket can affect the liquidity of the ETF’s portfolio.868 For 

example, an ETF whose basket does not reflect a pro rata share of the fund’s portfolio may alter 

the liquidity profile of the ETF’s portfolio and may adversely affect the fund’s future ability to 

meet cash redemptions or mitigate shareholder dilution.869 We recognize that certain market 

incentives exist to mitigate the likelihood of significant or frequent divergence between an ETF’s 

basket and the fund’s portfolio. For example, if an ETF’s basket is not correlated with the fund’s 

portfolio, the ETF likely will develop a higher tracking error. Nonetheless, such divergence may 

 866 See Comment Letter of Occupy the SEC on 2015 ETP Request for Comment (Aug. 21, 2015), available at 

https://www.sec.gov/comments/s7-11-15/s71115-32.pdf.

867 See Comment Letter of Flow Traders Group on 2015 ETP Request for Comment (Aug. 17, 2015), available 

at https://www.sec.gov/comments/s7-11-15/s71115-25.pdf. 

868 See Proposing Release, supra footnote 9, at nn.23-24, 156-157 and accompanying text.

869 Under limited circumstances, an index ETF’s redemption basket also may differ from the portfolio deposit 

made by the authorized participant.
273

occur, with potentially adverse consequences to the remaining shareholders in the fund. 

Accordingly, we are requiring an ETF to consider the effect of its basket composition on the 

fund’s overall portfolio liquidity (even if an ETF’s creation and redemption baskets reflect a pro 

rata share of the ETF’s portfolio).870 

A few commenters also suggested that increasing ETF basket flexibility and eliminating 

the two percent limitation on redemption fees for ETFs would help enhance ETF liquidity and 

the orderly and efficient operation of the arbitrage function.871 We are not addressing these 

issues here because they are beyond the scope of this rulemaking.

Portfolio Liquidity Classification

Under the final rule, an open-end fund (other than an In-Kind ETF) will be required to 

classify each of the fund’s portfolio investments (generally by asset class) into one of four 

categories: highly liquid investments; moderately liquid investments; less liquid investments; 

and illiquid investments. A number of commenters noted, as the Commission recognized in the 

Proposing Release and as we reiterate above, that an open-end fund (including an open-end ETF) 

that redeems in cash has a different nature of liquidity risk than an ETF that redeems through inkind transfers of securities, positions, and other assets.872 

We note, for example, that when a mutual fund experiences daily net redemptions, the 

 870 One commenter on the 2015 ETP Request for Comment, discussing the potential effects of basket 

composition on an ETF’s overall liquidity, noted that an ETF whose basket reflects a pro rata share of the 

ETF’s portfolio will have a larger number of securities in the basket, with the size of each individual 

position potentially being smaller. This commenter suggested that, as a result: (i) the smaller lots can be 

more difficult for an authorized participant to trade efficiently, thereby increasing the bid/ask spreads of the 

ETF; and (ii) the pro rata basket is more likely to include less liquid or even illiquid securities that an ETF 

not subject to the pro rata requirement can exclude. See Comment Letter of Charles Schwab & Co. on the 

on 2015 ETP Request for Comment (Aug. 17, 2015), available at https://www.sec.gov/comments/s7-11-

15/s71115-28.pdf. 

871 See, e.g., BlackRock Comment Letter; ICI Comment Letter I; Fidelity Comment Letter.

872 See, e.g., BlackRock Comment Letter; Proposing Release, supra footnote 9.
274

fund will likely be required to sell its portfolio holdings in order to generate cash to meet 

redemptions. To the extent that a fund must sell a less liquid security in order to generate the 

cash proceeds required, there is enhanced liquidity risk—that is, risk that a fund cannot meet 

redemptions without significant dilution of remaining investors. Therefore, we believe that it is 

appropriate for such a fund to assess its liquidity risk by analyzing the amount of time it will 

take, in current market conditions, to convert its portfolio assets (without the conversion (or in 

some cases, sale or disposition) significantly changing the market value of the investments). 

As discussed above, an In-Kind ETF’s liquidity risk is different from the liquidity risk of 

a fund that generally meets redemptions in cash. Rather than liquidity risk affecting investors 

directly in their ability to receive cash redemption proceeds, illiquidity in an ETF’s portfolio or 

its basket assets can adversely impact investors by contributing to a widening of the bid-ask 

spread of the ETF shares. This widening could result in shareholders transacting in an ETF’s 

shares at market prices that do not maintain a “close tie” to the NAV per share of the ETF. The 

declining liquidity in an ETF’s portfolio also could affect the arbitrage function related to the 

ETF, as discussed above.

Despite our concern about the specific liquidity-related risks in ETFs described above, 

we view the liquidity classification information for In-Kind ETFs as less necessary for the 

Commission, investors, and other potential users of this information because, unlike for mutual 

funds, the daily identity and weightings of ETF portfolio holdings are well known to authorized 

participants and other ETF liquidity providers, and would be required to be disclosed daily under 

our final rules to qualify for the exemption from the classification requirement.

873 Authorized 

 873 See rule 22e-4(a)(9). See also, Precidian ETFs Trust, et al., Investment Company Act Release No. 31300 

(Oct. 21, 2014) [79 FR 63971 (Oct. 27, 2014)] (notice of application) (“The Commission therefore has 

granted such exemptive relief to date only to those actively managed ETFs that have provided daily 
275

participants are the only shareholders that are permitted to transact with the ETF at NAV, and 

these sophisticated broker-dealers are more likely to be able to readily discern the ETF’s 

liquidity profile from this daily portfolio information. 

We continue to believe that it is important that an In-Kind ETF maintain sufficient 

liquidity in its portfolio. Accordingly, the final rule requires that an In-Kind ETF, in assessing 

liquidity risk, take into account certain factors that are more tailored to the way in which such 

funds operate and the resulting liquidity risks. For example, those factors include considering 

the relationship between portfolio liquidity and the arbitrage function, as well as the effect of the 

composition of in-kind baskets on the overall liquidity of the fund’s portfolio. However, given 

the more limited utility of this classification information for the reasons described above, and 

considering the burdens of tracking and reporting it to us, we do not believe that it is appropriate 

to require an In-Kind ETF to classify its portfolio investments into liquidity categories based on 

a “days-to-cash” framework and report that information to the Commission.874 

 

transparency of their portfolio holdings.”). The identity and weightings of the constituents of affiliated 

indices are required by exemptive application condition to be made publicly available on a daily basis. See, 

e.g., Columbia ETF Trust I, et. al., Investment Company Act Release No. 32134 (May 31, 2016) (order) 

(related application with conditions available at: 

https://www.sec.gov/Archives/edgar/data/1233991/000119312516578039/d194333d40appa.htm). The 

identity and weightings of the constituents of non-affiliated indexes are not required to be made publicly 

available on a daily basis. However, because: (1) these index compositions are generally broadly available 

to liquidity providers either publicly, by subscription or by license; and (2) index-based ETFs publish their 

purchase and redemption baskets daily, and those baskets generally are tracking baskets that represent 

either a pro rata replication of the index or a sampling of the index, authorized participants and other ETF 

liquidity providers should nonetheless be able to determine the liquidity profile of a non-affiliated, indexbased ETF on a daily basis. Unlike ETFs, ETMF are only required to provide the same disclosure about 

the identity and weightings of their portfolio holdings as mutual funds. 

874 In the Proposing Release, we proposed to apply the portfolio liquidity classification requirement to openend ETFs (in addition to other open-end funds), in part, because, ETFs permit authorized participants to 

redeem in cash (even if these funds typically redeem in kind). See Proposing Release, supra footnote 9, at 

n. 129 and accompanying text. Accordingly, we determined that it was appropriate to require that all ETFs 

classify their portfolio liquidity by assessing the fund’s ability to convert portfolio positions into cash. The 

final rule, however, establishes a more tailored regulatory regime for In-Kind ETFs, that, by definition, do 

not meet redemptions through more than a de minimis amount of cash. Thus, under the final rule, we do 

not believe it is necessary to require that In-Kind ETFs be subject to the portfolio liquidity classification 
276

Highly Liquid Investment Minimum

Under the final rule, an open-end fund (other than an In-Kind ETF) will be required to 

determine a percentage of the fund’s net assets that it will invest in assets that are highly liquid 

investments. The fund will determine its highly liquid investment minimum using the first 

category in the liquidity classification requirement (i.e., cash and assets convertible into cash 

within three business days). The fund also will be required to take certain actions when the 

fund’s highly liquid investments fall below its minimum.875 

In determining to adopt a highly liquid investment minimum for certain open-end funds, 

we considered comments received on proposed rule 22e-4, which would have required a “threeday liquid asset minimum.”876 Multiple commenters suggested that the concept of a three-day 

liquid asset minimum does not take into account the unique structural aspects of ETFs.877 One 

commenter suggested that the concept of “convertible into cash within three business days” has 

little relevance to an ETF that does not liquidate securities to meet cash redemptions.

878 

Consistent with the comments received, we are not requiring that an In-Kind ETF adopt a 

highly liquid investment minimum. First, an open-end fund will be required to establish its 

highly liquid investment minimum using its “highly liquid investment” portfolio classification. 

As discussed earlier, we have determined that it is not necessary to require that an In-Kind ETF 

classify its portfolio liquidity (e.g., into “highly liquid investment,” or “moderately liquid 

investment”). The portfolio liquidity classifications incorporate a “convertible to cash” concept 

 requirement (which is based on a “days-to-cash” or “days-to-sell” framework).

875 See supra section III.D; rule 22e-4(b)(1)(iii).

876 See supra section III.D.

877 See, e.g., Dechert Comment Letter; ICI Comment Letter I; BlackRock Comment Letter; SIFMA Comment 

Letter I.

878 See BlackRock Comment Letter.
277

that is generally not relevant for an In-Kind ETF (except in managing cash holdings to no greater 

than a de minimis amount of cash). Because the highly liquid investment minimum incorporates 

the same “convertible to cash” concept as the portfolio liquidity classifications (which, for the 

reasons discussed above, we are not requiring for In-Kind ETFs), we do not believe it is 

appropriate to require that an In-Kind ETF establish a highly liquid investment minimum. 

Second, the highly liquid investment minimum, as discussed above, is intended to 

increase the likelihood that an open-end fund meets redemption requests without significant

dilution of remaining investors. Open-end funds that redeem in cash and In-Kind ETFs operate 

differently, and therefore evaluate liquidity risk differently. We believe, for example, that it is 

necessary for an open-end fund that meets redemptions in cash (including an ETF) to manage its 

liquidity risk by establishing a minimum amount of highly liquid investments that, as defined in 

the final rule, are quickly convertible to cash (within 3 business days). In this way, the highly 

liquid investment minimum increases the likelihood that the fund will be able to meet 

redemption requests in cash without significant dilution of remaining investors. Conversely, we 

believe, for example, that it is more appropriate for an In-Kind ETF that meets redemptions 

through in-kind transfers of securities, positions, and other assets (and no more than a de minimis

amount of cash) to, among other things, assess its liquidity risk through consideration of the 

factors we have discussed above (e.g., assessing the relationship between portfolio liquidity and 

the arbitrage function). For these reasons, we are excluding In-Kind ETFs from the highly liquid 

investment minimum requirement in rule 22e-4.

We discussed above the requirement that funds (including ETFs) other than In-Kind
278

ETFs establish a highly liquid investment minimum.879 One commenter noted that the three-day 

liquid asset minimum might increase tracking error, or force an ETF to either violate the terms of 

its exemptive order,880 or refuse in-kind purchase requests from authorized participants, thus 

interfering with the arbitrage mechanism that keeps ETF market prices close to their underlying 

NAV.881 An ETF that does not qualify as an In-Kind ETF necessarily meets redemptions 

through more than a de minimis amount of cash. For the reasons discussed above, we believe 

that it is appropriate to require a fund that meets redemptions, at least partially in cash, to comply 

with the liquidity classification and highly liquid investment minimum requirements.882 With 

regard to tracking error, an ETF with an index-based strategy, like other open-end funds, needs 

to balance its implementation of its investment strategy with the need for appropriate liquidity 

risk management given its obligation to meet redemptions without significant dilution. We 

recognize that this balancing may result in tracking error, and such a fund may wish to address 

and manage this risk through appropriately designed policies and procedures. This concern, 

along with the concerns regarding potentially violating an exemptive order, or refusing an inkind purchase request from an authorized participant, are also mitigated by the additional 

flexibility provided for in the final rule. Under the final rule (as compared with the proposal), a 

fund that breaches its highly liquid investment minimum will be subject to certain board 

reporting requirements, but will not be barred from purchasing non-conforming assets (as would 

 879 See supra section III.D.

880 See ICI Comment Letter I (noting that if an ETF was prohibited from accepting a less liquid asset, the ETF 

may violate a requirement that that all creation baskets correspond pro rata to the ETF’s portfolio 

positions).

881 Id.

882 An ETF that does not qualify as an In-Kind ETF would not be required to determine and periodically 

review a highly liquid investment minimum if it holds primarily highly liquid investments. See supra

section III.D.
279

have been required as proposed).883 Under the final rule, therefore, a fund will have flexibility to 

address potentially adverse situations, including tracking error, that may arise as a result of 

complying with the highly liquid investment minimum. 

K. Limitation on Unit Investment Trusts’ Investments in Illiquid Investments

As noted above, the proposed scope of rule 22e-4 did not include UITs, although we 

requested comment on whether UITs should be included within its scope, and whether we should 

include specific limitations on UIT’s holdings of illiquid assets at inception.

884 As adopted 

today, UITs remain excluded from the rule’s liquidity risk management program requirements. 

However, as suggested by some commenters, we are now requiring a limited liquidity review for 

UITs. Under the final rules, the UIT’s principal underwriter or depositor must determine, on or 

before the initial deposit of portfolio securities into the UIT, that the portion of the illiquid 

investments that the UIT holds or will hold at the date of deposit that are assets is consistent with 

the redeemable nature of the securities it issues.

885

As discussed in detail in the Proposing Release, most UITs serve as separate account 

vehicles used to fund variable annuity and variable life insurance contracts,

886 and these UITs 

essentially function as pass-through vehicles, investing principally in securities of one or more 

open-end investment companies that would be subject to rule 22e-4.887 Also, UITs are not 

 883 See supra section III.D.

884 See supra section III.A.2.d; Proposing Release, supra footnote 9 at section III.A.3 and comment requests 

following n 156 (“alternatively, should we require UITs to meet certain minimum liquidity requirements at 

the time of deposit of the securities...”).

885 See rule 22e-4(c). The rule also requires UITs to maintain a record of that determination for the life of the 

UIT and for five years thereafter. See also Rule 144A Release supra footnote 37at n.61 (discussing 

liquidity requirements for UITs prior to the adoption of rule 22e-4).

886 See Proposing Release, supra footnote 9, at n.139 and accompanying text. We currently estimate that 

approximately 92.9% of UITs serve as separate account vehicles (based on data as of December 31, 2015). 

887 See id., at nn.139-140 and accompanying text.
280

actively managed, and thus certain provisions of rule 22e-4 that require a fund’s board to 

approve and oversee the fund’s liquidity risk management program and the fund’s adviser, 

officer, or officers to administer it are inapposite to the management structure of a UIT.888 

Several commenters argued (in the context of ETFs organized as UITs) that UITs may be 

subject to liquidity risk comparable to other funds.889 As discussed previously, in recognition of 

the different unmanaged organizational structure of UITs, we continue to believe that including 

UITs within the scope of rule 22e-4’s liquidity risk management program requirements (or even 

the tailored program requirements for ETFs that redeem in kind) would not be feasible. 

However, we recognize that UITs may in some circumstances be subject to liquidity risk

(particularly where the UIT is not a pass-through vehicle and the sponsor does not maintain an 

active secondary market for UIT shares) as investor redemption requests may lead to dissipation 

of UIT assets, forcing a UIT to sell securities that it holds to meet redemptions. 

Accordingly, today we are adopting a limited liquidity review requirement for UITs to 

require that a UIT’s principal underwriter or depositor determine upon initial deposit of a 

registered UIT that the level of illiquid investments it will hold is consistent with the redeemable 

nature of the securities it issues.

890 Though commenters focused their discussion on UITs that 

are ETFs, we believe it is appropriate for the principal underwriter or depositor of any registered 

 888 See id., at nn.141-143 and accompanying text. 

889 See Anonymous Comment Letter I; BlackRock Comment Letter. One of these commenters also observed 

that, while there are few ETFs that are UITs, some of the largest ETFs in the world (by volume/value 

traded) are UIT ETFs, and thus any liquidity risks faced by these UIT ETFs could lead to significant 

adverse market consequences. The commenter also expressed concern that excluding UIT ETFs from the 

scope of rule 22e-4 may prompt more ETF sponsors to structure ETFs as UITs rather than open-end funds 

to avoid being subject to the liquidity risk management program requirement. See Anonymous Comment 

Letter I. We recognize the risks of excluding UIT’s from 22e-4, and thus are adopting the liquidity review 

requirement discussed in this section, as a tailored approach that fits the unique unmanaged structure of 

UITs, including ETFs that are structured as UITs. (ETMFs are not structured as UITs because, as they are 

structured today, they are actively managed and thus cannot operate as UITs.) 

890 See supra footnote 885 and accompanying text. 
281

UIT to conduct the initial liquidity assessment described above on or before the date of the initial 

deposit of securities into the UIT. The securities that the UIT is expected to hold should be 

examined so that they are consistent with the ability of a UIT to issue redeemable securities, 

much as an open-end fund will be required to evaluate whether its investment strategy and the 

securities it holds is appropriate for an open-end fund under the final liquidity risk management 

program.

891 Though UITs are not actively managed and do not have a board of directors, 

corporate officers, or an investment adviser to render advice during the life of the trust, making 

active liquidity risk management inapposite to the management structure of a UIT, we believe 

that this requirement of a tailored, one-time, initial liquidity risk management requirement for 

UITs is in line with the unmanaged structure of a UIT and its liquidity risk.

892 

We expect that this initial review requirement would in many respects be similar to the 

process for determining whether a fund’s holding of illiquid investments is consistent with rule 

22e-4’s 15% limitation on illiquid investments, taking into account the unique structure and 

purpose of UITs. If a UIT were to hold or planned to hold more than 15% of its investments in 

illiquid investments at the time of initial deposit, such a level of illiquid investments is unlikely 

to be consistent with the nature of the redeemable securities it issues. Thus, if a UIT planned to 

hold significant amounts of illiquid securities (in excess of 15%), its principal underwriter or 

depositor would be unlikely to be able to make the determination that its investment’s liquidity is 

consistent with its issuance of redeemable securities.

 891 As noted above, all UITs are subject to the requirements of section 22(e) and therefore must meet 

redemptions within seven days. See also section 4(2). 

892 With regard to UITs structured as ETFs in particular, we agree with commenters’ concerns that UIT ETFs’ 

liquidity risks may be comparable to those faced by other ETFs and that the relatively large size of certain 

UIT ETFs could lead to significant market consequences if these UIT ETFs were to encounter liquidity 

issues. However, because UIT ETFs are unmanaged and must fully replicate their underlying indices, we 

believe that a one-time determination regarding liquidity concerns at the commencement of the offering of 

a registered UIT is the appropriate manner to mitigate such concerns. 
282

Due to the unmanaged structure of UITs and the fixed nature of their portfolios, it would 

be inconsistent with their structure and portfolios to require UITs to re-evaluate the securities 

they hold based on their liquidity characteristics and change their investments accordingly over 

time. Therefore, the requirement only applies at the time of the UIT’s creation. Although this is 

a one-time determination at the time of the UIT’s initial deposit, it should take into account the 

planned structure of the UIT’s holdings. In particular, if the UIT tracks an index, the 

determination should consider the index design and whether the index design is likely to lead to 

the UIT holding an amount of illiquid assets that is inconsistent with the redeemable nature of 

the securities it issues. 

As discussed above, because of the unmanaged nature of an UIT, we recognize that 

depending on its particular circumstances, after initial deposit, an UIT might potentially hold a 

higher level of illiquid investments due to redemptions or changes in the liquidity of the 

investments it holds. Nonetheless, we expect that the requirement for the depositor or principal 

underwriter to determine that the liquidity of the investments the UIT holds is consistent with the 

nature of the redeemable securities it issues at the time of initial deposit should help enhance UIT 

liquidity. 

L. Disclosure and Reporting Requirements Regarding Liquidity Risk and Liquidity 

Risk Management

Receiving relevant information about the operations of a fund and its principal 

investment risks is important to investors in choosing the appropriate fund for their risk 

tolerances. Investors in open-end funds generally expect funds to pay redemption proceeds 

promptly following their redemption requests based, in part, on representations made by funds in 

their disclosure documents. Currently, funds are not expressly required to disclose how they 

manage the liquidity of their investments, and limited information is available regarding fund 
283

liquidity and whether the liquidity of a fund’s portfolio securities corresponds with its anticipated 

liquidity needs. 

We are adopting, substantially as proposed with some modifications in response to 

comment, amendments to Form N-1A that will require a fund to further describe its procedures 

for redeeming the fund’s shares including the number of days following receipt of shareholder 

redemption requests in which the fund typically expects to pay redemption proceeds to 

redeeming shareholders and the methods the fund typically uses to meet redemption requests, 

including whether those methods are used regularly or only in stressed market conditions.

893 We 

also are adopting an amendment to General Instruction A of Form N-1A to conform the 

definition of “exchange-traded fund” to the definition of ETF adopted today in connection with 

rule 22e-4 and the adoption of Form N-CEN in the Investment Company Reporting 

Modernization Adopting Release.894

In addition, we are adopting new Form N-LIQUID to incorporate information that would 

have previously been reported on Form N-PORT under the proposal concerning a fund’s 

investments in illiquid investments, but with some modifications in response to comments. 

Under this new reporting form, a fund is required to notify the Commission when more than 15% 

of the fund’s net assets are, or become, illiquid investments that are assets as defined in rule 22e4 and report information about the investments affected.

895 A fund also is required to report on 

Form N-LIQUID if the fund’s illiquid investments that are assets previously exceeded 15% of 

net assets and the fund determines that its illiquid investments that are assets have changed to be 

 893 See Items 11(c)(7) and (c)(8) of Form N-1A. 

894 See infra footnote 906.

895 See Part A and Part B of Form N-LIQUID.
284

less than or equal to 15% of net assets.896 In addition, under the new form, a fund is required to 

notify the Commission if the fund’s holdings in highly liquid investments that are assets fall 

below the fund’s highly liquid investment minimum for more than 7 consecutive calendar 

days.

897 Information reported on Form N-LIQUID will be non-public.

We are adopting, as proposed, the requirement that a fund report on Form N-CEN 

information regarding the use of lines of credit, interfund lending, and interfund borrowing.898 In 

addition, we are adopting a new requirement that a fund report on Form N-CEN whether the 

fund is an “In-Kind Exchange-Traded Fund” as defined in rule 22e-4.

899

Many commenters expressed general support for enhanced disclosures regarding fund 

liquidity risk management practices.900 Some commenters noted that understanding the liquidity 

dynamics of an investment strategy employed by a fund would be beneficial to investors901 and 

that enhanced information could assist the Commission in its role as the primary regulator of 

investment companies and help investors make more informed investing decisions by providing 

more transparency into fund investment practices.902 Other commenters expressed concerns with 

 896 See Part C of Form N-LIQUID.

897 See Part D of Form N-LIQUID.

898 See Item C.20 of Form N-CEN. In the Proposing Release, we also proposed to add to Form N-CEN a 

requirement for funds to report whether the fund required 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. See Proposing Release, supra footnote 9, at section III.G.3.a. We are 

adopting this requirement in the Investment Company Reporting Modernization Adopting Release. See 

Investment Company Reporting Modernization Adopting Release, supra footnote 120. 

899 Item E.5 of Form N-CEN.

900 See, e.g., BlackRock Comment Letter; J.P. Morgan Comment Letter; LPL Comment Letter (supporting 

increased disclosure about liquidity); SIFMA Comment Letter I (expressing general support for the 

proposed amendments to Form N-1A and proposed Form N-CEN).

901 See BlackRock Comment Letter.

902 See Charles Schwab Comment Letter.
285

specific disclosure and reporting requirements outlined in the proposal, which are discussed in 

detail below.

1. Amendments to Form N-1A

Form N-1A is used by open-end funds, including money market funds and ETFs, to 

register under the Investment Company Act and to register offerings of their securities under the 

Securities Act. We are adopting, substantially as proposed, amendments to Form N-1A that will 

require a fund to further describe its procedures for redeeming the fund’s shares including the 

number of days following receipt of shareholder redemption requests in which the fund typically 

expects to pay redemption proceeds to redeeming shareholders.903 A fund also will be required 

to describe the methods the fund typically expects to use to meet redemption requests in stressed 

and non-stressed market conditions.904 Funds will not be required, however, to file as exhibits to 

their registration statements credit agreements as we proposed. We note that these amendments 

will apply to all open-end funds, including money market funds and ETFs.905

In addition, we are adopting an amendment to General Instruction A of Form N-1A to 

conform the definition of “exchange-traded fund,” which currently defines an ETF to mean, in 

part, a fund or class, “the shares of which are traded on a national securities exchange” to the 

definition of ETF adopted today in connection with rule 22e-4 and the adoption of Form NPORT and Form N-CEN in the Investment Company Reporting Modernization Adopting 

Release, which both define an ETF, in part, to mean a fund or class, “the shares of which are 

 903 See Item 11(c)(7) of Form N-1A.

904 See Item 11(c)(8) of Form N-1A.

905 See supra footnote 4; see also infra section V.H.; and Proposing Release, supra footnote 9, at section V.G.
286

listed and traded on a national securities exchange.”906

Many commenters generally supported enhancing prospectus disclosure requirements,907

noting, for example, that enhanced disclosures will improve shareholder and market participant 

knowledge regarding fund redemption procedures and liquidity risk management.908 Several 

commenters expressed concerns with the proposed requirements to disclose the number of days 

or the methods in which a fund will pay redemption proceeds909 and include lines of credit 

agreements as exhibits to the fund registration statement.910 We discuss the comments received 

in response to the proposal, as well as the amendments to Form N-1A and modifications to the 

proposal, in more detail below. 

 906 See General Instructions A of Form N-1A (emphasis added) and General Instruction E of Form N-CEN. 

See also Investment Company Reporting Modernization Adopting Release, supra footnote 120. For 

purposes of reporting on proposed Form N-CEN, we proposed to define (i) “exchange-traded fund” as an 

open-end management investment company (or series or class thereof) or UIT, the shares of which are 

listed and traded on a national securities exchange at market prices, and that has formed and operates under 

an exemptive order under the Investment Company Act granted by the Commission or in reliance on an 

exemptive rule under the Act adopted by the Commission and (ii) “exchange-traded managed fund” as an 

open-end management investment company (or series or class thereof) or UIT, the shares of which are 

listed and traded on a national securities exchange at NAV-based prices, and that has formed and operates 

under an exemptive order under the Investment Company Act granted by the Commission or in reliance on 

an exemptive rule under the Act adopted by the Commission. See Investment Company Reporting 

Modernization, Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 

2015)] (“Investment Company Reporting Modernization Proposing Release”), at n.446 and accompanying 

text. In the Investment Company Reporting Modernization Proposing Release, we requested comment on 

whether the definitions of the type of funds listed in proposed Form N-CEN were appropriate and if any 

different definitions should be used. We did not receive any comments on the proposed definitions of ETF 

and ETMF in proposed Form N-CEN, and are adopting the definitions of ETF and ETMF, as proposed. 

See Investment Company Reporting Modernization Adopting Release, supra footnote 120.

907 See, e.g., CFA Comment Letter; LPL Comment Letter; Charles Schwab Comment Letter; Vanguard 

Comment Letter.

908 See J.P. Morgan Comment Letter.

909 See, e.g., Fidelity Comment Letter; Federated Comment Letter; NYC Bar Comment Letter; Vanguard 

Comment Letter.

910 See, e.g., Fidelity Comment Letter; Invesco Comment Letter; T. Rowe Comment Letter; Voya Comment 

Letter.
287

a. Timing of the Redemption of Fund Shares

Form N-1A requires funds to describe their procedures for redeeming fund shares.911 

Disclosure regarding other important redemption information, such as the timing of payment of 

redemption proceeds to fund shareholders, varies across funds as today there are no specific 

requirements for this disclosure under the form. Some funds disclose that they will redeem 

shares at a price based on the next calculation of net asset value after the order is placed but may 

delay payment for up to seven days (consistent with section 22(e) of the Act), and others provide 

no specific time periods for the payment. Some funds disclose differences in the timing of 

payment of redemption proceeds based on the distribution channel or payment method through 

which the fund shares are redeemed, while others do not.

We proposed amendments to Item 11 of Form N-1A that would require a fund to disclose 

the number of days in which the fund would pay redemption proceeds to redeeming 

shareholders. 912 Under the proposal, if the number of days in which the fund would pay 

redemption proceeds differed by distribution channel, the fund also would be required to disclose 

the number of days for each distribution channel.913 We also proposed amendments to Item 11 

that would require a fund to disclose the methods that the fund uses to meet redemption 

 911 See Item 11(c) of Form N-1A, which requires a fund to describe procedures for redeeming fund shares, 

including (1) any restrictions on redemptions; (2) any redemption charges; (3) if the fund has reserved the 

right to redeem in kind; (4) any procedure that a shareholder can use to sell fund shares to the fund or its 

underwriter through a broker-dealer (noting any charges that may be imposed for such service); (5) the 

circumstances under which the fund may redeem shares automatically without action by the shareholder in 

accounts below a certain number or value of shares; (6) the circumstances under which the fund may delay 

honoring a request for redemption for a certain time after a shareholder’s investment; and (7) any 

restrictions on, or costs associated with, transferring shares held in street name accounts.

912 See proposed Item 11(c)(7) of Form N-1A; see also Proposing Release, supra footnote 9, section III.G.1.

913 Id.
288

requests.914 Under the proposal, funds would have been required to disclose whether they use the 

methods regularly to meet redemptions or only in stressed market conditions.

Some commenters expressed general support for these new disclosure requirements under 

the proposal, stating that this information will improve shareholder and market participant 

knowledge regarding fund redemption procedures and liquidity risk management915 and provide 

meaningful information about the general time taken to meet redemptions and the fund’s 

approaches to liquidity risk management.916

Some commenters also expressed concerns with the proposed requirement that funds 

disclose the number of days in which a fund will pay redemption proceeds for each distribution 

channel, stating that the disclosure could present undue complexity to the prospectus and may 

lead to shareholder confusion.917 In addition, commenters argued that a fund does not always 

have a direct contractual relationship with the ultimate beneficial owners of its shares, as there 

are often multiple intermediaries between the mutual fund and its shareholder, and that a fund is 

not in the best position to disclose to its shareholders a precise timeframe in which an 

intermediary will transmit the proceeds of a shareholder’s redemption.918

We understand that in most cases, the distribution channel through which a shareholder 

transacts in fund shares is unlikely to have a material effect on the timing of the payment of 

redemption proceeds, but instead that the choice of method of payment of redemption proceeds 

 914 See proposed Item 11(c)(8) of Form N-1A.

915 See J.P. Morgan Comment Letter.

916 See ICI Comment Letter I.

917 See, e.g., Fidelity Comment Letter. See also e.g., Federated Comment Letter (stating that distribution 

channel level disclosure is unnecessary and could present undue complexity in prospectus if there are minor 

deviations).

918 See Fidelity Comment Letter.
289

will have the most significant effect on when an investor receives proceeds. For example, we 

understand that the industry’s central fund transaction processing utility (the NSCC), typically 

debits or credits the cash accounts of users of the utility (such as funds or their transfer agents on

one side of the transaction, and intermediaries on behalf of beneficial owners, on the other side

of the transaction) regarding net purchase or redemption activities in shares of a fund on T+1

(and to a lesser extent with respect to certain funds on T+3). Such intermediary users of the 

utility would in turn update their account records, including the beneficial owner’s activity, on 

that date regardless of the type of book entry securities, account structure, or intermediary that

the beneficial owner holds through. However, if the beneficial owner wishes to receive 

remittance of redemption proceeds via check (for example, instead of reinvesting them in another 

investment), it may take a certain number of days for the intermediary (or fund, as applicable) to 

process and mail the check to the customer. Accordingly, in a change from the proposal, the 

final form amendments do not require disclosure on timing of redemption proceeds based on 

distribution channel, but instead only require a fund to disclose typical expected payout times 

based on the payment method chosen by the investor (e.g., check, wire, automated clearing 

house).

919

Thus, under the final amendments, if the number of days a fund expects to pay 

redemption proceeds differs by method of payment (e.g., check, wire, automated clearing house), 

then the fund is required to disclose the typical number of days or estimated range of days that 

the fund expects it will take to pay out redemption proceeds for each method used.

920 This 

requirement focuses on disclosing when the fund expects to make the payment, not when the 

 919 See Item 11(c)(7) of Form N-1A.

920 See id. (emphasis added).
290

shareholder should expect to receive the proceeds, because receipt of proceeds is unlikely to be 

in the fund’s control (for example, a fund cannot predict how long a mailed check will take to 

arrive). We believe narrowing the disclosure requirement to the effects of payment methods 

rather than the effects of all types of distribution channels addresses comments. We also believe 

that this modification will increase the quality of information provided to fund shareholders 

about the timing of their redemption proceeds and, at the same time, reduce the likelihood that 

disclosures regarding such timing will be overly granular and complex for investors and overly 

burdensome for registrants.

921

Other commenters expressed concerns about specific aspects of the proposed disclosure 

amendments. For example, some commenters stated that requiring funds to disclose the number 

of days in which the fund will pay redemption proceeds to redeeming shareholders would 

pressure funds to disclose shorter redemption payment periods, thereby limiting funds from 

exercising discretion in stressed markets.922 Other commenters opposed a requirement to 

disclose the number of days or methods used to pay redemption proceeds,923 arguing, for 

example, that the disclosure requirement would inappropriately limit the flexibility of a fund to 

meet redemptions to timing and methods previously disclosed in its prospectus924 or would cause 

generic disclosures because of the variety of methods available to funds to meet redemptions.925 

One commenter recommended that the Commission narrow the scope of the amendments to only 

 921 See Proposing Release, supra footnote 9, section III.G.1.a.

922 See FSR Comment Letter; NYC Bar Comment Letter.

923 See, e.g., Fidelity Comment Letter; Federated Comment Letter; Invesco Comment Letter; Vanguard 

Comment Letter.

924 See, e.g., Invesco Comment Letter; NYC Bar Comment Letter; Vanguard Comment Letter.

925 See Federated Comment Letter.
291

the “typical” number of days, methods, and funding sources used for meeting redemption 

requests.926

In consideration of these comments, and in a modification to the proposal, we are 

adopting amendments to Item 11 of Form N-1A to require a fund to disclose the number of days 

following receipt of shareholder redemption requests in which the fund typically expects to pay

redemption proceeds to redeeming shareholders,927 rather than the number of days in which the 

fund will pay redemption proceeds as proposed. Funds may wish to consider also disclosing

whether payment of redemption proceeds may take longer than the number of days that the fund 

typically expects and may take up to seven days as provided in the Investment Company Act. 

We appreciate commenters’ concerns, and believe that this adjustment to the language in 

Form N-1A will give funds flexibility to provide disclosures about redemption procedures that 

do not inappropriately limit a fund’s ability to meet redemptions to the exact timing previously 

disclosed in its prospectus. We continue to believe that requiring this disclosure will inform the 

public about a critical aspect of a shareholder’s relationship with a fund – when the shareholder 

can expect redemption proceeds. Funds generally should disclose timing that reflects their actual 

operational procedures for meeting redemption rather than generic disclosures about fund 

redemptions, regardless of what other funds in the industry may disclose. We continue to 

believe that it is in the public interest to inform investors on the timing of when fund 

shareholders should expect redemption proceeds. We believe that this disclosure requirement 

will also enhance consistency in fund disclosures regarding the timing in which a fund will pay 

 926 See ICI Comment Letter I.

927 See Item 11(c)(7) of Form N-1A (emphasis added).
292

redemption proceeds, thereby improving the information provided to shareholders and the ability 

of investors to compare redemption procedures across funds.

b. Methods Used to Meet Shareholder Redemption Obligations

As noted above, some commenters opposed a requirement to disclose the methods used 

(and number of days) to pay redemption proceeds, arguing, for example, that the disclosure 

requirement would inappropriately limit the flexibility of a fund to meet redemptions to timing 

and methods previously disclosed in its prospectus or would cause generic disclosures because of 

the variety of methods available to funds to meet redemptions.928 Some commenters generally 

opposed requirements for funds to disclose the methods used to meet redemption requests, 

stating, for example, that it does not serve a purpose for investors to know precisely how the 

fund meets their redemption requests – so long as they receive their redemption proceeds within 

the period prescribed by regulation.

929 As noted above, one commenter suggested that we narrow 

the scope of the disclosure requirement to only the “typical” methods funds use for meeting 

redemption requests.930

In light of these comments, in a modification to the proposal, we are adopting 

amendments to Item 11 of Form N-1A to require a fund to disclose the methods that the fund 

typically expects to use to meet redemption requests, and whether those methods are used 

regularly, or only in stressed market conditions.

931 We believe requiring that the description of 

the procedures for redeeming fund shares include a description of the methods a fund typically 

 928 See, e.g., Federated Comment Letter; Invesco Comment Letter; NYC Bar Comment Letter; Vanguard 

Comment Letter.

929 See Invesco Comment Letter.

930 See ICI Comment Letter I; see also footnote 926 and accompanying text.

931 See Item 11(c)(8) of Form N-1A (emphasis added).
293

expects to use to meet redemption requests will improve disclosure about another critical aspect 

of a shareholder’s relationship with a fund – how a shareholder can expect to receive redemption 

proceeds. We appreciate the concerns expressed by commenters and believe that the modified 

language in the form provides some needed flexibility for funds while at the same time providing

investors with improved information concerning redemption procedures. Furthermore, this 

disclosure requirement will increase consistency in fund disclosure documents regarding fund 

redemption practices and improve the comparability of such information across funds. Absent 

this amendment, disclosures concerning the methods funds use to pay redemption proceeds will 

continue to vary across funds. 

We believe that requiring specific disclosure on the methods a fund uses to pay 

redemption proceeds could improve investor knowledge on how a fund manages liquidity and its 

redemption obligations to shareholders. At the foundation of the prospectus disclosure 

framework is the provision to all investors of user-friendly information that is key to an 

investment decision.

932 Additionally, given the increase in open-end funds pursuing alternative 

and fixed income strategies with varied liquidity risks,

933 the sources of liquidity and methods 

used to meet shareholder redemptions are key information that investors need. 

Methods to meet redemption obligations may include, for example, sales of portfolio 

assets, holdings of cash or cash equivalents, the use of lines of credit and/or interfund lending, 

and in-kind redemptions.934 Funds may also use redemption fees to help mitigate dilution and 

address transaction costs associated with shareholder activity. We also believe that requiring this 

 932 See Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management 

Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 

2009)] (“N-1A Release”), at section I.

933 See supra section II.C.1.

934 See supra footnote 686 and accompanying text.
294

disclosure could encourage funds to consider their operations and ensure that the methods they 

may use to meet shareholder redemption obligations in normal and reasonably foreseeable 

stressed markets are viable. 

As noted above, Form N-1A requires funds to disclose whether they reserve the right to 

redeem their shares in kind instead of in cash and to describe the procedures for such 

redemptions.

935 As proposed, we are amending Form N-1A to incorporate this disclosure 

requirement into Item 11(c)(8) discussed above. We understand that the use of in-kind 

redemptions (outside of the ETF context) historically has been rare and that many funds reserve 

the right to redeem in kind only as a tool to manage liquidity risk under emergency 

circumstances or to manage the redemption activity of a fund’s large institutional investors.936 

We also are aware that there are often logistical issues associated with redemptions in kind and 

that these issues can limit the availability of in-kind redemptions as a practical matter. A fund 

should consider whether adding relevant detail to its disclosure regarding in-kind redemptions, 

including, for example, whether redemptions in kind will be pro-rata slices of the fund’s 

portfolio or individual securities or a representative basket of securities, or revising its disclosure 

if the fund would be practically limited in its ability to redeem its shares in kind, would provide 

more accurate information to investors. 

One commenter expressed concerns that the proposed additional disclosure requirements 

in Form N-1A runs against the Commission’s goal of clear and concise, user-friendly 

 935 See Item 11(c)(3) of Form N-1A.

936 See supra section III.J. We note that funds also have the ability to redeem in kind, subject to the limitations 

under rule 18f-1 under the Act for funds that have made an election under the rule. An 18f-1 election 

commits a fund to pay in cash all requests for redemption by any shareholder of record, limited in amount 

with respect to each shareholder during any 90-day period to the lesser of $250,000 or 1% of the fund’s net 

asset value at the beginning of the period.
295

disclosures.937 We believe that the amendments adopted today in this Release, including specific 

modifications in response to commenters, respond appropriately to this commenter’s concern and 

are designed to provide disclosures to investors with key information in a clear, concise, and 

understandable manner. We believe that investors in an open-end fund should have information 

on how the fund expects to meet redemptions and in what time period they expect to pay 

redemption proceeds. 

c. Credit Agreements Exhibit

We also proposed to amend Item 28 of Form N-1A to require a fund to file as an exhibit 

to its registration statement any agreements related to lines of credit for the benefit of the fund to 

increase Commission, investor, and market participant knowledge concerning the arrangements 

funds have made in order to strengthen their ability to meet shareholder redemption requests and 

manage liquidity risk and the terms of those arrangements.938 In light of concerns expressed by 

commenters, we are not adopting amendments to Form N-1A to require the filing of credit 

agreements as exhibits to a fund’s registration agreement. 

Many commenters objected to the credit agreements exhibit requirement,939 with some 

arguing, for example, that credit agreements are often extremely lengthy documents that are not 

user-friendly,940 the disclosure of which would be unnecessary in light of the lines of credit 

reporting requirements in Form N-CEN as well as information concerning lines of credit 

 937 See Federated Comment Letter.

938 See Proposing Release, supra footnote 9, at section III.G.1 (where we also proposed to include an 

instruction related to credit agreements noting that the specific fees paid in connection with the credit 

agreements need not be disclosed in the exhibit filed with the Commission to preserve the confidentiality of 

this information).

939 See, e.g., Fidelity Comment Letter; CRMC Comment Letter; Oppenheimer Comment Letter; Voya 

Comment Letter.

940 See CRMC Comment Letter; T. Rowe Comment Letter.
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disclosed in a fund’s statement of additional information and financial statements.941 Other 

commenters expressed concern that public disclosure of line of credit agreements in a fund’s 

registration statement could ultimately harm fund shareholders, noting that public disclosure 

could (1) disrupt and weaken a fund’s ability to negotiate credit terms;942 (2) make public 

proprietary and competitive information (e.g., certain representations and warranties) that lenders 

and funds may wish to keep confidential and are not easily redacted;943 and (3) ultimately 

discourage lending banks from granting lending terms to funds out of a concern that terms 

granted would become standard in other lending agreements.944 

Rather than include line of credit agreements as exhibits, other commenters suggested 

including a narrative discussion of lines of credit information, similar to the data required to be 

disclosed in Form N-CEN, in a fund’s statement of additional information.945 Some commenters 

did not oppose requiring the filing of line of credit agreements as an exhibit to a fund’s 

registration statement if, in addition to redacting fees as proposed, certain other portions of the 

agreement were permitted to be redacted.946

We find the concerns expressed by commenters persuasive and have determined to not 

adopt this amendment to Form N-1A. We acknowledge that credit agreements can be lengthy, 

complex documents that may be of limited value to retail investors and that the information 

provided in the proposed exhibits could be, in part, duplicative of information provided in a 

 941 See, e.g., Oppenheimer Comment Letter; T. Rowe Comment Letter; Voya Comment Letter.

942 See Oppenheimer Comment Letter; Fidelity Comment Letter.

943 See CRMC Comment Letter; Invesco Comment Letter; Oppenheimer Comment Letter; Voya Comment 

Letter.

944 See Fidelity Comment Letter.

945 See ICI Comment Letter I; CRMC Comment Letter.

946 See FSR Comment Letter (requesting redaction of the identity of the counterparty); Federated Comment 

Letter (requesting redaction of the rate payable by the fund on any drawdowns).
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fund’s statement of additional information and financial statements. We believe that requiring 

funds to report the use of lines of credit in response to reporting requirements in Form N-CEN is 

an appropriate means to increase Commission, investor, and market participant knowledge 

concerning the arrangements funds have made in order to strengthen their ability to meet 

shareholder redemption requests and manage liquidity risk and the terms of those arrangements. 

d. Additional Disclosure Requirements

Some commenters recommended that the Commission require additional disclosures in a 

fund’s registration statement about a fund’s specific liquidity risk management policies and 

procedures947 and the market impact costs associated with redemption activity.948 For example, 

one commenter recommended requiring a fund to disclose a narrative of its liquidity risk 

management program in its statement of additional information as well as a statement in the fund 

prospectus about the liquidity risk appetite of each fund.949 Another commenter expressed 

support for the Commission requiring funds to include a discussion of their liquidity risk 

management policies and procedures, similar to what is currently required on Form N-1A for 

policies and procedures regarding proxy voting (Items 17 and 27) and valuation procedures (Item 

23), among others.950 In addition, one commenter recommended that we consider requiring a 

fund to also disclose the level of “position concentration” that is appropriate for the fund in terms 

of portfolio liquidity in light of the fund’s investment strategy and investor profile.951 While 

another commenter recommended that, at a minimum, funds be required to provide disclosures 

 947 See, e.g., Invesco Comment Letter; J.P. Morgan Comment Letter.

948 See BlackRock Comment Letter.

949 See Invesco Comment Letter. 

950 See J.P. Morgan Comment Letter.

951 See BlackRock Comment Letter.
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noting the possibility of suspending redemptions and how the fund will handle redemption 

requests in that situation.952

We support commenters’ goals of providing useful information about a fund’s liquidity 

risk management practices to investors but also remain committed to encouraging statutory 

prospectuses that are simple, clear, and useful to investors953 and registration statements that 

provide useful information, rather than boilerplate legal representations. In the interest of 

balancing these two goals, we are adopting the proposed amendments to Form N-1A 

substantially as proposed without including these specific additional disclosure requirements 

suggested by commenters in the text of the form. We note, however, that nothing in Form N-1A 

prohibits disclosures about the features of a fund’s liquidity risk management program where 

relevant to understanding disclosures under existing reporting requirements.

2. New Form N-LIQUID

We are also adopting a new requirement that open-end investment companies, including 

In-Kind ETFs to the extent applicable954 but not including money market funds (i.e., registrants), 

file on a non-public basis a current report to the Commission on new Form N-LIQUID when 

certain significant events related to a fund’s liquidity occur.

955 This requirement will be 

implemented through our adoption of new rule 30b1-10, which requires funds to file a report on 

new Form N-LIQUID in certain circumstances. The content of this report is similar to the 

 952 See CFA Comment Letter.

953 See N-1A Release, supra footnote 932. 

954 As discussed below, some of the events required to be reported on Form N-LIQUID are in connection with 

the breach of a fund’s highly liquid investment minimum. See Part D of Form N-LIQUID. Because InKind ETFs are not subject to the highly liquid investment minimum requirement under rule 22e-4(b)(1)(iii),

they would not be subject to this Part D reporting requirement on Form N-LIQUID. 

955 See rule 30b1-10.
299

information that we proposed to be reported on Form N-PORT under the proposal concerning a 

fund’s investments in illiquid assets, but with some modifications in response to comments. A 

report on Form N-LIQUID is required to be filed, as applicable, within one business day of the 

occurrence of one or more of the events specified in the form.956 Form N-LIQUID will be nonpublic. For the same reasons discussed previously regarding our determination to keep 

information regarding a fund’s highly liquid investment minimum and specific position level 

disclosure of illiquid investments non-public, we find that it is neither necessary nor appropriate 

in the public interest or for the protection of investors to make the information filed on Form NLIQUID publicly available.957

First, a registrant is required to file Form N-LIQUID within one business day when more 

than 15% of its net assets are, or become, illiquid investments that are assets as defined in rule 

22e-4.

958 If this occurs, the registrant will be required to report on Form N-LIQUID general 

information about the registrant as well as (1) the date(s) of the event, (2) the current percentage 

of the registrant’s net assets that are illiquid investments that are assets, and (3) identification 

information about the illiquid investments.

959 

Second, if a registrant whose illiquid investments that are assets previously exceeded 

15% of net assets determines that its holdings in illiquid investments that are assets have changed 

 956 Form N-LIQUID will also require a fund to report the following general information: (1) the date of the 

report; (2) the registrant’s central index key (“CIK”) number; (3) the EDGAR series identifier; (4) the 

Securities Act file number; and (v) the name, email address, and telephone number of the person authorized 

to receive information and respond to questions about the filing. See Part A of Form N-LIQUID.

957 See supra footnote 615 and accompanying text and footnote 743 and accompanying text. Section 45(a) of 

the Investment Company Act requires information in reports filed with the Commission pursuant to the 

Investment Company Act to be made available to the public, unless we find that public disclosure is neither 

necessary nor appropriate in the public interest or for the protection of investors.

958 See Part A and Part B of Form N-LIQUID.

959 See Items A.1 - A.5 and Items B.1 - B.3 of Form N-LIQUID.
300

to be less than or equal to 15% of the registrant’s net assets, then the registrant also is required to 

report within one business day (1) the date(s) on which its illiquid investments that are assets fell 

to or below 15% of net assets and (2) the current percentage of the registrant’s net assets that are 

illiquid investments that are assets.

960 

Lastly, a registrant also is required to notify the Commission on Form N-LIQUID within 

one business day if its holdings in highly liquid investments that are assets fall to or below the 

registrant’s highly liquid investment minimum for more than 7 consecutive calendar days.961 If 

this occurs, a fund is required to report the date(s) on which the fund’s holdings in liquid 

investments that are assets fell below the fund’s highly liquid investment minimum.

962

As discussed above, we are modifying the 15% standard asset-reporting requirement 

originally proposed by incorporating this information into the fourth “illiquid investment” 

classification category reported on Form N-PORT.963 Under the proposal, Form N-PORT would 

have required a fund to report, for each portfolio asset, whether the asset is a 15% standard asset 

in order to allow our staff and other interested parties to track the extent that funds are holding 

15% standard assets and to discern the nature of those holdings and assist these groups in 

tracking the fund’s exposure to liquidity risk.964 

Some commenters recommended that the Commission require more detailed reporting 

data from funds that hold a larger percentage of securities that are less liquid or illiquid and that 

funds should notify the Commission more promptly than the Form N-PORT filing deadline when 

 960 See Item C.1 and Item C.2 of Form N-LIQUID. 

961 See Part D of Form N-LIQUID.

962 See Item D.1 of Form N-LIQUID.

963 See Item C.7 Form N-PORT; see also supra section III.C.6.

964 See Proposing Release, supra footnote 9, at section II.G.2.b. 
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a fund’s illiquid assets exceed 15% of net assets, or if the fund otherwise encounters indications 

of increased liquidity risk.965 Other commenters expressed support for the addition of an early 

warning notification provision, under which funds would be required to notify the Commission 

when illiquid assets held at the end of a business day exceed 15% of net assets and continue to 

exceed 15% of net assets three business days after the threshold was first exceeded.966 Another 

commenter expressed the belief that the sheer scale of Americans’ reliance on open-end funds as 

an investment instrument and the potential for systemic contagion that arises when funds 

confront liquidity challenges must inform any consideration of the Commission’s proposal.967 In 

the commenter’s view, the reporting requirements under the proposal with underlying factorbased analysis was largely discretionary and lacked mandatory requirements, and thereby failed

to adequately account for the potential systemic threat to the nation’s financial stability posed by 

liquidity risk.968 

We appreciate the concerns and suggestions raised by commenters and agree that the 

Commission should be notified promptly when a fund encounters indications of increased 

liquidity risk and believe that new Form N-LIQUID addresses some concerns expressed by 

commenters that certain liquidity events that could affect the liquidity of a particular fund and/or 

indicate potential liquidity risks across the fund industry require particular attention by 

Commission staff. Pursuant to Part B of Form N-LIQUID, registrants will now be required to 

 965 See, e.g., Charles Schwab Comment Letter (noting that this proposed approach could be similar to the 

Commission’s 2015 Derivatives Proposing Release, which has proposed to enhance requirements for funds 

whose aggregate exposure to derivatives exceeds 50% of its net assets); see also, e.g., SIFMA Comment 

Letter III.

966 See, e.g., SIFMA Comment Letter III (noting that this early warning notification could respond to concerns 

raised by the Third Avenue Fund liquidation); see also Third Avenue Temporary Order, supra footnote 12.

967 See Better Markets Comment Letter.

968 See id.
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report to the Commission within one business day of when their percentage of illiquid 

investments that are assets exceeds (and subsequently falls to or below) 15% of their net 

assets.

969 Providing this information more promptly than monthly reporting on Form N-PORT, 

as proposed, will be the “early warning notification” that some commenters recommended970 and 

will inform the Commission of potential liquidity stress events at the earliest possible juncture. 

Similarly, requiring a registrant to report when its holdings in highly liquid investments that are 

assets fall below the registrant’s highly liquid investment minimum will add to this early warning 

system and ensure the Commission is made aware of such breaches promptly, rather than later in 

reports filed on Form N-PORT.

971 We believe that the information reported on Form N-LIQUID 

will assist Commission staff in its monitoring efforts of liquidity, including monitoring of not 

only the reporting fund but also funds that may have comparable characteristics to the reporting 

fund and could be similarly affected by market events. 

Form N-LIQUID also includes general filing and reporting instructions, as well as

definitions of specific terms referenced in the form.972 These instructions and definitions are intended 

to provide clarity to funds and to assist them in filing reports on Form N-LIQUID.

3. Amendments to Form N-CEN

We proposed several reporting items under Part C of Form N-CEN to allow the 

Commission and other users to track certain liquidity risk management practices that we expect 

funds to use on a less frequent basis than the day-to-day portfolio construction techniques 

 969 See Part B and Part C of Form N-LIQUID; see also General Instruction A of Form N-LIQUID. 

970 See SIFMA Comment Letter III.

971 See Part D of Form N-LIQUID.

972 See General Instructions A (Rule as to Use of Form N-LIQUID), B (Application of General Rules and 

Regulations), C (Information to Be Included in Report Filed on Form N-LIQUID), D (Filing of Form NLIQUID), E (Paperwork Reduction Act Information), and F (Definitions) of Form N-LIQUID.
303

captured by Form N-PORT.973 We are adopting these reporting requirements substantially as 

proposed. Where we have received comments on specific reporting requirements, we discuss 

them in more detail below.

a. Lines of Credit, Interfund Lending, and Interfund Borrowing

We are adopting, largely as proposed, but with a modification in response to comment, 

the requirement in Form N-CEN that a management company report information regarding the 

use of lines of credit, interfund lending, and interfund borrowing.974 Several commenters 

expressed general support for these reporting requirements on Form N-CEN.975 In a modification 

to the proposal, if a fund reports that it has access to a line of credit, for each line of credit the 

fund will be required to report whether the line of credit is a committed or uncommitted line of 

credit.

976 The fund will be required to report information concerning the size of the line of credit 

in U.S. dollars, the name of the institution(s) with which the fund has the line of credit, and 

whether the line of credit is for that fund alone or is shared among multiple funds.977 If the line 

of credit is shared among multiple funds, the fund is required to disclose the names and SEC File 

numbers of the other funds (including any series) that may use the line of credit.978 If the fund 

responds affirmatively to having available a line of credit, the fund is required to disclose 

 973 See Proposing Release, supra footnote 9, at section III.G.3. 

974 See Item C.20 of Form N-CEN. We have modified the numbering convention for items within Form NCEN from the proposal to be consistent with Form N-CEN as adopted in the Investment Company 

Reporting Modernization Adopting Release and to clarify that responses regarding lines of credit, interfund 

lending, and interfund borrowing should apply to each line of credit or loan, as applicable.

975 See, e.g., CFA Comment Letter; Federated Comment Letter; Vanguard Comment Letter.

976 See Item C.20.a.i of Form N-CEN (emphasis added).

977 See Item C.20.a.ii-iv. of Form N-CEN.

978 See Item C.20.a.iv.1 of Form N-CEN. Under Form N-CEN, “SEC File number” means the number 

assigned to an entity by the Commission when that entity registered with the Commission in the capacity in 

which it is named in Form N-CEN. See General Instruction E to Form N-CEN. 
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whether it drew on the line of credit during the reporting period.979 If the fund drew on that line 

of credit during the reporting period, the fund is required to disclose the average dollar amount 

outstanding when the line of credit was in use and the number of days that line of credit was in 

use.980 

The Proposing Release included a request for comment on whether funds should be

required to report information on uncommitted lines of credit on Form N-CEN.981 In general, a 

committed line of credit represents a bank’s obligation, in exchange for a fee, to make a loan to a 

fund subject to specified conditions. For uncommitted or standby lines of credit, however, a 

bank indicates a willingness, but no obligation, to lend to a fund.982 As one commenter noted, 

funds may have certain tools like lines of credit from banks for temporary liquidity management 

purposes “when more typical means (e.g., use of new or existing cash or sales of portfolio 

holdings) are unavailable or otherwise sub-optimal.”983 One commenter suggested that funds 

report the availability of uncommitted lines of credit in addition to committed lines of credit in 

Form N-CEN.

984 

In consideration of these comments, we are including in Form N-CEN a requirement for 

funds to report the availability and use of committed and uncommitted lines of credit.

985 We 

believe that this information will allow our staff and other potential users to assess what sources 

of external liquidity are available to funds and to what extent funds rely on dedicated external 

 979 See Item C.20.a.v of Form N-CEN.

980 See Item C.20.a.vi. and vii of Form N-CEN.

981 See Proposing Release, supra footnote 9, at section III.G.3.c.

982 See Fortune, supra footnote 781 at 47.

983 ICI Comment Letter I.

984 See Federated Comment Letter.

985 See Item C.20.a.(i) of Form N-CEN.
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sources of liquidity, rather than relying on the liquidity of fund portfolio investments alone, for 

liquidity risk management. In addition, we believe that if funds make substantial use of 

uncommitted lines of credit, the reporting of that reliance could flag potential vulnerabilities in a 

fund or the fund industry, particularly in the event of a market crisis when uncommitted lines of 

credit might become unavailable. Furthermore, having funds report information on lines of 

credit will also allow monitoring of whether lines of credit are concentrated in particular 

financial institutions. 

We are adopting, as proposed, the requirement that a fund report whether it engaged in 

interfund lending or interfund borrowing during the reporting period, and, if so, the average 

amount of the interfund loan when the loan was outstanding and the number of days that the 

interfund loan was outstanding.986 This information will provide some transparency regarding 

the extent to which funds use interfund lending or interfund borrowing. We understand that one 

reason that funds have sought exemptive relief to engage in interfund lending and borrowing is 

to meet redemption obligations if necessary.987

b. Additional Information Concerning ETFs 

In a modification to the proposal, we are requiring that each ETF that complies with rule 

22e-4 as an “In-Kind ETF” under the rule, identify itself accordingly in reports on Form 

N-CEN.988 As discussed above, we are adopting certain tailored liquidity risk management 

program requirements for ETFs, and certain ETFs that qualify as In-Kind ETFs will not be 

required to classify their portfolio investments or comply with the highly liquid investment

 986 See Items C.20.b and c of Form N-CEN.

987 For example, we understand that funds may engage in interfund lending and borrowing to pay out 

redemption proceeds same-day or T+1 while the fund awaits proceeds from sales of non-traded securities.

988 See Item E.5 of Form N-CEN; see also supra section III.J regarding the definition and treatment of “InKind ETFs” under rule 22e-4.
306

minimum requirement of rule 22e-4.

989 We believe that the In-Kind ETF information reported on 

Form N-CEN will be helpful in understanding the volume of ETFs that identify as In-Kind ETFs 

and thus are not required to classify their portfolio investments or comply with the highly liquid 

investment minimum requirement of rule 22e-4.

990

4. Safe Harbors

Some commenters suggested that the Commission should include a safe harbor and/or 

protection from liability as part of the final rule for proposed liquidity-related disclosures.991 One 

commenter recommended that the Commission provide a safe harbor for “forward-looking 

statements” given the speculative nature of the proposed disclosures.992 Another commenter 

recommended that the Commission implement measures to shield from liability funds that in 

good faith make forward-looking assessments of liquidity at either the asset or portfolio level 

that subsequently turn out to materially differ from actual liquidity.993 One commenter further 

suggested that the Commission should include a provision stating that funds and their affiliates 

will not face liability for errors in classification or otherwise in implementing their liquidity risk 

management programs, and related reports and (if applicable) disclosures, unless (i) the error is 

material and (ii) the fund or affiliate acted knowingly or recklessly. Commenters argued that any 

safe harbor provision should also make clear that funds and managers would not face liability for 

violation of rule 22e-4 based on second-guessing, either by the Commission or by fund 

shareholders, of the design of the liquidity risk management program.994 One commenter 

expressed concern that, even if a safe harbor provision were established that protected funds and 

 989 Id.

990 ETFs that redeem in cash, or that do not qualify otherwise as “In-Kind ETFs” (as defined in rule 22e4(a)(9)) will be subject to the full set of liquidity risk management program elements, including the 

classification and highly liquid investment minimum requirements. See rule 22e-4(b)(1)(i)-(iii).
307

directors from Commission enforcement actions, funds and directors could still be subject to 

private litigation.995 We decline to provide such a safe harbor.

M. Effective and Compliance Dates

We are adopting the following effective and compliance dates, as set forth below.

1. Liquidity Risk Management Program

The compliance date for our liquidity risk management program requirement is 

December 1, 2018 for larger entities, and June 1, 2019 for smaller entities. Thus all registered 

open-end management investment companies, including open-end ETFs, that are not smaller

entities, will be required to adopt and implement a written liquidity risk management program, 

approved by a fund’s board of directors on December 1, 2018, while smaller entities will be 

required to do so six months later, on June 1, 2019.

996 

In the Proposing Release, the Commission stated that it expected to provide a tiered set of 

compliance dates based on asset size.997 The Commission expected that 18 months after the 

 991 See, e.g., ICI Comment Letter I; LSTA Comment Letter; SIFMA Comment Letter II; T. Rowe Comment 

Letter.

992 See FSR Comment Letter.

993 See ICI Comment Letter I (noting that the Commission has precedent for using its authority to shield from 

potential liability certain forward-looking information that registrants are required to provide (see, e.g., rule 

175 under the Securities Act; rule 3b-6 under the Exchange Act; Item 303(c) of Reg. S-K; and Disclosure 

in Management’s Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate 

Contractual Obligations, Securities Act Release No. 33-8182 (Feb. 5, 2003) (regarding MD&A 

disclosures)). 

994 See SIFMA Comment Letter II.

995 See Federated Comment Letter.

996 The compliance date in the section applies to rule 22e-4, rule 30b1-10, and Form N-LIQUID. 

997 See Proposing Release, supra footnote 9, at section III.H. Specifically, for larger entities – namely, funds 

that together with other investment companies in the same “group of related investment companies” have 

net assets of $1 billion or more as of the end of the most recent fiscal year – the Commission proposed a 

compliance date of 18 months after the effective date to comply with the Proposed Rule. For smaller 

entities (i.e., funds that together with other investment companies in the same “group of related investment 

companies” have net assets of less than $1 billion as of the end of the most recent fiscal year), the proposal 

provided for an extra 12 months (or 30 months after the effective date) to comply with proposed rule 22e-4. 
308

effective date would provide an adequate period of time for larger entities to prepare internal 

processes, policies, and procedures and implement liquidity risk management programs that 

would meet the requirements of the rule.998 We believed that smaller entities would benefit from 

having an additional 12 months to establish and implement a written liquidity risk management 

program.999

Most of the commenters who discussed the proposed liquidity risk management program 

compliance date(s) opposed tiered compliance and requested at least 30 months to comply. 

Some argued larger funds would need at least 30 months to comply because of their size: more 

funds and a greater number and variety of investments to classify would require more time.1000 

Others cited operational limitations: a need of adequate time for 1) all funds to properly prepare 

processes, policies and procedures; 2) managers to adjust operations and develop reporting 

capabilities; and 3) mutual fund boards to review, approve, and implement the program.1001 The 

only commenter that supported tiered compliance requested lengthier compliance dates for both 

larger and smaller entities.1002 

After evaluating the comments received, we believe that larger entities would benefit 

from an additional period of time to come into compliance with the rules over the 18 months that 

was proposed. Therefore, we are providing an additional 6 months for these entities, for a total 

of 24 months (i.e., December 1, 2018) to come into compliance. We continue to believe that 

smaller entities may face additional or different challenges in coming into compliance with the 

 998 Id.

999 Id.

1000 See, e.g., Fidelity Comment Letter; FSR Comment Letter; ICI Comment Letter I; Invesco Comment Letter.

1001 See, e.g., BlackRock Comment Letter; CRMC Comment Letter; T. Rowe Comment Letter; Vanguard 

Comment Letter.

1002 See Dechert Comment Letter.
309

rules quickly, and are therefore providing an extended compliance period of a total of 30 months

(i.e., June 1, 2019) for such smaller entities. 

2. Amendments to Form N-1A, Form N-PORT, and Form N-CEN

In the Proposing Release, the Commission expected to require all initial registration 

statements on Form N-1A, and all post-effective amendments that are annual updates to effective 

registration statements on Form N-1A, filed six months or more after the effective date, to 

comply with the proposed amendments to Form N-1A.1003 Few commenters discussed the Form 

N-1A amendments. One commenter agreed that 6 months was sufficient to comply with the 

amendments;1004 another commenter requested 30 months to comply.1005 Because we do not 

expect that funds will require significant amounts of time to prepare these additional 

disclosures,1006 we are adopting a compliance date for our amendments to Form N-1A of June 1, 

2017. This will provide a six month compliance period for these amendments, as proposed.

Similar to the tiered compliance dates for the liquidity classification requirements 

(discussed above), we are providing a tiered set of compliance dates based on asset size for the 

additions to Form N-PORT and Form N-CEN.

1007 In the Proposing Release, for larger entities, 

we expected that 18 months would provide an adequate period of time for funds, intermediaries, 

and other service providers to conduct the requisite operational changes to their systems and to 

establish internal processes to prepare, validate, and file reports containing the additional 

information requested by the proposed amendments to Form N-PORT. Further, we believed that 

 1003 See Proposing Release, supra footnote 9, at section III.H.

1004 See ICI Comment Letter I.

1005 See Vanguard Comment Letter.

1006 See Proposing Release, supra footnote 9, at section III.H.

1007 Id.
310

smaller entities would benefit from extra time to comply and from the lessons learned by larger 

investment companies during the adoption period for Form N-PORT. For Form N-CEN, we

proposed a compliance date of 18 months after the effective date to comply with the new 

reporting requirements.1008 We expected that 18 months would provide an adequate period of 

time for funds, intermediaries, and other service providers to conduct the requisite operational 

changes to their systems and to establish internal processes to prepare, validate, and file reports 

containing the additional information requested by the proposed amendments to Form N-CEN. 

Multiple commenters, restating their concerns about operational limitations, requested 30 months 

for all entities to comply with the Form N-PORT and Form N-CEN amendments.1009 

As discussed above, we are persuaded that larger entities would benefit from extra time 

to comply and are therefore providing a compliance date of December 1, 2018 for larger entities

to come into compliance with the additional liquidity-related reporting requirements of Form NPORT and Form N-CEN. This will result in larger funds filing their first reports with additional 

liquidity-related information on Form N-PORT, reflecting data as of December 31, no later than 

January 31. For smaller entities, the compliance date will be June 1, 2019. This will provide 

smaller entities an additional six months to comply with the new liquidity-related reporting 

requirements.

IV. ECONOMIC ANALYSIS

A. Introduction and Primary Goals of Regulation

1. Introduction

As discussed above, the Commission is adopting regulatory changes to require a liquidity 

 1008 Id.

1009 See Cohen & Steers Comment Letter; Fidelity Comment Letter; ICI Comment Letter I; Vanguard omment 

Letter.
311

risk management program, and to require new disclosures regarding liquidity risk and liquidity 

risk management (collectively, the “final liquidity regulations”). Because of the significant 

diversity in liquidity risk management practices that we have observed in the fund industry, there 

exists the need for enhanced comprehensive baseline regulations instead of only guidance for 

fund liquidity risk management. In summary, and as discussed in greater detail in section III 

above, the final liquidity regulations include the following:

o New rule 22e-4 will require that each fund stablish a written liquidity risk management 

program. A fund’s liquidity risk management program broadly requires a fund to assess, 

manage and review the fund’s liquidity risk; to classify the liquidity of each of the fund’s 

portfolio investments; to determine a highly liquid investment minimum (except for 

funds that hold primarily highly liquid investments); and to limit illiquid investments to 

15% of fund investments. The final rule also provides for a tailored program for all ETFs,

but offers some exemptions for In-Kind ETFs. Finally, the rule requires for board 

oversight of the liquidity risk management program.

o Amendments to Form N-1A and additional elements of new Form N-PORT and Form 

N-CEN will require enhanced fund disclosure and reporting regarding position liquidity 

and shareholder redemption practices. New Form N-LIQUID will require more prompt, 

non-public notification to the Commission when a fund’s holdings of assets that are 

illiquid investments exceed 15% of net assets, or when a fund’s holdings of highly liquid 

investments that are assets fall below the fund’s highly liquid investment minimum for 

more than 7 consecutive calendar days.

The Commission is sensitive to the economic effects of the final liquidity regulations, 

including the benefits and costs as well as the effects on efficiency, competition, and capital 
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formation. The economic effects are discussed below in the context of the primary goals of the 

final liquidity regulations.

2. Primary Goals

The primary goals of the final liquidity regulations are to promote investor protection by 

reducing the risk that funds will be unable to meet their redemption obligations, elevate the 

overall quality of liquidity risk management across the fund industry, increase transparency of 

funds’ liquidity risks and risk management practices, and mitigate potential dilution of nontransacting shareholders’ interests. Funds are not currently subject to requirements under the 

federal securities laws or Commission rules that specifically require them to maintain a 

minimum level of portfolio liquidity (with the exception of money market funds), and follow 

Commission guidelines (not rules) that generally limit their investment in illiquid assets.

1010 

Additionally, a fund today is only subject to limited disclosure requirements concerning the 

fund’s liquidity risk and risk management.1011 As discussed in the Proposing Release, staff 

outreach has shown that funds today engage in a variety of different practices—ranging from 

comprehensive and rigorous to minimal and basic—for assessing the liquidity of their portfolios, 

managing liquidity risk, and disclosing information about their liquidity risk, redemption 

practices, and liquidity risk management practices to investors.1012 We believe that the enhanced 

requirements for funds’ assessment, management, and disclosure of liquidity risk and enhanced 

limits on illiquid investment holdings could decrease the chance that funds would be unable to 

meet their redemption obligations and mitigate potential dilution of non-redeeming shareholders’ 

 1010 See supra section II.D; infra section IV.B.1.a.

1011 See supra section II.D; infra section IV.B.1.c.

1012 See supra section II.D; infra sections IV.B.1.a, IV.B.1.c.
313

interests.

The final liquidity regulations are also intended to lessen the possibility of early 

redemption incentives (and investor dilution) created by insufficient liquidity risk management, 

as well as the possibility that investors’ share value will be diluted by costs incurred by a fund as 

a result of other investors’ purchase or redemption activity. When a fund experiences significant 

redemption requests, it may sell portfolio securities or borrow funds in order to obtain sufficient 

cash to meet redemptions.1013 However, sales of a fund’s portfolio investments conducted in 

order to meet shareholder redemptions could result in significant adverse consequences to 

non-redeeming shareholders when a fund fails to adequately manage liquidity. For example, if a 

fund sells portfolio investments under unfavorable circumstances, this could create dilution for 

non-redeeming shareholders.1014 Funds also may borrow from a bank or use interfund lending 

facilities to meet redemption requests, but there are costs (such as interest rates) associated with 

such borrowings. Both selling of portfolio investments and borrowing to meet redemption 

requests could cause funds to incur costs that would be borne mainly by non-redeeming 

shareholders.1015 These factors could result in dilution of the value of non-redeeming 

shareholders’ interests in a fund,1016 which could create incentives for early redemptions in times 

of liquidity stress, and result in further dilution of non-redeeming shareholders’ interests.1017 

There also is a potential for adverse effects on the markets when open-end funds fail to 

adequately manage liquidity. For example, the sale of less liquid portfolio investments at 

 1013 See supra section II.B.2; infra sections IV.C.1, IV.C.2.

1014 See supra footnotes 79-80 and accompanying text.

1015 See supra footnote 259 and accompanying text.

1016 See supra footnotes 79-80 and accompanying text; infra sections IV.C.1, IV.C.2.

1017 See supra footnote 85 and accompanying text; infra sections IV.C.1, IV.C.2.
314

discounted or even fire sale prices when a fund is facing redemption pressures can produce 

significant negative price pressure on those investments and correlated investments, which can 

impact other investors holding these investments and may transmit stress to other funds or 

portions of the markets.1018 For reasons discussed in detail below, we believe that the liquidity 

risk management program requirement, including the enhanced restrictions on holdings of assets 

that are illiquid investments, should mitigate the risk of potential shareholder dilution and 

decrease the incentive for early redemption in times of liquidity stress.

Finally, the final liquidity regulations are meant to address recent industry developments 

that have underscored the significance of funds’ liquidity risk management practices. In recent 

years, there has been significant growth in the assets managed by funds with strategies that focus 

on holding relatively less liquid investments, such as fixed income funds (including emerging 

market debt funds), open-end funds with alternative strategies, and emerging market equity 

funds.1019 There also has been considerable growth in assets managed by funds that exhibit 

characteristics that could give rise to increased liquidity risk, such as relatively high investor 

flow volatility.1020 Additionally, as discussed in detail above, standard fund redemption and 

securities settlement periods have tended to become significantly shorter over the last several 

decades, which has caused funds to satisfy redemption requests within relatively short time 

periods (e.g., within T+3, T+2, and next-day periods).1021 But while fund redemption periods 

have become shorter, certain funds, for example, certain bank loan funds and emerging market 

 1018 See supra footnote 89 and accompanying text.

1019 See supra section II.C.1; infra section IV.B.3; see also DERA Study, supra footnote 95, at 6-9. Relevant 

statistics from the DERA Study were updated through 2015 using the CRSP US Mutual Fund Database.

1020 See infra section IV.B.3.

1021 See supra footnotes 102 and 103 and accompanying text.
315

debt funds, have increased their holdings of portfolio securities with relatively long settlement 

periods, which could result in a liquidity mismatch between when a fund plans or is required to 

pay redeeming shareholders, and when any asset sales that the fund has executed in order to pay 

redemptions will settle.1022 Collectively, these industry trends have emphasized the importance 

of effective liquidity risk management among funds and enhanced disclosure regarding liquidity 

risk and risk management. 

B. Economic Baseline

The final liquidity regulations will affect all funds and their investors, investment 

advisers and other service providers, all issuers of the portfolio securities in which funds invest, 

and other market participants potentially affected by fund and investor behavior. The economic 

baseline of the final liquidity regulations includes funds’ current practices regarding liquidity risk 

management and liquidity risk disclosure, as well as the economic attributes of funds that affect 

their portfolio liquidity and liquidity risk. These economic attributes include industry-wide 

trends regarding funds’ liquidity and liquidity risk management, as well as industry 

developments highlighting the importance of robust liquidity risk management by funds.

1. Funds’ Current Practices Regarding Liquidity Risk Management and Liquidity 

Risk Disclosure 

a. Funds’ Current Liquidity Risk Management Requirements and Practices

Under section 22(e) of the Investment Company Act, a registered investment company is 

required to make payment to shareholders for redeemable securities tendered for redemption 

within seven days of their tender.1023 In addition to the seven-day redemption requirement in 

 1022 See supra footnotes 104, 105, 377, and 378 and accompanying text.

1023 See section 22(e) of the Act. 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 

redeemable security in accordance with its terms for more than seven days after tender of the security 
316

section 22(e), registered investment companies that are sold through broker-dealers are required 

as a practical matter to meet redemption requests within three business days because 

broker-dealers are subject to rule 15c6-1 under the Exchange Act, which establishes a three-day 

(T+3) settlement period for purchases and sales of securities (other than certain types of 

securities exempted by the rule) effected by a broker or a dealer, unless a different settlement 

period is expressly agreed to by the parties at the time of the transaction. Furthermore, rule 

22c-1 under the Act, the “forward pricing” rule, requires funds, their principal underwriters, and 

dealers to sell and redeem fund shares at a price based on the current NAV next computed after 

receipt of an order to purchase or redeem fund shares, even though cash proceeds from purchases 

may be invested or fund investments may be sold in subsequent days in order to satisfy purchase 

requests or meet redemption obligations.

With the exception of money market funds subject to rule 2a-7 under the Act, the 

Commission has not promulgated rules requiring open-end funds to hold a minimum level of 

liquid investments.

1024 The Commission historically has taken the position that open-end funds 

should maintain a high degree of portfolio liquidity to ensure that their portfolio securities and 

other assets can be sold and the proceeds used to satisfy redemptions in a timely manner in order 

to comply with section 22(e) and their other obligations.

1025 The Commission also has stated that 

open-end funds have a “general responsibility to maintain a level of portfolio liquidity that is 

appropriate under the circumstances,” and to engage in ongoing portfolio liquidity monitoring to 

determine whether an adequate level of portfolio liquidity is being maintained in light of the 

 absent specified unusual circumstances. 

1024 See supra footnotes 61–62 and accompanying text.

1025 See Restricted Securities Release, supra footnote 37.
317

fund’s redemption obligations.1026 Open-end funds are also required by rule 38a-1 under the Act 

to adopt and implement written compliance policies and procedures reasonably designed to 

prevent violations of the federal securities laws, including policies and procedures that provide 

for the oversight of compliance by certain of the fund’s service providers, and such policies and 

procedures should be appropriately tailored to reflect each fund’s particular compliance risks; the 

rule also requires board approval and review of the service providers’ compliance policies and 

procedures.

1027 An open-end fund that holds a significant portion of its assets in securities with 

long settlement periods or with infrequent trading, or an open-end fund that represents it will pay 

redemptions in fewer than seven days, for instance, may be subject to relatively greater liquidity 

risks than other open-end funds.

Additionally, long-standing Commission guidelines generally limit an open-end fund’s 

aggregate investment in “illiquid assets” to no more than 15% of the fund’s net assets (the “15% 

guideline”).1028 Under the 15% guideline, a portfolio security or other asset is considered illiquid 

if it cannot be sold or disposed of in the ordinary course of business within seven days at 

approximately the value at which the fund has valued the investment.1029 The 15% guideline has 

generally limited funds’ exposure to particular types of securities that cannot be sold within 

seven days and that the Commission and staff have indicated may be illiquid, depending on the 

facts and circumstances. Depositors of UITs are currently required to consider which of their 

restricted securities are illiquid.

1030

 1026 See supra footnote 64 and accompanying text.

1027 See Rule 38a-1 Adopting Release, supra footnote 65.

1028 See supra footnote 38 and accompanying text.

1029 See supra footnote 39 and accompanying text.

1030 See Rule 144A Release supra footnote 37 at n.61 (discussing liquidity requirements for UITs prior to the 
318

As noted in the Proposing Release, staff outreach has shown that funds currently employ 

a diversity of practices with respect to assessing portfolio investments’ liquidity, as well as 

managing liquidity risk. Section II.D.3 above provides an overview of these practices, which 

include, among others: assessing the ability to sell particular investments within various time 

periods, taking into account relevant market, trading, and other factors; monitoring initial 

liquidity determinations for portfolio investments (and modifying these determinations, as 

appropriate); holding certain amounts of the fund’s portfolio in highly liquid investments or cash 

equivalents; establishing committed back-up lines of credit or interfund lending facilities; and 

conducting stress testing relating to the extent the fund has liquid investments to cover possible 

levels of redemptions.1031 Some commenters indicated that they view in-kind redemptions as an 

important liquidity risk management tool.1032 Another commenter noted that ETFs are often used 

to help manage liquidity risk because they can allow funds to maintain market exposure while 

ensuring sufficient liquidity.1033 As noted in the Proposing Release, the staff has observed that 

some of the funds with relatively more thorough liquidity risk management practices have 

appeared to be able to meet periods of high redemptions without significantly altering the risk 

profile of the fund or materially affecting the fund’s performance, and thus with few dilutive 

impacts. It therefore appears that these funds have generally aligned their portfolio liquidity with 

 

adoption of rule 22e-4).

1031 See also, e.g., Nuveen FSOC Notice Comment Letter, supra footnote 85 (discussing stress tests of a fund’s 

ability to meet redemptions over certain periods); BlackRock FSOC Notice Comment Letter, supra 

footnote 85 (discussing several overarching principles that provide the foundation for a prudent market 

liquidity risk management framework for collective investment vehicles, including an independent risk 

management function, compliance checks to ensure portfolio holdings do not exceed regulatory limits, a 

risk management function that is independent from portfolio management, and measuring levels of liquid 

assets into “tiers of liquidity”); Invesco FSOC Notice Comment Letter, supra footnote 248, at 11 

(discussing liquidity analysis).

1032 See BlackRock Comment Letter; Invesco Comment Letter.

1033 See BlackRock Comment Letter.
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their liquidity needs, and that their liquidity risk management permits them to efficiently meet 

redemption requests. Other funds, however, employ portfolio investment liquidity assessment 

and liquidity risk management practices that are substantially less rigorous.1034 As discussed 

above in section II.D.3, some funds do not take different market conditions into account when 

evaluating portfolio investment liquidity, and do not conduct ongoing liquidity monitoring. 

Likewise, some funds do not have independent oversight of their liquidity risk management 

outside of the portfolio management process. As a result, funds’ procedures for assessing the 

liquidity of their portfolio securities, as well as the comprehensiveness and independence of their 

liquidity risk management, vary significantly.

A fund may meet redemption requests in a variety of ways, including by using cash,

borrowing under a line of credit, or by selling portfolio investments. The fund’s portfolio 

liquidity as well as its value will be affected by the choice of which investments are sold. 

Subsequent portfolio transactions after redemptions are met will also affect portfolio liquidity

and value. For example, a fund facing a large redemption request might lessen the impact on 

portfolio value of selling investments by selling the most liquid portion of the portfolio or using 

some of its cash or a line of credit.

1035 That choice benefits non-redeeming investors by 

minimizing transaction costs and the loss in fund value due to the price impact of selling, but it 

also could increase the liquidity risk of the fund portfolio and the fund may incur transaction 

costs if it subsequently engages in portfolio transactions such as rebalancing towards its previous 

 1034 See infra section IV.C.1.b, where the potential consequences of less rigorous liquidity risk management are 

discussed in the context of risk management program benefits.

1035 We note that in some instances, selling only the most liquid investments to meet a large redemption could 

be inconsistent with the fund’s investment mandate. For example, if a fund’s investment mandate required 

it to hold a certain percentage of its portfolio in equities, the fund might not be able to sell a large portion of 

its equity holdings to meet redemption requests and still hold the required percentage of its portfolio in 

equities.
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portfolio allocation.

1036 If the fund instead were to sell a “strip” of the portfolio (i.e., a crosssection or representative selection of the fund’s portfolio investments), the immediate impact on 

fund value may be greater, but the liquidity of the fund portfolio would be unchanged as a result 

of the sale. Funds also could choose to meet redemptions by selling a range of investments in 

between their most liquid, on one end of the spectrum, and a perfect pro rata strip of 

investments, on the other end of the spectrum.1037 All of the above ways by which a fund may 

meet redemptions potentially occur in conjunction with other strategic portfolio management 

decisions, such as opportunistically paring back or eliminating holdings in a particular 

investment or sector while meeting redemptions.

Staff analysis of the impact of large redemptions on U.S. equity fund portfolio liquidity is 

consistent with the hypothesis that the average U.S. equity fund does not sell a strip of its 

portfolio investments to meet large redemptions, but instead appears—based on changes in 

funds’ portfolio liquidity following net outflows—to disproportionately sell the more liquid 

portion of its portfolio for this purpose.

1038 Similarly, staff analysis shows that after a U.S. 

municipal bond fund encounters net outflows, the typical U.S. municipal bond fund will 

experience an increase in its holdings of municipal bonds (and a decrease in its holdings of cash 

 1036 See, e.g., supra footnote 71 (discussing recent circumstances in which, during a year of heavy redemptions 

that caused a high yield bond fund’s assets to shrink 33% in this period, the fund’s holdings of lower 

quality bonds grew to 47% of assets, from 35% before the redemptions).

1037 See, e.g., Hao Jiang, Dan Li, and Ashley Wang, Dynamic Liquidity Management by Corporate Bond 

Mutual Funds (May 6, 2016) (unpublished working paper), available at 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2776829. The study presents preliminary evidence 

consistent with the notion that corporate bond funds tend to sell proportional “strips” of their portfolios 

during periods of high market volatility and disproportionately sell more liquid assets during periods of 

lower market volatility.

1038 DERA Study, supra footnote 95, at 43-46. The DERA Study analyzes U.S. equity mutual fund liquidity 

management trends using the Amihud liquidity measure. See Proposing Release, supra footnote 9, at 

n.621. We respond to comments on this result and other aspects of the DERA study in section IV.C.1.f.
321

and cash equivalents), potentially decreasing the fund’s overall portfolio liquidity.1039

b. Funds’ Current Liquidity Risk Disclosure Requirements and Practices

Items 4 and 9 of Form N-1A require a fund to disclose the principal risks of investing in 

the fund.

1040 A fund currently must disclose the risks to which the fund’s portfolio as a whole is 

expected to be subject and the circumstances reasonably likely to adversely affect the fund’s 

NAV, yield, or total return.

1041 Some funds currently disclose that liquidity risk is a principal risk 

of investing in the fund, but often do so in a generic way.

Item 11 of Form N-1A requires a fund to describe its procedure for redeeming fund 

shares, including restrictions on redemptions, any redemption charges, and whether the fund has 

reserved the right to redeem in kind.

1042 Disclosure regarding other redemption information, such 

as the timing of payment of redemption proceeds to fund shareholders, varies across funds as 

there are currently no specific requirements for this disclosure. Some funds disclose that they 

will redeem shares within a specific number of days after receiving a redemption request, other 

funds disclose that they will honor such requests within seven days (as required by section 22(e) 

of the Act), and others provide no specific time periods. Additionally, some funds disclose 

differences in the timing of payment of redemption proceeds based on the payment method by

which the fund shares are redeemed, while others do not.

Funds are not currently required to disclose information about the liquidity of their 

portfolio investments. However, some funds voluntarily disclose in their registration statements 

any specific limitations applicable to the fund’s investment in 15% guideline assets, as well as 

 1039 DERA Study, supra footnote 95, at 47-49.

1040 Item 4(b)(1)(i) and Item 9(c) of Form N-1A.

1041 Id.

1042 Item 11(c) of Form N-1A.
322

types of assets considered by the fund to be subject to the 15% guideline.

Form N-1A does not currently require funds to disclose information about liquidity risk 

management practices such as the establishment (or use) of committed back-up lines of credit. A 

fund is, however, required to disclose information regarding the amount and terms of unused 

lines of credit for short-term financing, as well as information regarding related party 

transactions in its financial statements or notes thereto.1043 

2. Fund Industry Developments Regarding Funds’ Liquidity Risk Management

a. Overview

Below we discuss the size and growth of the U.S. fund industry generally, as well as the 

growth of various investment strategies within the industry. We show that the fund industry has 

grown significantly in the past two decades, and during this period, funds with international 

strategies, fixed income funds, and funds with alternative strategies have grown particularly 

quickly. We also determine the types of funds that demonstrate notably volatile and 

unpredictable flows. Because volatility and predictability in a fund’s flows can affect the extent 

to which the fund is able to meet expected and reasonably foreseeable redemption requests 

without diluting the interests of fund shareholders, assessing trends regarding these factors can 

provide information about sectors of the fund industry that could be particularly susceptible to 

liquidity risk.

While we believe that these trends are relevant from the perspective of addressing 

potential liquidity risk in the fund industry (and in funds’ underlying portfolio investments), we 

emphasize that liquidity risk is not confined to certain types of funds or investment strategies. 

Although we recognize that certain fund characteristics could make a fund relatively more prone 

 1043 See 210.5-02.19(b) and 210.4-08(k) of Regulation S-X.
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to liquidity risk, we believe that all types of funds entail liquidity risk to some extent.1044 Thus, 

while in this section we discuss certain types of funds and strategies that are generally considered 

to exhibit increased liquidity risk, we are not asserting that only these types of funds and 

strategies involve liquidity risk, or that a fund of the type and with the strategy discussed below 

necessarily demonstrates greater liquidity risk than a fund that does not have these same 

characteristics.

b. Size and Growth of the U.S. Fund Industry and Various Investment Strategies Within the 

Industry

Open-end funds and ETFs manage a significant and growing amount of assets in U.S. 

financial markets. As of the end of 2015, there were 10,633 open-end funds (excluding money 

market funds, but including ETFs), as compared to 5,279 at the end of 1996.1045 The assets of 

these funds were approximately $15.0 trillion in 2015, having grown from about $2.63 trillion in 

1996.1046 Within these figures, the number of ETFs and ETFs’ assets have increased notably in 

the past decade. There were 1,594 ETFs in 2015, as opposed to a mere 119 in 2003, and ETFs’ 

assets have increased from $151 billion in 2003 to $2.1 trillion in 2015.1047

U.S. equity funds represent the greatest percentage of U.S. open-end fund industry 

assets.1048 Open-end U.S. equity funds, excluding ETFs, money market funds and variable 

annuities, held 44.7% of U.S. fund industry assets as of the end of 2015. The investment 

strategies with the next-highest percentages of U.S. fund industry assets are foreign equity funds 

 1044 See supra section III.A.2.

1045 See 2016 ICI Fact Book, supra footnote 11, at 22, 176, 183. Specifically, as of the end of 2015, there were 

9,039 open-end mutual funds (including funds that invest in other funds) and 1,594 ETFs. There were 

approximately 50 ETFs that invest in other ETFs, which are not included in our figures.

1046 See 2016 ICI Fact Book, supra footnote 11, at 174, 182.

1047 See 2016 ICI Fact Book, supra footnote 11, at 182, 183.

1048 DERA Study, supra footnote 95, at Table 1.
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(16.7%), general bond funds (13.2%), and mixed strategy funds (12.3%).1049 Funds with 

alternative strategies1050 only represent a small percentage of the U.S. fund industry assets, but as 

discussed below, the number of alternative strategy funds and the assets of this sector have 

grown considerably in recent years.1051

While the overall growth rate of funds’ assets has been generally high (about 7.2% per 

year, between the years 2000 and 20151052), it has varied significantly by investment strategy.1053 

U.S. equity funds’ assets grew substantially in terms of dollars from the end of 2000 to 2015,1054

but this sector’s assets as a percentage of total U.S. fund industry assets decreased from about 

65% to about 45% during that same period.1055 Like U.S. equity funds, the assets of U.S. 

corporate bond funds, government bond funds, and municipal bond funds also increased in terms 

of dollars from 2000 to 2015, but each of these sectors’ assets as a percentage of the fund 

industry decreased during this period.1056 On the other hand, the assets of foreign equity funds, 

 1049 Id. The figure for general bond funds does not include assets attributable to foreign bond funds (1.9%), 

U.S. corporate bond funds (0.8%), U.S. government bond funds (1.4%), and U.S. municipal bond funds 

(4.7%). The figure for mixed strategy funds includes assets of, among others, target date funds, convertible 

securities funds, and flexible portfolio funds. 

1050 Alternative funds are funds that seek total returns through the use of alternative investment strategies, 

including but not limited to equity market neutral, long/short equity, global macro, event driven, credit 

focus strategies.

1051 DERA Study, supra footnote 95, at 7-8.

1052 DERA Study, supra footnote 95, at Table 2.

1053 The figures in this paragraph and the following paragraph, discussing the variance in growth rate of funds’ 

assets by investment strategy, exclude ETF assets. 

1054 U.S. equity funds held about $5.6 trillion as the end of 2015, compared to about $2.9 trillion at the end of 

2000. DERA Study, supra footnote 95, at Table 2.

1055 DERA Study, supra footnote 95, at Table 2.

1056 Id. U.S. corporate bond funds held about $95 billion at the end of 2015, as opposed to $66 billion in 2000; 

these funds’ assets as a percentage of the U.S. fund industry decreased from 1.5% in 2000 to 0.8% in 2015. 

U.S. government bond funds held about $174 billion at the end of 2015, as opposed to $91 billion in 2000; 

these funds’ assets as a percentage of the U.S. fund industry decreased from 2.1% in 2000 to 1.4% in 2015. 

U.S. municipal bond funds held about $592 billion at the end of 2015, as opposed to $278 billion in 2000; 

these funds’ assets as a percentage of the U.S. fund industry decreased from 6.3% in 2000 to 4.7% in 2015.
325

general bond funds, and foreign bond funds increased steadily and substantially as a percentage 

of the fund industry over the same period.1057 For example, foreign equity funds increased 

steadily from 10.6% of total industry assets in 2000 to 16.7% in 2015. And within these three 

investment strategies, certain investment subclasses (emerging market debt and emerging market 

equity) have grown particularly quickly from 2000 to 2015.1058 The overall growth rate of funds’ 

assets between the years 2000 and 2015 was greater for index funds (12.3%) than actively 

managed funds (4.9%).1059

The assets of funds with alternative strategies1060 also have grown rapidly in recent years. 

From 2005 to 2015, the assets of alternative strategy funds grew from $366 million to $310 

billion, and from the end of 2011 to the end of 2013, the assets of alternative strategy funds grew 

by an average rate of almost 80% each year. However, as discussed above, funds with 

alternative strategies remain a relatively small portion of the U.S. fund industry as a percentage 

of total assets.1061

 1057 Id. Foreign equity funds held about $2.1 trillion in 2015, as opposed to $465 billion in 2000. U.S. general 

bond funds held about $1.7 trillion at the end of 2015, as opposed to $240 billion in 2000; these funds’ 

assets as a percentage of the U.S. fund industry increased from 5.4% in 2000 to 13.2% in 2015. Foreign 

bond funds held about $244 billion at the end of 2015, as opposed to $19 billion in 2000; these funds’ 

assets as a percentage of the U.S. fund industry increased from 0.4% in 2000 to 1.9% in 2015.

1058 DERA Study, supra footnote 95, at 9. Emerging market debt and emerging market equity funds held about 

$289 billion at the end of 2015, as opposed to $20 billion in 2000. The assets of emerging market debt 

funds and emerging market equity funds grew by an average of 18.1% and 19.8%, respectively, each year 

from 2000 through 2015. 

These investment subclasses represent a small portion of the U.S. mutual fund industry (the combined 

assets of these investment subclasses as a percentage of the U.S. fund industry was 2.3% at the end of 

2015).

1059 See 2016 ICI Fact Book, supra footnote 11, at 174, 218.

1060 See supra footnote 95 for a discussion of the primary investment strategies practiced by “alternative 

strategy” funds.

1061 See supra footnote 1051 and accompanying text.
326

c. Significance of Fund Industry Developments

The industry developments discussed above are notable for several reasons. The growth 

of funds generally over the past few decades demonstrates that investors have increasingly come 

to rely on investments in funds to meet their financial needs.1062 These trends also demonstrate 

growth in particular types of funds that may entail increased liquidity risk. In particular, there 

has been significant growth in high-yield bond funds, emerging market debt funds, and funds 

with alternative strategies. Commissioners and Commission staff have previously spoken about 

the need to focus on potential liquidity risks relating to fixed income assets and fixed income 

funds,1063 and within this sector, funds that invest in high-yield bonds could be subject to greater 

liquidity risk as they invest in lower-rated bonds that tend to be less liquid than investment grade 

fixed income securities.1064 Emerging market debt funds may invest in relatively illiquid 

securities with lengthy settlement periods.1065 Likewise, funds with alternative strategies may 

hold portfolio investments that are relatively illiquid.1066 Moreover, Commission staff 

 1062 See supra footnote 21 and accompanying text.

1063 See supra footnote 93 and accompanying text.

1064 The Commission and Commission staff have cautioned that high yield securities may be considered to be 

illiquid, depending on the facts and circumstances. See Interval Fund Proposing Release, supra footnote

41; see also SEC Investor Bulletin, What Are High-Yield Corporate Bonds?, SEC Pub. No. 150 (June 

2013), available at http://www.sec.gov/investor/alerts/ib_high-yield.pdf (noting that high-yield bonds may 

be subject to more liquidity risk than, for example, investment-grade bonds). But see Who Owns the 

Assets?, supra footnote 378 (discussing the liquidity characteristics of high-yield bond funds in depth, and 

noting that these funds have weathered multiple market environments, and are generally managed with 

multiple sources of liquidity).

1065 See, e.g., supra footnote 377 and accompanying text (discussing the settlement cycles associated with 

transactions in certain foreign securities); see also Reuters, Fitch: Close Look at EM Corporate Bond 

Trading Reveals Liquidity Risks (Apr. 16, 2015), available at

http://www.reuters.com/article/2015/04/16/idUSFit91829620150416. But see Who Owns the Assets?, 

supra footnote 378 (discussing the liquidity characteristics of emerging market debt funds in depth, and 

noting that these funds tend to hold a portion of their assets in developed market government bonds 

(providing further liquidity), generally establish limits on less liquid issuers, and generally maintain 

allocations to cash for liquidity and rebalancing purposes). 

1066 See supra footnotes 99-100 and accompanying text.
327

economists have found that both foreign bond funds (including emerging market debt funds) and 

alternative strategy funds have historically experienced relatively more volatile and 

unpredictable flows than the average mutual fund,1067 which could increase these funds’ liquidity 

risks by making it more likely that a fund may need to sell portfolio investments in a manner that 

creates a market impact in order to pay redeeming shareholders.

One commenter has argued that flow volatility, which staff economists have used as a 

measure of liquidity risk, does not necessarily translate into liquidity risk.1068 In this 

commenter’s view, for example, a fund with volatile but predictable flows may have less 

liquidity risk than a fund with less volatile but less predictable flows. Likewise, a U.S. equity 

fund could have much greater flow volatility than a foreign bond mutual fund without having 

greater liquidity risk because the equity fund’s assets are more liquid. However, differences in 

average flow volatility between fund categories persist after accounting for predictability, and 

the analysis suggests that changes in flow volatility may influence the management of fund 

liquidity.

1069 Flow volatility is not the sole determinant of liquidity risk for a fund, but it is an 

important determinant, which makes it useful in helping understand differences in potential 

liquidity risk within and between fund categories. 

The same commenter has also suggested that the same approach of measuring liquidity 

risk does not consider the usage of derivatives in managing volatile flows, noting that they are 

often more liquid than their underlying assets.

1070 We acknowledge that derivatives could play a 

role in managing fund flows. As is the case for corporate bond holding data, data on fund 

 1067 DERA Study, supra footnote 95, at 16-24.

1068 ICI Comment Letter II.

1069 DERA Study, supra footnote 95, at 23-24, 37.

1070 ICI Comment Letter II.
328

holdings of derivatives is limited so our analysis of holdings level data was necessarily limited to 

U.S. equity funds.

C. Benefits and Costs, and Effects on Efficiency, Competition, and Capital 

Formation

Taking into account the goals of the final liquidity regulations and the economic baseline, 

as discussed above, this section discusses the benefits and costs of the final liquidity regulations, 

as well as the potential effects of the final liquidity regulations on efficiency, competition, and 

capital formation. This section also discusses reasonable alternatives to rule 22e-4 and the 

disclosure and reporting requirements regarding funds’ liquidity risk and liquidity risk 

management. 

1. Rule 22e-4

a. Summary of Rule 22e-4’s Requirements

Rule 22e-4 will require each fund to establish a written liquidity risk management 

program. The rule specifies that a fund’s liquidity risk management program shall include the 

following required program elements: (i) assessment, management, and periodic review of the 

fund’s liquidity risk; (ii) classification of the liquidity of each of the fund’s portfolio investments 

based on asset class, so long as the fund or its adviser does not have information about any 

market, trading, or investment-specific considerations that are reasonably expected to 

significantly affect the liquidity characteristics of an investment that would suggest a different 

classification for that investment;1071 (iii) determining and periodically reviewing a highly liquid 

investment minimum and adopting and implementing policies and procedures for responding to a 

shortfall of the fund’s assets that are highly liquid investments below its highly liquid investment 

 1071 Rule 22e-4 (b)(1)(ii)
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minimum; (iv) prohibiting the fund’s acquisition of “illiquid investments” (that is, any 

investment that the fund reasonably expects cannot be sold or disposed of in current market 

conditions in seven calendar days or less without the sale or disposition significantly changing

the market value of the investment) if, following the acquisition, the fund would hold more than 

15% of its net assets in assets that are illiquid investments; (v) requiring a fund whose illiquid 

investments that are assets exceed 15% of its net assets to conduct certain board reporting; and 

(vi) for funds that engage in, or reserve the right to engage in, redemptions in kind, establishing 

policies and procedures regarding how and when it will engage in such redemptions in kind.1072 

A fund’s board, including a majority of the fund’s independent directors, will be required to 

provide general oversight of the fund’s liquidity risk management program, but the board would 

not have to approve the fund’s highly liquid investment minimum.1073 The fund will be required 

to designate the fund’s adviser or officer(s) responsible for administering the program, and such 

designation is required to be approved by the fund’s board of directors.1074 The fund’s board will 

also be required to review, at least annually, a written report prepared by the fund’s investment 

adviser or officer(s) administering the liquidity risk management program reviewing the 

adequacy and effectiveness of the implementation of the fund’s liquidity risk management 

program, including the fund’s highly liquid investment minimum, and the effectiveness of its 

implementation.1075

Rule 22e-4 also includes certain recordkeeping requirements. A fund will be required to 

keep a written copy of its liquidity risk management policies and procedures, as well as copies of 

 1072 Proposed rule 22e-4(b)(2)(iv).

1073 Proposed rule 22e-4(b)(3)(i).

1074 Proposed rule 22e-4(b)(3)(iii).

1075 Rule 22e-4(b)(3)(ii).
330

any materials provided to the fund’s board in connection with the approval of the initial liquidity 

risk management program and annual board reporting requirement.1076 A fund will also be 

required to keep a written record of how its highly liquid investment minimum, and any 

adjustments thereto, were determined.1077

In addition, two types of funds are subject to tailored requirements by the final rule. 

First, funds that primarily hold highly liquid assets do not have to establish a highly liquid 

investment minimum as part of their liquidity risk management programs.1078 Second, ETFs are 

required to assess and manage liquidity risk with respect to certain additional factors tailored to 

the specific risks of ETFs. 1079 However, an ETF that meets the final rule’s definition of an “InKind ETF” is not required to establish a highly liquid investment minimum or to classify its 

individual portfolio holdings.1080

In addition to the special treatment of In-Kind ETFs and primarily highly liquid funds, 

the final rules differ from the proposed version in several ways that may have economic 

consequences: (1) it integrates the definition of illiquid investments subject to the 15% illiquid 

investment limit as a part of the portfolio classification process, requiring the consideration of 

market, trading, and investment-specific factors and market depth in determining whether an 

investment is illiquid, as well as the periodic review of this assessment at least monthly; (2) it 

reduces the number of categories used to classify portfolio investment liquidity from six to four 

and requires fewer long-term liquidity projections; (3) it simplifies portfolio position 

 1076 Rule 22e-4(c)(1) and (2).

1077 Rule 22e-4(c)(3).

1078 Rule 22e-4(b)(1)(iii)(A).

1079 Rule 22e-4(b)(1)(iii)(D)-(E).

1080 See infra footnote 846 and accompanying text for the definition of “In-Kind ETF.”
331

classification by allowing them to be based on asset classes, with customized exceptions for 

individual positions where necessary;1081 (4) it does not prohibit the acquisition of less liquid 

investments if a fund goes below its highly liquid investment minimum, but instead requires that 

a fund report to its board if it goes below its highly liquid investment minimum, and, if the 

shortfall lasts more than 7 consecutive calendar days, also requires reporting to the Commission; 

(5) it requires that a fund’s board approve and annually review a report concerning its liquidity 

risk management program, but generally does not require the board to approve the highly liquid 

investment minimum (except in some circumstances) or material changes to these programs; (6) 

it requires that a fund assess its liquidity risk with respect to several factors, where applicable, in 

both stressed and normal market conditions, whether its strategy is appropriate for an open-ended 

fund, and whether its strategy involves a concentrated portfolio or large positions in particular 

issuers;1082 (7) it requires that principal underwriters or depositors of UITs to determine, on or 

before the date of the initial deposit of portfolio securities into a UIT, that the portion of the 

illiquid investments that the UIT holds or will hold at the date of deposit that are assets is 

consistent with the redeemable nature of the securities that it issues; and (8) requires that In-Kind 

ETFs offer daily transparency by posting on the ETF’s website on each day that the national 

securities exchange on which the fund’s shares are listed is open for business, before 

commencement of trading of fund shares on the exchange, the identities and quantities of the 

securities, assets or other positions held by the fund, or its respective master fund, that will form 

the basis for the fund’s calculation of net asset value at the end of the business day.

 1081 See supra footnote 408 and accompanying text. 

1082 Rule 22e-4(b)(1)(iii)(A)-(C).
332

b. Benefits

Rule 22e-4, as adopted, should produce the same broad benefits for current and potential 

fund investors as discussed in the proposal. Where appropriate, we discuss below any changes in 

these benefits due to differences between the proposed and final rules. Specifically, the liquidity 

risk management program requirements are likely to improve investor protection by decreasing 

the chance that some funds may be unable to meet their redemption obligations, would meet such 

obligations by diluting the fund’s shares, or would meet such obligations through methods that 

would have other adverse impacts on non-redeeming investors (e.g., increased risk exposure and 

decreased liquidity). To the extent that some funds do not currently meet the liquidity risk 

management standards required by the rule—either by meeting the rule’s minimum baseline 

requirements for fund assessment and management of liquidity risk or via alternative liquidity 

risk management approaches—investor protection will be enhanced by imposing these minimum 

requirements on funds.

We believe that the liquidity risk management program requirement should promote 

improved alignment of the liquidity of the fund’s portfolio with the fund’s expected (and 

reasonably foreseeable) levels of redemptions. As discussed above, rule 22e-4 will require each 

fund to classify the liquidity of its portfolio investments in assessing its liquidity risk, and to 

determine a highly liquid investment minimum to increase the likelihood that the fund will hold 

adequate liquid investments to meet redemption requests without significant dilution. Each fund 

will have flexibility to determine the particular investments that it holds in connection with its 

highly liquid investment minimum. Assets eligible for inclusion in a fund’s highly liquid 

investment minimum could include a broad variety of securities, as well as cash and cash 

equivalents. While one fund may conclude that it is appropriate to hold a significant portion of 
333

its assets that are highly liquid investments in cash and cash equivalents, another could decide it 

is appropriate to hold assets that are convertible to cash within longer periods (but not exceeding 

three business days) as the majority of its highly liquid investments. The highly liquid 

investment minimum requirement should allow funds to continue to meet a wide variety of 

investors’ investment needs by obliging funds to maintain appropriate liquidity in their 

portfolios. The proposed rule would have required funds to set a firm three-day liquid asset 

minimum, prohibiting the acquisition of relatively less liquid assets until a fund was back above 

its minimum, instead of allowing them to operate below the minimum with board notification, so 

the final rule should mitigate any unfavorable market effects related to the systematic purchase 

or sale of investments once a strict minimum was exceeded. In extreme cases—for example, if 

investments that the fund sought to purchase were trading at fire sale prices due to a market 

event—a fund could go below its minimum to trade opportunistically. However, that might 

cause the fund to operate below its highly liquid investment minimum for more than 7 

consecutive calendar days, requiring reporting to the fund’s board and the Commission within 

one business day, so funds may be hesitant to take advantage of attractive market prices when 

they are close to their minimum under the final rule. The ability to deviate from the minimum 

for up to 7 consecutive calendar days with required reporting at the next regular board meeting, 

or for longer periods provided the fund reports to the board and the Commission, could also 

reduce the likelihood that funds set artificially low minimums, which would be less protective of 

investors than a minimum with some flexibility built in such as the one we are adopting. The 

limitation on the acquisition of assets that are illiquid investments to no more than 15% of net 

assets, along with the corresponding enhancements to how investment illiquidity is assessed, 

complements the highly liquid investment minimum requirement by increasing the likelihood 
334

that a fund’s portfolio is not overly concentrated in investments whose liquidity is limited. 

Furthermore, the additional board reporting requirements triggered when a fund’s illiquid 

investments that are assets exceed 15% of net assets decreases the likelihood that a fund’s 

portfolio is overly concentrated in investments classified as illiquid for an extended period of 

time without board oversight.

We believe that the rule also will decrease the probability that a fund will need to meet 

redemption requests through activities that can materially affect the fund’s NAV or risk profile 

or dilute the interests of fund shareholders. For example, when a fund is insufficiently liquid or 

does not effectively manage liquidity and is faced with significant redemptions, or both, it may 

be forced to sell portfolio investments under unfavorable circumstances, which could create 

significant negative price pressure on those investments.1083 This, in turn, could disadvantage 

non-redeeming shareholders by decreasing the value of those shareholders’ interests in the 

fund.1084 Even if a fund were to sell the most liquid portion of its portfolio to meet redemption 

requests, which would minimize the loss in fund value due to the price impact of selling, these 

asset sales could decrease the liquidity of the fund portfolio, potentially creating increased 

liquidity risk for non-redeeming shareholders. As discussed above, staff analysis is consistent 

with the hypothesis that U.S. equity funds may disproportionally sell more liquid assets, 

especially when facing significant outflows, as opposed to selling a pro rata “strip” of the fund’s 

portfolio assets, which minimizes price impact on a fund in the short term, but ultimately 

decreases the liquidity of the fund’s portfolio.1085 Short-term borrowings by a fund to meet 

 1083 See Coval & Stafford, supra footnote 86 (discussing how mutual fund fire sales impact asset prices).

1084 While the impact of fire sales on asset prices may be short lived in some instances, Coval and Stafford 

show that the impact of fire sales can often take many months to dissipate. Id.

1085 See supra footnote 1038 and accompanying text. 
335

redemption requests could also disadvantage non-redeeming shareholders by leveraging the 

fund, which requires the fund to pay interest on the borrowed funds (although, in some instances, 

the costs of borrowing may be less than the costs of selling assets to meet redemptions) and 

magnifies any gains or losses to non-redeeming shareholders. Moreover, the costs of borrowing 

(that is, the costs associated with maintaining a committed line of credit, as well as interest 

expenses associated with drawing on a credit line) could be passed on to fund shareholders in the 

form of fund operating expenses, which adversely affect a fund’s NAV. To the extent that the 

program requirement results in liquidity risk assessment and management that enhance funds’ 

ability to meet redemption obligations, it will be less likely that a fund takes actions to pay 

redemptions that cause dilution or have other adverse impacts on non-redeeming shareholders.

The potential negative consequences of asset sales undertaken to pay fund redemptions 

could create early redemption incentives in times of liquidity stress, or a “first-mover 

advantage.”1086 For example, academic studies have suggested that an incentive exists for market 

participants to front-run trades conducted by a fund in response to significant changes in fund 

flows.1087 This suggests that sophisticated fund investors could anticipate that significant fund 

outflows could lead a fund to conduct trades that would disadvantage non-redeeming 

shareholders, which could create an incentive to redeem ahead of such trades. If investors’ 

redemptions are motivated by a first-mover advantage, this could lead to increasing levels of 

redemptions, and as the level of outflows from a fund increases, the incentive to redeem also 

 1086 See supra footnote 85 and accompanying text (discussing the possibility of a first-mover advantage with 

respect to the timing of shareholder redemption from funds, but also arguments that such a first-mover 

advantage does not exist in funds, as well as arguments that even if incentives to redeem ahead of other 

shareholders do exist, this does not necessarily imply that investors will in fact redeem en masse in times of 

market stress).

1087 See Coval & Stafford, supra footnote 86; Dyakov & Verbeek, supra footnote 86.
336

increases. Any negative effects on non-redeeming shareholders thus could be magnified by a 

first-mover advantage to the extent that this dynamic produces growing redemptions and 

decreasing portfolio liquidity. The first-mover advantage is more commonly discussed with 

respect to money market funds, especially institutional prime money market funds that operated 

under a fixed NAV prior to the 2014 reform (that will become effective October 14, 2016), but 

the incentives that have been argued to create the first-mover advantage among those funds could 

in theory exist (in possibly weaker form) among other open-end funds. We agree with 

commenters that the empirical support for the existence of a first-mover advantage is not 

conclusive and that the mutual fund industry has been able to successfully navigate periods of 

historical market stress.1088 While we understand that fund investors may not have historically 

been motivated to redeem on account of a perceived (or actual) first-mover advantage during 

previous periods of stress, we cannot predict how investors may behave in the future. To the 

extent that economic incentives exist to redeem fund shares prematurely, such redemptions could 

lead to investor dilution as discussed above, and the possibility of protecting against this 

potential dilution could be one benefit of rule 22e-4.

The program requirement aims to promote a minimum baseline for liquidity risk 

management in the fund industry. This should promote investor protection by elevating the 

overall quality of liquidity risk management across the fund industry, reducing the likelihood that 

funds will meet redemption obligations only through activities that could significantly dilute 

 1088 See, e.g., Comment Letter of Wellington Management Group LLP on the Notice Seeking Comment on 

Asset Management Products and Activities, Docket No. FSOC-2014-0001 (Mar. 25, 2015), at 4; ICI FSOC 

Notice Comment Letter, supra footnote 68, at 7; Nuveen FSOC Notice Comment Letter, supra footnote 85,

at 10; Dechert Comment Letter; Vanguard Comment Letter; Comment Letter of the Independent Trustees 

of Fidelity Fixed Income and Asset Allocation Funds (Jan. 13, 2016) (all arguing that evidence shows that 

fund shareholders’ redemptions are largely driven by other concerns rather than a theoretical first-mover 

advantage).
337

shareholders or adversely affect fund risk profiles. Shareholders in funds that already engage in 

strong liquidity risk management practices may be less likely to benefit from the program 

requirement, or may benefit less, than shareholders in funds that do not employ equally rigorous 

practices. We cannot quantify the total benefits to fund operations and investor protection that 

we discuss above, but to the extent that staff outreach has noted that some funds currently have 

no (or very limited) formal liquidity risk management programs in place, rule 22e-4 would 

enhance current liquidity risk management practices.

Finally, to the extent that the program requirement results in funds less frequently 

needing to sell portfolio investments in unfavorable market conditions in order to meet 

redemptions, the requirement also could lower potential spillover risks that funds could pose to 

the financial markets generally. If, as a result of the program requirement, a fund was prepared 

to meet redemption requests in other ways, the rule could decrease the risk that the fund might 

indirectly transmit stress to other market sectors and participants. The rule should help ensure 

that all funds, not just those with liquidity risk management practices currently in place, operate 

in a manner that lessens the chance of spillover risks. We are unable to quantify this potential 

benefit because we cannot predict the extent to which funds would enhance their current liquidity 

risk management practices as a result of rule 22e-4, or predict the precise circumstances that 

could entail negative spillover effects in light of less-comprehensive liquidity risk management 

by funds.1089

Commenters generally did not disagree with the benefits of the proposed rule, with any 

exceptions noted in the above discussion of rule 22e-4’s benefits. As discussed above, the final 

 1089 The ability of the Commission to perform such analysis is limited by difficulties in both gathering data 

about funds’ liquidity risk management practices and quantifying such data.
338

rule differs from the proposal in several key respects, but it largely preserves the proposed rule’s 

benefits. First, funds that primarily hold assets that are highly liquid investments are not 

required to establish a highly liquid investment minimum, so any benefits that might have 

accrued to shareholders of these funds under the proposed rule may be diminished. However, 

these funds are less likely to be exposed to the liquidity risks discussed above to the same degree 

as other funds, so any loss in benefits should be negligible and is likely to be less than the costs 

of establishing a minimum. Similarly, In-Kind ETFs are exempt from certain aspects of the final 

rule, because the benefits of those aspects of the final rule would have been insignificant for InKind ETFs. The final rule instead achieves benefits with respect to ETFs by replacing these lessapposite requirements with new tailored requirements for ETFs that are designed to promote the 

proper management of ETF liquidity, focused on preventing the arbitrage mechanism that keeps 

ETFs priced properly from being adversely impacted by a lack of liquidity. In addition, the new 

requirement for daily transparency will permit the sophisticated authorized participants that 

directly interact with the ETF to effectively evaluate the liquidity of the ETF’s holdings. Since 

nearly all In-Kind ETFs already provide daily transparency as a matter of course, we believe no 

additional costs arise for In-Kind ETFs.1090

Second, modifications to the proposal allow funds to classify portfolio investments via 

assignments to asset classes as a default, but require them to classify specific investments 

separately if they merit special attention,1091 which preserves the benefits of investment liquidity 

 1090 We note that ETMFs are not required to provide such daily transparency under their orders, and thus would 

need to choose to provide such daily transparency if they wished to take advantage if this provision. 

Choosing to take advantage of this provision is within the discretion of ETFs that could potentially qualify 

as In-Kind. As discussed in the PRA section below, we estimate that not all ETFs would qualify as In-kind, 

either because of their use of cash for redemptions or because of their choice not to provide daily 

transparency of holdings. 

1091 See supra footnote 1064 and accompanying text.
339

classification without imposing the additional cost of individually classifying each portfolio 

position in all cases. Third, the rule’s simplification of classification categories from six to four, 

with shorter-term horizons, still provides a reasonably nuanced view of a fund portfolio’s 

position-level liquidity while responding to commenters’ concerns that the proposed rule’s more 

detailed classification would have required too much precision at long-term horizons and would 

not accurately reflect a fund’s actual liquidity profile. Fourth, the final rule should preserve the 

benefits of board oversight of a fund’s liquidity risk management program without requiring that 

board members approve the highly liquid investment minimum (except in certain circumstances). 

The modifications to the board’s role make the board’s involvement in the liquidity risk 

management more consistent with the board’s historical duty to provide oversight (instead of 

day-to-day management). 

Changes to the final rule could also provide additional benefits relative to the proposal. 

While the final rule clarifies that the factors a fund should consider in devising a liquidity risk 

management program may be considered as appropriate, it also requires that funds consider two 

additional factors—whether a given strategy is appropriate in an open-ended fund or involves a 

concentrated portfolio or concentrated positions in particular issuers—which could improve the 

risk management program’s effectiveness for funds that do not already consider these factors. 

The final rule also more precisely specifies criteria for both the initial and ongoing assessment of 

whether investments should be classified as illiquid under the 15% illiquid investment limit by 

tying it to the same criteria used in assigning investments to other liquidity categories (including 

considering relevant market, trading, and investment-specific considerations, and market depth), 

which should reduce a firm’s compliance burdens relative to the proposed rule while at the same 

time providing a more precise picture of how exposed to illiquid investments a given fund is. 
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Finally, while UITs were not subject to rule 22e-4 under the proposal, the final rule requires that 

the principal underwriter or depositor of a UIT will be required to determine, on or before the 

date of the initial deposit of portfolio securities into the UIT, that the portion of illiquid 

investments the UIT holds or will hold at the date of deposit that are assets is consistent with the 

redeemable nature of the securities it issues. This enhancement of the final rule over the 

proposal could benefit investors by reducing the likelihood that a UIT could be created that holds 

an excessive amount of illiquid securities, which in turn would reduce the liquidity risk 

associated with UITs.

c. Costs

One-Time and Ongoing Costs Associated With Program Establishment and 

Implementation

Funds will incur one-time costs to establish and implement a liquidity risk management 

program in compliance with rule 22e-4, as well as ongoing program-related costs. As discussed 

above, funds today employ a range of different practices, with varying levels of quality, for 

assessing the liquidity of their portfolio investments and managing fund liquidity risk. 

Accordingly, funds whose practices regarding portfolio investment liquidity classification and 

liquidity risk assessment and management most closely align with the liquidity risk management 

program requirements would incur relatively lower costs to comply with rule 22e-4. Funds 

whose practices for classifying the liquidity of their portfolio investments and for assessing and 

managing liquidity risk are less thorough or not closely aligned with the rule, on the other hand, 

may incur relatively higher initial compliance costs.

Some commenters suggested that the estimates of costs in the rule proposal were 

significantly understated and that the true costs of compliance with the rule requirements would 
341

likely exceed the expected benefits.1092 Another commenter suggested that costs were 

underestimated because other fund systems would also have to be modified to ensure compliance 

with the entirety of the requirements of the rule.1093 For example, if funds are required to 

maintain or target a certain level of fund liquidity, then the trade order management system 

would have to be modified to ensure accurate monitoring of such limitations. We have revised 

the discussion of costs to both reflect new information on the potential costs of compliance and 

changes in the rule that are designed to lessen the potential costs. Specifically, we use estimates 

provided by commenters to approximate costs for each fund complex under the proposed rule 

and then qualitatively discuss how changes to the proposed rule affect these estimates. Because 

most changes to the final rule reduce requirements for some segment of funds relative to the 

proposal, the estimates below can generally be considered an upper bound on fund costs except 

where explicitly noted.

Staff estimates of the one-time costs in the proposal, which ranged from $1.3 million to 

$2.25 million per fund complex, were partly based on estimates from another Commission 

rulemaking.1094 Some commenters expressed concern about the calculation of this estimate 

because it was based on assumptions driven by analysis performed with respect to money market 

fund reform.1095 While some of the large scale system modifications required by rule 22e-4 will 

be similar to those required for money market funds due to regulatory reform, and we attempted 

 1092 See CFA Comment Letter; Cohen & Steers Comment Letter; Dechert Comment Letter; Dodge & Cox 

Comment Letter; Federated Comment Letter; FSR Comment Letter; ICI Comment Letter I; Invesco 

Comment Letter; LSTA Comment Letter; MFDF Comment Letter; SIFMA Comment Letter I; T. Rowe 

Comment Letter; Vanguard Comment Letter; Voya Comment Letter.

1093 See Federated Comment Letter.

1094 See Proposing Release, supra footnote 9, at n.702 and accompanying text.

1095 See FSR Comment Letter; SIFMA Comment Letter I.
342

to adjust our estimates for differences between the two rules, one commenter suggested that the 

process of classifying portfolio assets was more akin to a fund’s costs in analyzing the value of 

its assets.1096 We acknowledge that could be an informative approach to estimating costs, but 

absent concrete estimates associated with that approach, which the commenter did not provide, 

we have updated our estimates based on the limited quantitative information available from 

commenters.1097 One commenter estimated that there would be $2 million in initial 

implementation costs and more than $650,000 in annual recurring costs for automating a

classification process that would have to manage 63,000 different portfolio positions.

1098 

Another commenter estimated the costs of building a system to classify the liquidity of its 

investments, which is not currently commercially available, in the millions of dollars to manage 

their 44,000 different portfolio positions.

1099 We use the former as a basis for our analysis 

because it is comparable in magnitude to the latter.1100 Because there are likely to be economies 

of scale in developing the policies, procedures, and systems required to comply with rule 22e-4, 

we approximate the cost per fund complex by assuming fixed costs constitute 30% of the 

commenter’s estimates, and extrapolate using the number of funds per complex to scale variable 

 1096 See Dechert Comment Letter.

1097 As in the proposal, the estimates assume that each fund would not bear all of the costs (particularly, the 

costs of systems modification) on an individual basis, but instead that these costs would likely be allocated 

among the multiple users of the systems, that is, each of the members of a fund complex. Accordingly, we 

expect that, in general, funds within large fund complexes would incur fewer costs on a per fund basis than 

funds within smaller fund complexes, due to economies of scale in allocating costs among a group of users.

1098 See Invesco Comment Letter.

1099 See T. Rowe Comment Letter.

1100 We estimate that there were 146 funds in the second commenter’s fund complex as of December 31, 2015, 

which implies an estimated cost of approximately $4 million using our estimation procedure, in line with 

the commenter’s statement that its cost would be “in the millions.” See supra footnote 1094 for discussion 

of the estimation procedure.
343

costs up or down.1101 In addition, because the process of classifying assets under the proposal 

would likely constitute a majority of a fund’s costs, we assume the classification process 

constitutes approximately 75% of a fund’s cost of complying with proposed rule 22e-4. This 

method results in one-time costs for funds under the proposed rule that range from approximately 

$0.8 million to $10.2 million, that the average cost per fund complex is $1 million, and the 

aggregate cost is approximately $855 million. The estimated range of costs using this approach 

is wider than our approach in the proposal, but the estimated aggregate cost is lower than our 

initial estimate of $1.3 billion. While these estimates would change if we varied our assumption 

that fixed costs comprise 30% of the commenter’s estimate—for example, increasing this 

percentage would compress the range of costs and the aggregate may increase or decrease—they 

are of the same order of magnitude as our estimates in the proposal.

These estimated one-time costs are attributable to the following activities, as applicable 

to each of the funds within the complex: (i) developing policies and procedures relating to each 

of the required program elements,1102 and the related recordkeeping requirements of the rule; (ii) 

 1101 We use CRSP U.S. Mutual Fund Database to obtain the number of funds for each complex. As of 

December 31, 2015, there were 7551 mutual funds (excluding money market funds and annuities), 1484 

ETFs (excluding non-40-act ETFs, ETNs, and Commodity ETFs), and 847 fund complexes (334 of them 

with only one fund). The commenter, Invesco, consisted of 87 funds as of that date, and we assume the 

fixed cost component of their estimate is $0.6 million (30% of $2 million). The remaining $1.4 million is 

assumed to be a variable cost that scales linearly with the number of funds. To arrive at a total cost of 22e4, each of these estimates is scaled so that the classification process constitutes 75% of the total costs of 

proposed rule 22e-4.

1102 Specifically, a fund would be required, where applicable, to establish policies and procedures relating to: (i) 

assessment, management, and periodic review of the fund’s liquidity risk; (ii) classification of the liquidity 

of each of the fund’s portfolio investments, as well as at-least-monthly reviews of the fund’s liquidity 

classifications; (iii) the requirements to determine and periodically review a highly liquid investment 

minimum, and to adopt and implement policies and procedures for responding to a shortfall of the fund’s 

highly liquid investments below its highly liquid investment minimum; (iv) the requirement to limit the 

fund’s acquisition of illiquid investments over 15% of the fund’s net assets; and (v) for funds that engage 

in, or reserve the right to engage in, redemptions in kind, the requirement to establish policies and 

procedures regarding how it will engage in such redemptions in kind. The final rule also provides for a 

tailored program for ETFs that redeem in kind, excluding them from the classification and highly liquid 

investment minimum requirements, but requiring them to consider additional factors as part of their 
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planning, coding, testing, and installing any system modifications relating to each of the required 

program elements; (iii) integrating and implementing policies and procedures relating to each of 

the required program elements (including classifying the liquidity of each of the fund’s portfolio 

investments pursuant to rule 22e-4(b)(1)(ii)), as well as the recordkeeping requirements of the 

rule; (iv) preparing training materials and administering training sessions for staff in affected 

areas; and (v) costs associated with educating the fund’s board and obtaining approval of the 

program. These activities are likely to cut across many different functional groups within a fund 

or fund complex, including legal, compliance, risk, portfolio management, accounting, and 

technology staff. To the extent that some of the systems needed to support the required program 

elements are developed by third parties, fund complexes may be able to implement their liquidity 

risk management programs for less than our estimated cost of developing these programs 

themselves, but the final rule emphasizes that it is ultimately each fund’s responsibility to 

classify its positions, so these potential cost reductions may be limited. For example, we 

understand that third parties have already developed programs that include certain market, 

trading, and investment-specific factors which could be useful in classifying the liquidity of 

portfolio investments, and are currently available for purchase.1103

We have also revised our estimates of the ongoing costs of complying with rule 22e-4 

using the same approach and based on the same commenter’s estimate as above for one-time 

 liquidity risk assessment and management that reflect potential liquidity-related concerns that could arise 

from the structure and operation of ETFs. The final rule also provides an exclusion from the highly-liquid 

investment minimum requirement for funds that primarily hold highly liquid investments. The rule also 

provides for board oversight of the liquidity risk management program.

1103 See supra footnote 323 and accompanying text (discussing Commission guidance on a fund’s use of 

third-party service providers to obtain data to inform or supplement its consideration of the liquidity 

classification factors). We understand, based on staff outreach, that annual costs to subscribe to the 

liquidity classification services provided by third-party data and analytics providers currently range from 

$50,000 - $500,000.
345

costs. While our analysis in the proposal assumed ongoing costs ranged from 10% to 25% of the 

one-time costs resulting from the rule, we’ve reduced the low end of the range to 5% to reflect 

changes from the Proposing Release, discussed below, that should lower some funds’ 

compliance burdens, and increased the high end of the range to 32.5% to reflect the commenter’s 

estimate that ongoing costs for their fund under the proposed rule would be $0.65 million 

(compared to one-time costs of $2 million). We again extrapolate from the commenter’s 

estimate as above to arrive at a minimum and maximum cost estimate for each fund, which 

implies a range of ongoing costs across all funds of $40,000 to $3.3 million per fund complex. 

These costs are attributable to the following activities, as applicable to each of the funds within 

the complex: (i) classification of the liquidity of each of the fund’s portfolio investments, as well 

as at-least-monthly reviews of the fund’s liquidity classifications (rule 22e-4(b)(1)(ii)); (ii) 

periodic review of the fund’s liquidity risk (rule 22e-4(b)(1)(i)); (iii) periodic review of the 

adequacy of the fund’s highly liquid investment minimum (rule 22e-4(b)(1)(iii)(A)(2)); (iv) 

systems maintenance; (v) additional staff training; (vi) approval, annual review, and general 

oversight by the board of the fund’s liquidity risk management program (rule 22e-4(b)(2)); and 

(viii) recordkeeping relating to the fund’s liquidity risk management program (rule 

22e-4(b)(3)).1104 Relative to the proposed rule, the final rule reduces the responsibilities of a 

fund’s board, which is not required to approve the fund’s highly liquid investment minimum or 

material changes to the fund’s liquidity risk management program, which should reduce the 

board-related costs embedded in the above estimates of rule 22e-4’s one-time and ongoing costs.

 1104 As discussed in greater detail below, we anticipate that, depending on the personnel (and/or third-party 

service providers) involved in the activities associated with administering a liquidity risk management 

program, certain of the estimated ongoing costs associated with these activities could be borne by the fund, 

and others could be borne by the adviser.
346

The original classification scheme would have mandated significant micro-level analysis 

of instruments not currently conducted by fund advisers according to many commenters.1105 

Such an analysis would have required entirely new systems for many fund complexes and would 

have required funds to incur significant expenses (especially for smaller fund complexes).1106 

The new classification system lowers the potential costs of compliance with the liquidity 

classification requirement by (i) reducing the number of classification categories reduced from 

six to four, (ii) only requiring “days-to-cash” estimates out to 7 days, (iii) allowing funds to 

generally classify based on asset class (subject to an exception process), (iv) changing the 

process for considering position size to reduce complexity, and (v) simplifying the classification 

factors to be considered into a single requirement that funds consider market, trading, and 

investment-specific data when classifying an investment. As a whole, these changes should 

lower the potential costs of compliance with the classification requirement relative to the 

proposal estimates above without significantly reducing the potential benefits of the requirement.

Specifically with respect to position size, commenters argued that evaluating “days-tocash” was inherently biased against large funds and could lead to “plain vanilla” funds that 

generally invest in only highly-liquid securities (e.g., S&P 500 funds) being classified as highly 

illiquid if they manage a large amount of assets.1107 The rule now only requires a fund to 

determine whether trading varying portions of a position in a particular portfolio investment or 

asset class, in sizes that the fund reasonably anticipates trading, is reasonably expected to 

significantly affect its liquidity. This change should prevent large “plain vanilla” funds from 

 1105 See Credit Suisse Comment Letter; Dechert Comment Letter; Federated Comment Letter; Fidelity 

Comment Letter; Oppenheimer Comment Letter; SIFMA Comment Letter I; Wellington Comment Letter.

1106 See Dechert Comment Letter; ICI Comment Letter I; SIFMA Comment Letter I; T. Rowe Comment Letter.

1107 See Dodge & Cox Comment Letter; Oppenheimer Comment Letter; Vanguard Comment Letter; ICI 

Comment Letter I; ICI Comment Letter II; Invesco Comment Letter.
347

appearing to be very illiquid under the classification scheme while still maintaining the idea that 

position size is an important consideration in the evaluation of liquidity. Relative to the 

proposed rule, this should reduce the costs associated with determining how position size affects 

the number of days required to liquidate an investment and eliminate the cost of classifying 

separate portions of a position into separate liquidity buckets.

The classification process has also been revised in response to commenter concerns about 

the need to evaluate whether an investment can be sold for cash without materially affecting the 

security’s price, which investors could interpret as an indication that they can redeem out of 

funds at a known or protected NAV.1108 One commenter expressed concern that if investors were 

given estimates of liquidity that are speculative or stale, or both, which might fail to predict 

liquidity with accuracy during periods of market stress, then funds could be potentially subject to 

significant litigation costs.1109 The value impact component of the rule has been modified so that 

determinations of market impact can be based on a reasonable expectation that an investment can 

be converted to cash (or in some cases, sold or disposed of) without the conversion (or in some 

cases, sale or disposition) significantly changing the market value, rather than a price “that does 

not materially affect the value of that asset immediately prior to sale.” This modification in the 

definition should relieve funds of the need to develop precise security-by-security expectations 

of forward looking liquidity while still emphasizing the need to consider the potential market 

impact of buying or selling an investment, reducing compliance costs relative to the proposed 

rule.

Commenters also expressed concern about the use of third-party vendors in the process of 

 1108 See ICI Comment Letter II.

1109 See Dodge & Cox Comment Letter.
348

liquidity classification.1110 If only a few vendors were able to provide the necessary data, such 

data would likely cause significant expenses for the funds, and those expenses would likely be 

passed on, at least in part, to fund investors through higher fees. Another commenter suggested 

that the cost of third-party liquidity data should be included in any estimate of the potential costs 

of the classification system because of the strong likelihood that all funds would need to 

subscribe to a third-party vendor to ensure compliance with the rule.1111 As discussed in the 

proposal, we believe outsourcing program functions to vendors should, if anything, reduce 

compliance costs, and we noted that liquidity classification services already exist.1112 In addition, 

our updated estimate of costs above is based on a large investment manager’s estimate of 

constructing an internal system from scratch, so we would expect the cost of a vendor-based 

solution, which would be partially amortized across all of its clients, to be lower. The changes 

made to the classification system from the proposal could also lessen the costs associated with 

third-party vendors relative to the proposed rule. In particular, to the extent that requiring less 

precision via fewer classification categories and shorter time horizons, allowing funds to 

generally classify according to asset class (subject to an exception process), and requiring a 

simpler position size evaluation criterion reduce the scope and intensity of the investment 

classification process, funds may not rely as much on vendors to comply with the rule, and 

vendors themselves may experience reduced costs in developing programs, leading to lower 

prices if they pass on some of the savings to funds.

If all funds use a small number of third-party vendors, there could be other indirect, but 

 1110 See Dechert Comment Letter; Federated Comment Letter; ICI Comment Letter I; ICI Comment Letter II;

MFDF Comment Letter; Nuveen Comment Letter; SIFMA Comment Letter I; T. Rowe Comment Letter; 

Wells Fargo Comment Letter.

1111 See Interactive Data Comment Letter.

1112 See Proposing Release, supra footnote 9, at n.705 and accompanying text.
349

potentially large, costs. According to one commenter, the vendors could become de facto 

liquidity “rating agencies” and their “upgrades” and “downgrades” of asset liquidity could have 

systemic effects on the market.1113 For example, if a vendor were to remove a widely-held 

investment from the highly liquid investment category, then many funds could simultaneously 

attempt to sell that investment, which could harm both fund investors and the wider market. 

Given the data limitations and difficulties in estimating liquidity for many less liquid 

investments, that potential effect might be driven by error-prone modeling instead of true 

changes in liquidity. We emphasize above that while third-party products can serve as a useful 

input to the classification process, it is the fund’s responsibility to determine the liquidity of each 

investment, which should lessen the potential for systemic issues by reducing fund reliance on 

third-party vendors and allowing more of the necessary liquidity analysis to be performed within 

each fund complex.1114

Several additional components of the final rule will affect costs relative to the proposal. 

First, by excluding any fund that primarily holds assets that are highly liquid investments from 

the requirement to have a highly liquid investment minimum, the final rule avoids imposing any 

potential costs related to the minimum on some funds that would benefit less from having a 

minimum. It is possible that some funds that do not qualify as primarily highly liquid funds will 

incur the costs of establishing a minimum without a significant benefit. Second, whereas funds 

may currently use back-office operations to limit their acquisition of illiquid assets under exiting 

Commission guidelines, the final rule’s enhanced illiquid investment standard may require funds 

to incur direct costs associated with a shift of these operations to other business functions (we 

 1113 See ICI Comment Letter II.

1114 See supra section III.C.1.b. (providing guidance on the appropriate use of data vendors).
350

also discuss indirect costs associated with the enhanced illiquid investment limit below).1115 

Third, the final rule does not require In-Kind ETFs to establish a highly liquid investment 

minimum or classify the liquidity of their portfolios, which will reduce their costs relative to 

other funds, but it also requires them—as it does all ETFs—to consider several additional factors 

as part of their liquidity risk programs, which may increase their implementation costs. Finally, 

principal underwriters or depositors of UITs, which had no liquidity risk requirements under the 

proposed rule, will now have to incur a one-time cost on or before the date of the initial deposit 

of the portfolio securities into the UITs to assess whether the amount of illiquid investments they 

expect the UITs to hold is compatible with the redeemable nature of the securities they issue. 

This cost should be comparable in magnitude to incurring a fraction of the ongoing costs of an 

open-ended fund under rule 22e-4 because it involves an analysis that is similar to complying 

with the rule’s 15% illiquid investment limit without having to establish all of the systems and 

processes that are required to perform that task on a continuing basis. Assuming that this activity 

accounts for 20% of an open-ended fund’s ongoing costs, we estimate that it would cost a UIT 

$8,000 to $52,000, and note that it will only be incurred by UITs that are launched after the 

rule’s compliance date.1116 UITs are already required to consider which of their restricted 

securities are illiquid, so this estimate should be considered an upper bound on the costs imposed 

on UITs by the rule. Finally, the rule’s provision requiring board oversight when a fund’s 

holding of illiquid assets exceed 15% of its net assets may impose additional costs on the fund to 

 1115 See supra section III.C.4.a.

1116 These figures are based on the same comment letter used to estimate one-time and ongoing costs for openended funds. We assume the costs associated with launching a UIT under rule 22e-4 are equivalent to 20% 

of the ongoing costs of a one fund complex. Under the assumptions above that ongoing costs for openended funds are 5% to 32.5% of their initial costs, fund complexes with one fund have estimated ongoing 

costs of approximately $40,000 to $260,000. Multiplying that range by 20% produces the UIT estimate.
351

hold a special board meeting, including the cost of preparing materials for the board’s 

deliberation, the cost of board members’ time, as well as the cost of consultations with outside 

counsel.

Depending on the personnel (and/or third-party service providers) involved with respect 

to the activities associated with establishing and implementing a liquidity risk management 

program, certain of the estimated one-time costs could be borne by the fund, and others could be 

borne by the fund’s adviser or other service providers. This cost allocation would be dependent 

on the facts and circumstances of a particular fund’s liquidity risk management program, and 

thus we cannot specify the extent to which the estimated costs would typically be allocated to the 

fund as opposed to the adviser. Estimated costs that are allocated to the fund would likely be 

borne by fund shareholders in the form of fund operating expenses.

Certain elements of the program requirement may entail marked variability in related 

compliance costs, depending on a fund’s particular circumstances and sources of potential 

liquidity risk. The process of classifying the liquidity of each of a fund’s portfolio investments 

could give rise to varying costs depending on the fund’s particular investment strategy. For 

example, a U.S. large cap equity fund would likely incur relatively few costs to obtain the data 

necessary to classify its portfolio positions, specifically given that, relative to the proposed rule, 

the final rule allows such a fund to generally classify its positions based on asset classes (subject 

to an exception process). On the other hand, funds that hold investments for which relevant 

market, trading, and other investment-specific data is less readily available, for which a general 

asset-class-based classification is more difficult to apply, or funds that require more exceptions 

to their asset-class-based classification would incur relatively greater costs associated with the 

classification of their portfolio positions’ liquidity. In addition, funds with multiple sub-advisers 
352

may incur relatively more costs to coordinate the process of classifying position liquidity as well 

as monitoring whether the fund is compliant with its highly liquid investment minimum and the 

15% illiquid investment limit.

Certain factors that the rule’s guidance suggests a fund should consider in assessing its 

liquidity risk also could entail relatively greater costs, depending on the fund’s circumstances. 

For instance, a fund with a relatively short operating history could incur greater costs in 

assessing the fund’s cash flow projections than a similarly situated fund with a relatively long 

operating history. This is because the newer fund could find it appropriate to assess redemption 

activity in similar funds during normal and stressed periods (to predict its future cash flow 

patterns), which could entail additional costs to gather and analyze relevant data about these 

comparison funds. Also, a fund whose shares are held largely through omnibus accounts may 

wish to periodically request shareholder information from financial intermediaries in order to 

determine how the fund’s ownership concentration may affect its cash flow projections. These 

data requests, and related analyses, could cause a fund to incur costs that another fund, whose 

shares are largely held directly, would not. A fund that deems it appropriate to establish and 

implement additional liquidity risk management policies and procedures beyond those 

specifically required under the rule also would incur additional related costs. While we 

recognize that, as described above, the costs to establish and implement a liquidity risk 

management program in compliance with rule 22e-4 will depend to some degree on the level of 

liquidity risk facing the fund, we are unable to quantify the various ways in which a fund’s 

individual risks and circumstances could affect the costs associated with establishing a liquidity 

risk management program.

Commenters suggested that the proposed three-day liquid asset minimum requirement 
353

could have had a number of unintended consequences. As discussed above, if third-party 

vendors become de facto “rating agencies” for liquidity, then a liquidity minimum could force 

many funds to sell the same investments simultaneously after a liquidity “downgrade,” which 

could have a systemic impact on funds and the overall market.1117 Similarly, if a fund were 

forced into predictable trading behavior during a market downturn because of the highly liquid 

investment minimum requirement, the liquidity and performance of that fund would be 

negatively impacted.1118 It is possible that the proposed three-day liquid asset minimum 

requirements could have created these types of unintended consequences by prohibiting a fund 

from acquiring less liquid assets if it was below its three-day liquid asset minimum, but the final 

rule does not include this prohibition. Instead, as discussed above, a fund is only required to 

report to its board and, possibly, the Commission when it is below its highly liquid investment 

minimum. This requirement should provide fund management the flexibility to avoid forced, 

predictable trading behavior while maintaining the emphasis on effective liquidity risk 

management the minimum is designed to provide. While fund liquidity may vary more under 

this approach, the reporting requirements surrounding any shortfall, including a requirement to 

provide the fund’s board with an explanation of how the fund plans to restore its minimum if a 

shortfall lasts more than 7 consecutive calendar days, should help provide oversight to prevent a 

fund from continually failing to meet its liquidity minimum. As a whole, this approach should 

result in lower costs for funds compared to the proposed three-day liquid asset minimum and, 

because we anticipate that lengthy breaches of the minimum will be relatively rare, it should not 

significantly decrease the benefits of having a highly liquid investment minimum.

 1117 ICI Comment Letter II.

1118 ICI Comment Letter II.
354

One commenter suggested that investor choice could be negatively impacted because of 

the implementation and on-going costs of the liquidity risk management program.1119 The 

commenter asserted that the costs could overwhelm small fund complexes and force them to 

either cease operations or consolidate with a larger complex.1120 Most of the changes made to the 

rule since its proposal—exclusions for funds that primarily hold assets that are highly liquid 

investments and In-Kind ETFs, a reduction in the number of investment classification categories, 

and the ability to generally classify investments based on asset classes (subject to an exception 

process)—should decrease the estimated implementation and on-going costs compared to the 

proposal. Yet it remains possible that some fund complexes will still find the costs burdensome. 

While investor choice may be harmed if a fund is closed because the costs of the rule are 

burdensome, remaining funds will be better positioned to avoid the negative consequences of 

inadequate liquidity management if that fund exited because it was unable to provide a minimum 

acceptable baseline of liquidity. To the extent that there are funds that are currently able to 

provide effective liquidity risk management, but would be forced to cease operations because of 

the costs of complying with the rule (even after changes from the proposal that increase 

flexibility and decrease implementation and on-going costs), investor choice may be negatively 

affected.

A fund may incur costs if it reallocates its portfolio to correspond with its initial or 

subsequently modified highly liquid investment minimum, or if the rule’s definition of an illiquid 

investment results in the fund holding more than 15% of its net assets in assets that are illiquid 

investments. While we are unable to anticipate how many funds may reallocate their portfolios 

 1119 Charles Schwab Comment Letter.

1120 Id.
355

for these two reasons, or the extent of such reallocation by any fund that does so, we anticipate 

that the transaction-related costs of any such reallocation will not be significant for most funds. 

This is because some funds may not need to reallocate their portfolios at all to correspond with 

their highly liquid investment minimum or the 15% illiquid investment limit, and those that do so 

would be able to gradually adjust their portfolios in order to buy and sell portfolio positions 

during times that are financially advantageous given the delayed compliance date. Thus, while a 

fund may reallocate its portfolio to comply with its highly liquid investment minimum and the 

15% illiquid investment limit by the time of the compliance date, a fund would not be required to 

conduct transactions in portfolio investments in any particular timeframe prior to the compliance 

date. If a fund wishes to reallocate its portfolio by the compliance date, we anticipate that the 

compliance date would provide sufficient time to do so with relatively few associated transaction 

costs. Along with the transaction-related costs associated with any portfolio reallocation, we 

recognize that this reallocation in turn could affect the performance and/or risk profiles of funds 

that modify their composition, which in turn could result in costs associated with decreased 

investment options available to investors and any changes to the market for relatively less liquid 

investments; these costs are discussed below. Finally, it is worth noting that, because the rule 

excludes both In-Kind ETFs and funds that primarily hold assets that are highly liquid 

investments from the requirement of having a highly liquid investment minimum, these funds 

will not incur any of the costs associated with transactions, reduced fund performance, or altered 

risk profiles associated with a minimum, though they will still incur these costs as they apply to 

the rule’s 15% illiquid investment limit.

Potential for Decreased Investment Options and Adverse Effects

We recognize that the rule requires a fund to determine the liquidity profile of its current 
356

portfolio and evaluate its potential liquidity needs, which could result in a fund concluding that 

its current portfolio lacks sufficient liquidity. This could lead a fund to modify its portfolio 

composition to meet its appropriate highly liquid investment minimum (e.g., one commenter 

stated that funds may decrease their holdings of long-term municipal bonds) or to comply with 

the more specific 15% illiquid investment limit.1121 The rule could therefore result in certain 

funds increasing their investments in relatively more liquid investments or altering the way in 

which their portfolios are managed, which in turn could affect the performance, tracking error, 

and/or risk profiles of these funds.1122 This is most likely to affect funds that currently hold 

investments with relatively lower liquidity. Such modifications to funds’ portfolio compositions 

could in turn decrease certain investment options available to investors or reduce investor 

returns. However, because these portfolio composition shifts are most likely to occur if a fund 

needs to adjust its existing liquidity level to comply with the rule, we anticipate that the potential 

for decreased yield is most likely to affect funds currently holding portfolios whose liquidity 

levels have the potential to create redemption-related liquidity risk for fund investors. Thus, the 

potential for decreased investment options for certain investors, and any related decrease in 

investment yield, has the potential offsetting benefit of decreased liquidity risk in the funds in 

which these investors hold shares. However, there could be other reasons funds may choose to 

invest in more liquid investments as a result of the rule even if this reallocation is not required, 

including the possibility that they do not want to appear less liquid than their peer funds in their 

publicly disclosed liquidity profile, or because increased disclosure requirements regarding the 

 1121 GFOA Comment Letter. 

1122 See, e.g., supra footnote 767 (discussing how index funds that use full replication strategies might need to 

move towards other techniques for tracking an index if full replication requires them to exceed the 15% 

illiquid asset limit).
357

timing of a fund’s redemption payments may result in funds holding more liquid investments.1123

We cannot quantify the number of funds that would need to significantly modify their 

portfolios’ risk profile as a result of the rule because we lack the information necessary to 

provide a reasonable estimate. Such an estimate would depend on the number of funds that 

might need to modify their current portfolio composition as a result of the rule, as well as the 

availability of relatively liquid investments that can act as adequate substitutes to existing 

investments for those affected funds. We are unable to quantify the total potential costs 

discussed in this section because: (1) we cannot anticipate the highly liquid investment minimum 

that each fund would determine to be appropriate based on its liquidity risk or the extent to 

which fund holdings exceed the rule’s more specific 15% illiquid investment limit relative to the 

current 15% guideline; (2) we cannot determine what relatively more liquid investments funds 

would purchase as substitutes; (3) we are unable to estimate the resulting changes to funds’ 

yields and risk profiles, nor how investors would react to these changes. In-Kind ETFs and 

funds that primarily hold assets that are highly liquid investments will not be subject to the 

highly liquid investment minimum, so this may reduce the aggregate costs associated with 

decreased investment options relative to the proposed rule. Commenters did not specifically 

object to our assessment of the rule’s impact on investment options in the proposed rule.

Market for Relatively Less Liquid Investments 

As discussed above, the rule could result in certain funds increasing their investments in 

relatively more liquid investments, which would effectively mean that these funds would 

decrease their investments in relatively less liquid investments. If funds decrease their 

investments in relatively less liquid investments, the market for those investments could become 

 1123 See infra section IV.c.2.a (discussing the effects of the rule’s disclosure requirements).
358

even less liquid. This could discourage new issuances of similar investments and decrease the 

liquidity of relatively less liquid investments that are still outstanding. The impact of decreased 

investment by funds in relatively less liquid markets will depend on how much current 

investment in those markets is driven by the funds, which varies between markets. Further, these 

market effects could be partially offset if other opportunistic investors with greater capacity to 

hold less liquid investments are attracted to the market by any lower prices for these investments 

that result if funds decrease their holdings of less liquid investments.1124 In addition, if the rule 

leads funds to better assess the liquidity risk associated with certain investments, any decrease in 

the prices of these investments could reflect more efficient pricing of the investments (that is, 

risk would be better reflected in asset prices than it is currently). Because funds currently are not 

required to report or disclose information concerning the liquidity of their investments, and 

because we cannot anticipate the highly liquid investment minimum that each fund would 

determine to be appropriate based on its liquidity risk or the extent to which the more specific 

15% illiquid investment limit will apply to current fund holdings, it is difficult to predict the 

extent to which the rule could lead funds to modify their portfolio holdings, or whether such 

modifications would discourage the issuance of certain investment. As a result, we cannot 

quantify the potential costs discussed in this section. Commenters did not specifically object to 

our assessment of the costs related to decreased investment in illiquid assets in the proposed rule.

d. Effects on Efficiency, Competition, and Capital Formation

The liquidity risk management program requirement would require a fund to assess its 

 1124 Relatively less liquid investments have a higher expected return compared to relatively more liquid 

investments, thereby compensating longer-term investors for holding relatively less liquid investments. See

Yakov Amihud & Haim Mendelson, Asset Pricing and the Bid-Ask Spread, 17 J. FIN. ECON. 223 (1986), 

available at 

http://pages.stern.nyu.edu/~lpederse/courses/LAP/papers/TransactionCosts/AmihudMendelson86.pdf.
359

liquidity risk and to determine its highly liquid investment minimum based on this risk 

assessment. For funds that do not already engage in liquidity risk management practices that 

meet the rule’s requirements, the requirements should improve the alignment between fund 

portfolio liquidity and fund liquidity needs. This improved alignment could enhance funds’ 

ability to meet redemptions in a manner that mitigates potential dilution of shareholders’ 

interests, and thus this improved alignment could be viewed as increasing efficiency to the extent 

that dilution is perceived as a drag on the ability of a fund’s NAV to reflect the performance of 

its portfolio. Additionally, the requirement for each fund to classify the liquidity of its portfolio 

investments and publicly report the aggregated percentage of its portfolio assigned to each of the 

four classifications categories could increase allocative efficiency by assisting investors in 

making investment choices that better match their risk tolerances. However, this potential 

efficiency gain will only hold to the extent that these portfolio-level classification aggregates, 

which are based on non-public subjective assessments of investment liquidity, are comparable 

across funds. Furthermore, this potential efficiency gain will only be achieved if this 

classification sufficiently contrasts the tradeoff between portfolio liquidity and performance 

across funds.

By enhancing funds’ liquidity risk assessment and risk management, the program 

requirement also could promote pricing efficiency in the sense that it could decrease the 

likelihood that a fund would be forced to sell portfolio investments under unfavorable 

circumstances in order to meet redemptions, potentially creating significant negative price 

pressure on those investments. If a fund’s asset sales were to cause temporary changes in market 

prices unrelated to an investment’s fundamentals, this could create a temporary pricing 

inefficiency. By decreasing the likelihood that these types of price movements would occur, the 
360

program requirement could decrease pricing inefficiency. However, the program requirement 

could negatively affect the efficient pricing of investments with lower liquidity if it indirectly 

discourages funds from investing in them (for example, if a fund were to decrease its holdings in 

investments that have lower liquidity if it determines, as a result of the fund’s liquidity risk 

assessment, that its appropriate highly liquid investment minimum or the more specific 15% 

illiquid investment limit do not correspond with the fund’s current portfolio composition). But 

as discussed above, this market effect could be partially offset if other investors are incentivized 

to buy relatively less liquid investments on account of any lower prices for these investments that 

result if funds decrease their holdings of these investments.1125 Alternatively, any price decreases 

experienced as a result of decreased mutual fund investment could be considered efficient price 

adjustments given the reduction in liquidity of the investments.

If the liquidity risk management program requirement results in a material decrease in 

funds’ investment in relatively less liquid investments, competition for these investments would 

initially be negatively affected. Under this scenario, the relatively less liquid investments in 

which funds formerly would have invested may become less liquid, since the number of current 

or potential market participants would be reduced. However, because this reduction in demand 

and liquidity results in larger illiquidity discounts and higher expected returns, some investors 

might become willing to invest in these assets, which in turn would partially offset the initial 

reduction in competition. As a corollary, if the liquidity risk management program requirement 

results in a material increase in funds’ investment in highly liquid investments, competition for 

these investments would be positively affected. However, as funds increase their investments,

the liquidity of those investments should increase and their liquidity premium decrease, which in 

 1125 See supra section IV.C.1.c.
361

turn could lead some investors to reduce their demand for these investments, partially offsetting

the initial increase in competition. Relative to the proposal, the competitive effects of fund 

demand for highly liquid investments relative to lower liquidity investments should, if anything, 

be reduced because the rule only requires a fund to consider stressed conditions that are 

reasonably foreseeable in determining its minimum.

The size of a fund, or the family of funds to which a fund belongs, could have certain 

competitive effects with respect to the fund’s implementation of its liquidity risk management 

program. If there are economies of scale in creating and administering multiple liquidity risk 

management programs, funds in large families would have a competitive advantage. For a fund 

in a smaller complex, however, a greater portion of the fund’s (and/or adviser’s1126) resources 

may be needed to create and administer a liquidity risk management program, which may 

increase barriers to entry in the fund industry, and lead to an adverse effect on competition. The 

size of a fund family also could produce competitive advantages or disadvantages with respect to 

a fund’s use of products developed by third parties to assist in classifying the liquidity of their 

portfolio investments, or to assess the fund’s liquidity risk. Funds in a large complex also could 

receive relatively more favorable pricing for third-party liquidity risk management tools, if the 

fund complex were to purchase discounted bulk services from the developer or receive 

relationship-based pricing discounts. To the extent that they choose to use liquidity risk 

management tools such as committed lines of credit and interfund lending,1127 funds in larger 

complexes likewise could receive more favorable rates on committed lines of credit than funds in 

smaller complexes, and could have opportunities to establish interfund lending arrangements 

 1126 See supra footnote 446 and accompanying text.

1127 See supra footnote 258 and accompanying text (discussing and providing guidance on the use of these 

tools).
362

more easily than funds in smaller complexes.

Any changes in certain investments’ or asset classes’ liquidity that could indirectly result 

from the liquidity risk management program requirement (for example, as discussed above, if the 

number of buyers and sellers for certain investments becomes significantly reduced as a result of 

the program requirement) could also affect capital formation among issuers of these investments. 

Because lower asset liquidity implies higher illiquidity premiums and larger asset price discounts 

some firms and other issuers of securities could be discouraged from issuing new securities in 

asset classes that are associated with lower liquidity. If changes in liquidity are not equal across 

all asset classes, firms and other entities may begin to shift their capital structure (e.g., begin to 

issue equity instead of debt) or to change the terms of certain securities that they issue in order to 

increase their liquidity (e.g., by standardizing the terms of certain debt securities, or modifying 

the securities’ terms to promote electronic trading).1128

Commenters did not specifically object to our assessment of the proposed rule’s effects 

on efficiency, competition, and capital formation. With the exception of the potential efficiency 

changes due to modifications reflected in the adoption of a highly liquid investment minimum 

and the more specific 15% illiquid investment limit discussed above, our assessment of the final

rule’s effects largely corresponds with those of the proposed rule.

e. Reasonable Alternatives

The Commission considered various alternatives to the individual elements of rule 22e-4. 

Those alternatives are outlined above in the sections discussing the rule elements.1129 The 

following discussion addresses economically significant alternatives to rule 22e-4, which involve 

 1128 See GFOA Comment Letter (discussing these types of effects on municipal bond issuers).

1129 See supra sections III.A.3, III.B.1.b, III.B.2.j, III.B.3.b, III.C.1.c, III.C.1.d, III.C.2.a, III.C.2.b, III.C.3.a, 

III.C.3.a, III.C.6.a, III.C.6.b, II.C.5.c, III.D.4, and III.E.
363

broader issues than the more granular alternatives to the individual rule elements discussed 

above.

Liquidity Risk Management Program and Scope

The Commission considered, but ultimately decided against, excluding certain types of 

funds from rule 22e-4.1130 For example, the rule could have carved out funds with investment 

strategies that historically have entailed relatively little liquidity risk, or funds with relatively low 

asset levels. We are not excluding any subset of open-end funds, other than money market 

funds, from the scope of the rule, although we have tailored the rule for certain kinds of 

investment companies that present different liquidity risks (In-Kind ETFs, funds that primarily 

hold assets that are highly liquid investments, and UITs). Some funds with investment strategies 

that historically have involved little liquidity risk invest in assets that have lower liquidity, or in 

more liquid assets that can experience episodes of lower liquidity.1131 To the extent that these 

types of investments create potential liquidity risk for a fund, excluding funds with investment 

strategies that have historically involved little liquidity risk could expose investors to more 

potential liquidity risk than they would face under the rule. Furthermore, investors in small 

funds could suffer from insufficient liquidity risk management just as investors in larger funds 

could. Indeed, staff analysis suggests that funds with relatively low total assets can experience 

greater flow volatility, including more volatility in unexpected flows, than funds with higher 

assets, which could indicate increased liquidity risk.1132 The program requirement permits a fund 

to customize and calibrate its liquidity risk management program to reflect the liquidity risks that 

 1130 See section III.A.2 for more detailed discussion of rule 22e-4’s scope.

1131 See Proposing Release, supra footnote 9, at n.123-124 (discussing liquidity issues in microcap stocks as 

well as treasury bonds during the “Flash Crash”).

1132 DERA Study, supra footnote 95, at 16-24. See infra footnote 1159 and accompanying paragraph regarding 

comments on small funds.
364

it typically faces (and that it could face in stressed market conditions). This flexibility is meant 

to result in programs whose scope, and related costs and burdens beyond the fixed cost of 

establishing a minimum liquidity risk management program, are appropriate to manage the 

actual liquidity risks facing a particular fund. For example, funds that primarily hold assets that 

are highly liquid investments are not required to adopt a highly liquid investment minimum 

because any benefits associated with this requirement as applied to these funds are less likely to 

justify the associated burdens.

Instead of adopting rule 22e-4, the Commission could issue guidance surrounding the 

assessment and management of liquidity risk, which would give funds more flexibility in 

managing liquidity risk and could reduce costs relative to the requirements of the rule. However, 

on account of the significant diversity in liquidity risk management practices that we have 

observed in the fund industry, we believe that the need exists for an enhanced comprehensive 

baseline requirement instead of only guidance for fund liquidity risk management.

Commenters suggested the rule could have also taken a purely principles-based approach

instead of a prescriptive approach.1133 The final rule is not a purely prescriptive rule; while it 

does specify certain standards, it provides funds with a substantial degree of flexibility in 

implementing those standards. That said, a purely principles-based approach that specified few 

or no requirements could give funds more flexibility in tailoring risk management programs to 

their needs and could reduce compliance costs, but it would be less certain to create a 

comprehensive baseline for fund liquidity risk management, which in turn would diminish the 

 1133 AIMA Comment Letter; CFA Comment Letter; Cohen & Steers Comment Letter; Dodge & Cox Comment 

Letter; Eaton Vance Comment Letter I; FSR Comment Letter; ICI Comment Letter I; ICI Comment Letter 

III; LSTA Comment Letter; MFDF Comment Letter; Nuveen Comment Letter; NYC Bar Comment Letter; 

Oppenheimer Comment Letter; State Street Comment Letter; Vanguard Comment Letter; Wellington 

Comment Letter; Wells Fargo Comment Letter; Dechert Comment Letter.
365

comparability (and thus the value) of information reported to the Commission and to the public 

about funds’ liquidity. Under a purely principles-based approach, an investor with investments 

in multiple funds would be aware that those funds are all generally required to manage liquidity 

risk, but may not have sufficient clarity about how each of the funds may have chosen to 

interpret and implement general principles so as to permit the investor to understand how this 

variation across funds affects the liquidity risk to which the investor is exposed. Finally, funds 

are not prohibited from developing or maintaining their own, tailored risk management programs 

to the extent that they are supplemental to the baseline that the Commission’s program requires.

The Commission considered proposing liquidity requirements similar to those imposed 

on money market funds—that is, the requirement to hold a specified minimum level of highly 

liquid investment holdings, and the ability to impose redemption fees and gates.1134 The 

requirements imposed on money market funds, and the tools available to these funds to manage 

heavy redemptions, are specifically tailored to the assets held by money market funds and the 

behavior of money market fund investors.1135 Imposing similar regulatory requirements on funds 

that are not money market funds would ignore significant differences between money market 

funds and other funds. We discuss the costs and benefits of requiring funds to hold a specified 

minimum level of highly liquid investments below (similar to the portfolio liquidity requirements 

applicable to money market funds). With respect to redemption fees, funds are already permitted 

to use them under existing regulations (up to a maximum fee of two percent), although those fees 

are largely used by certain funds to recoup costs incurred as a result of excessive short-term 

trading of mutual fund shares, rather than mitigating dilution arising from shareholder 

 1134 See supra footnotes 153-155 and accompanying text.

1135 See 2014 Money Market Fund Reform Adopting Release, supra footnote 43, at section II.
366

transaction activity generally, and are viewed as unpopular with investors and intermediaries. 

Redemption gates would allow funds to limit the potential dilution shareholders face in 

circumstances where they face extreme redemptions, but they would also impose constraints on 

shareholders’ access to their assets in those situations, and commenters were not in favor of 

extending rule 22e-3 to permit funds to make broader use of suspensions of redemptions.1136 In 

addition, funds that are not money market funds have not demonstrated the same risk of 

significant redemptions during times of market stress that money market funds may face and 

which redemption gates are meant to prevent, implying that the benefits of gates are less 

applicable to funds that are not money market funds.1137

Classifying Portfolio Investment Liquidity

The Commission considered multiple alternatives to the rule’s requirement that funds 

classify the liquidity of their portfolio investments, which establishes one component of a 

uniform baseline for fund liquidity risk management. As discussed above, commenters raised 

three primary structural alternatives to the proposed classification requirement: (i) a 

“principles-based” liquidity classification approach, where each fund would have to classify the 

liquidity of its portfolio assets, but the Commission would not require any specific classification 

scheme;

1138 (ii) a simplified version of the proposed classification system, with fewer 

classification categories based on shorter time projections than the proposal;1139 and (iii) an 

approach with new classification categories based on qualitative distinctions in the market- and 

 1136 See ICI Comment Letter I.

1137 See 2014 Money Market Fund Reform Adopting Release, supra footnote 43, at section III.A.1.

1138 See, e.g., AIMA Comment Letter; LSTA Comment Letter; Street Comment Letter; Wellington Comment 

Letter.

1139 See, e.g., Eaton Vance Comment Letter I; Interactive Data Comment Letter; Markit Comment Letter; Wells 

Fargo Comment Letter. Commenters generally suggested three, four, or five classification categories.
367

trading-related characteristics of different asset classes under different market conditions, which 

generally would rely on the Commission mapping different asset classes to each of these new 

classification categories.1140

A purely principles-based approach to classifying assets, as suggested by several 

commenters, would have the benefit of allowing each fund to tailor its classification scheme to 

the liquidity factors most relevant to the assets it invests in rather than imposing a one-size-fitsall approach that may be less applicable to some funds. However, as discussed above, this 

approach would not provide a uniform methodology for funds’ liquidity assessment procedures 

and would not promote reasonably comparable reporting to the Commission and disclosure to 

the public about funds’ portfolio liquidity.1141 Instead, also as discussed above, we are largely 

adopting commenters’ suggested approach of reducing the number of liquidity classifications 

from six to four.1142

The Commission considered but is not adopting commenters’ alternative of having the 

Commission establish a fixed classification schema to which all funds must adhere—for 

example, an enumeration of asset classes and a mapping of those classes to a liquidity 

classification.1143 This approach would have the benefit of producing liquidity classifications 

that are objectively comparable across funds, but the Commission may not be able to respond as 

 1140 See, e.g., BlackRock Comment Letter; MFS Comment Letter; Nuveen Comment Letter; CSRC Comment 

Letter.

1141 See supra section III.C.6.

1142 The Commission also could have, as described in the Proposing Release, required funds to classify each 

portfolio position as “liquid” or “illiquid,” but commenters did not support such an alternative, and we 

continue to believe that a two-category approach would be insufficiently nuanced to capture the full 

spectrum of portfolio position liquidity. See also supra section III.C.1.a for a more detailed discussion of 

commenter suggestions with respect to the number of liquidity classification categories.

1143 For examples suggesting this approach see, e.g., AFR Comment Letter; BlackRock Comment Letter; SRC 

Comment Letter. 
368

quickly as market participants to dynamic market conditions that might necessitate changes to 

asset class liquidity classifications, and would be unable to account for determinants of 

investment liquidity that are fund-specific.

Relatedly, some commenters also suggested classification categories based on 

alternatives to the “days-to-cash” criterion of the proposed and final rule, including, in whole or 

in part, on the fraction of average daily trading volume (“ADTV”) that each position size 

corresponds to, the expected behavior of bid-ask spreads in a given asset, or more qualitative 

liquidity buckets (e.g., “converted to cash quickly under most circumstances”).1144 Some of these 

more specific criteria may be appropriate for particular assets (e.g., ADTV is a reasonable 

measure for exchange-traded securities), but do not apply to all assets (e.g., bid-ask spreads are 

not readily available for some asset classes). Also, more qualitative criteria make it more 

difficult to compare classifications across funds relative to the “days-to-cash” approach in the 

final rule.

Highly Liquid Investment Minimum

The final rules require funds that do not primarily hold assets that are highly liquid 

investments to establish a highly liquid investment minimum as part of their liquidity risk 

management program and provides some flexibility by not prohibiting the acquisition of less 

liquid investments, but instead requiring a fund to report to the board and, in some cases, the 

Commission if it goes below its minimum. The first type of alternative the Commission 

considered with respect to this requirement concerns which investments satisfy a minimum, 

which could have varied along a spectrum from more liquid (e.g., only cash would qualify as a 

 1144 See Nuveen Comment Letter; BlackRock Comment Letter; Dodge & Cox Comment Letter; SIFMA 

Comment Letter I.
369

highly liquid investment) to less liquid (e.g., investments reasonably expected to convert to cash 

in the 7-day timeframe associated with open-ended fund redemption and settlement requirements 

would qualify). While there are various marginal benefits and costs associated with defining 

investments that satisfy the minimum at points along that spectrum—for example, cash is more 

liquid but does not provide any yield—the final rule aligns the definition of what investments are 

subject to the minimum with the definition of the first (most liquid) category of investments in 

the liquidity risk management program’s liquidity classification requirement.1145 This 

consistency in treatment means that fund advisers, investors, and the Commission can focus on a 

smaller number of clearly-defined concepts when broadly evaluating fund liquidity.

The Commission also considered whether to make the highly liquid investment minimum 

purely a target instead of a minimum. The proposed rule would have precluded funds from 

acquiring less liquid investments anytime they were below their highly liquid investment 

minimum. Commenters suggested this could lead to several potential costs, as discussed above 

regarding the rule’s costs and benefits, including the possibility that it could lead to herding 

behavior among funds.1146 Some commenters instead suggested that a target or range be used 

instead of a minimum, which could provide funds more flexibility in returning to their target 

without incurring unnecessary trading costs, as well as the ability to trade more opportunistically 

during periods of market stress.1147 However, a target might have been interpreted as an 

 1145 See the Proposing Release, supra footnote 9 at n.730 and associated text for a further discussion of cash 

and “seven day liquid assets” as alternatives for a minimum. We did not receive explicit comments on the 

merits of which types of investments should satisfy a minimum.

1146 For example, any market event that increases the value of the less liquid portion of many funds’ portfolios 

could place them below the minimum, and could indirectly result in some funds selling less liquid 

investments at the same time to bring their allocations back in line with their minimums.

1147 For comments discussing the costs and benefits of a target vs. a minimum, see, e.g., Blackrock Comment 

Letter; Federated Comment Letter; Invesco Comment Letter; PIMCO Comment Letter.
370

“average” level of highly liquid investments funds should hold and, without further requirements 

such as board reporting, may not have provided a sufficient incentive to fund managers to ensure 

that the percentage of a fund’s investments invested in relatively liquid investments is at (or 

above) the level deemed appropriate by the fund. The final rules strike a balance: funds are not 

prohibited from acquiring less liquid investments if they go below their highly liquid investment 

minimum, but they must report any shortfall to their boards (and the Commission where 

required). This should reduce concerns regarding herding behavior,1148 but does make it more 

burdensome for a fund to buy any assets that are not highly liquid investments opportunistically 

if the fund is at or below its highly liquid investment minimum, insofar as funds may not want to 

trigger their reporting obligation to their board, the Commission, or both.

Some commenters were generally opposed to a highly liquid investment minimum,1149

and the final rule could have excluded this requirement altogether. Doing so would still require 

that funds manage liquidity risk appropriately but would provide even more flexibility in how 

that is achieved. However, the highly liquid investment minimum requires funds to directly 

consider the assets they need to have on hand to meet redemptions in a flexible manner to reduce 

dilution that may result from forced sales, and funds have flexibility in setting a minimum that is 

appropriate to the needs of their fund as well as adjusting the minimum dynamically to adapt to 

changing market conditions.1150 We note that the final rule does not require funds that primarily 

 1148 For example, if an asset ceased to be a highly liquid investment, it could indirectly lead funds to sell that 

asset in order to meet their minimum. Coordinated selling could produce further downward pressure on the 

value of the investment. Some funds could be interested in purchasing such an investment if they viewed it 

to be undervalued and thus good for fund investors — which could also help counteract the downward 

pricing pressure caused by funds exiting their positions — but if such a purchase would cause them to 

violate their minimum, it would have been prohibited under the proposed rule.

1149 See, e.g., Invesco Comment Letter; Blackrock Comment Letter. 

1150 See supra footnote 638 and accompanying text.
371

hold assets that are highly liquid investments to establish a minimum.

The Commission also considered requiring a uniform highly liquid investment minimum 

for all funds. This alternative approach would have the advantage of being simple for investors 

to understand, easy for funds to apply, and simple for our examination staff to verify. However, 

this alternative would fail to account for notable differences between funds with respect to 

investment strategy, fund flow patterns, and other characteristics that contribute to funds’ 

liquidity risk, which in turn would make it reasonable for funds’ portfolios to have varying 

liquidity profiles. We believe that the fund-specific highly liquid investment minimum 

requirement will promote alignment of a fund’s liquidity needs with the liquidity of fund 

investments, while still permitting funds reasonable flexibility in implementation. In light of the 

significant diversity within the fund industry, we believe that flexibility is appropriate to help 

minimize the potential costs to investors of the requirement. This approach still includes 

elements that will help our staff to assess whether funds are holding an appropriate level of assets 

that are highly liquid investments. Each fund will be required to maintain a written record of 

how its highly liquid investment minimum was determined, as well as copies of materials 

submitted to the fund’s board in connection with the highly liquid investment minimum.1151 One 

benefit of a Commission-determined uniform highly liquid investment minimum would be to 

ensure that funds do not set their minimum at an artificially low level (e.g., 0) that is divorced 

from their liquidity risk. We believe that the requirement for a fund to consider certain specified 

factors in determining its minimum, as well as the recordkeeping and board review requirements 

discussed above, will help promote funds’ establishing realistic minimums, and discourage 

inappropriately low or zero minimums.

 1151 See proposed rule 22e-4(c)(2)-(3).
372

Instead of requiring funds to determine and invest their assets in compliance with a 

highly liquid investment minimum, we could require funds to conduct stress tests of their own 

design assessing the extent to which the fund has a level of highly liquid investments necessary 

to cover possible levels of redemptions. This would have the benefit of granting a fund 

flexibility in determining whether its portfolio liquidity profile is appropriate given its liquidity 

needs. However, because the quality and comprehensiveness of funds’ liquidity risk 

management currently varies significantly, we believe that requiring funds to have a highly 

liquid investment minimum is important in reducing the risk that funds will be unable to meet 

their redemption obligations, in minimizing dilution, and in elevating the overall quality of 

liquidity risk management across the fund industry. Also, we believe that it would be difficult to 

determine, depending on the level of discretion a fund would have in developing stress scenarios, 

whether these scenarios would accurately depict liquidity risk and lead funds to determine the 

appropriate level of portfolio liquidity they should hold. For example, if a fund’s liquidity needs 

were generally high during normal periods, but were not correspondingly extreme during stress 

events, basing this fund’s portfolio liquidity on the results of stress testing alone could cause a 

fund to hold too little liquidity during non-stressed periods. Therefore, we do not believe that a 

general stress testing requirement would be an adequate substitute for the highly liquid 

investment minimum requirement.

15% Illiquid Investment Limit

Instead of the adopted illiquid investment definition, the Commission could have codified 

a definition of illiquid investments that reflects the current 15% guideline. This approach would 

have had the benefit of already being accepted and understood by the industry, and would have 

entailed few additional implementation costs for funds. However, it would not have been 
373

harmonized with the rule’s requirements with respect to other liquidity classifications, 

particularly the requirement that funds review at least monthly whether their investments are 

illiquid with respect to relevant market, trading, and investment-specific factors, and also 

incorporate market depth considerations into this process.1152 To the extent that the rule’s 

liquidity classification requirement results in funds more accurately assessing the amount of 

illiquid investments in their portfolios, funds may improve on their liquidity risk management 

under the rule as adopted than under a codification of the 15% guideline.

f. Comments on the DERA Study

We received substantial comments on the DERA Study from one commenter. The 

Commission has carefully considered these comments and adjusted our analysis where 

appropriate. In terms of broader concerns, the commenter suggested that the analysis in the 

DERA Study does not provide a strong basis for the specifics of the rule.1153 For example, the 

commenter asserts that the DERA Study’s analysis does not provide a justification for funds 

sorting their assets into six liquidity categories and does not apply this classification in the 

DERA Study. The DERA Study’s analysis was not designed to justify each policy choice made 

in the rule. Rather, the analysis in the DERA Study makes certain findings and reports certain 

empirical results designed to inform the Commission more generally about the current state of 

fund liquidity.

With respect to the proposal’s interpretation of the DERA Study’s results, the commenter 

expressed the concern that the results in the DERA Study provide only indirect evidence on the 

selling behavior of funds in response to redemptions. While a direct test would be preferable, 

 1152 See supra sections III.C.1.b and III.C.3.b.

1153 ICI Comment Letter II.
374

such a test would require data on both daily fund flows and fund daily transactions, neither of 

which are available in sufficient detail for analysis. The commenter states that the DERA Study 

itself only shows that fund liquidity tends to decrease following outflows and that other 

endogenous factors, such as broad changes in market conditions due to macroeconomic events, 

could be causing changes in both fund liquidity and fund flows.1154 To demonstrate its concerns 

about endogeneity, the commenter uses a vector autoregression (VAR) to present evidence that a 

proxy for market returns causes changes to both the Amihud liquidity of the S&P 500 and net 

U.S. equity mutual fund flows in a manner consistent with its alternative hypothesis that a fund’s 

average Amihud liquidity may decrease due to an increase in market volatility rather than 

because of fund managers’ trading behavior.1155 The analysis performed in the DERA Study 

does control for broad changes in market liquidity at the fund class-level.

1156 To the extent that 

broad market effects drive variation in fund liquidity within a fund class in a way that is also 

correlated with fund flows, we acknowledge the commenter’s concern about endogeneity and 

have modified our interpretation in the discussion above, but we also note that there is anecdotal 

evidence that supports this interpretation.1157 With respect to the Amihud liquidity measure used 

in the study, the commenter states that the DERA Study’s conclusion that a “10% outflow 

increases the impact of selling $10 million of the asset-weighted average equity portfolio holding 

by 11 basis points” is a key result supporting the proposal’s hypothesis that funds sell their more 

 1154 ICI Comment Letter II.

1155 ICI Comment Letter II.

1156 DERA Study, supra footnote 95, at 43-44. The model includes Lipper class fixed effects, year-quarter fixed 

effects, and interactions of those fixed effects. The year-quarter and interaction fixed effects should capture 

any broad changes in liquidity within different fund styles over time, which could be related to 

macroeconomic events.

1157 See, e.g., supra footnote 71.
375

liquid assets first to meet redemptions. We disagree that the specific economic interpretation of 

the Amihud measure cited by the commenter is necessary to support the hypothesis that funds 

tend to sell their more liquid assets: to the extent that the Amihud measure reflects the liquidity 

of underlying fund assets, a decline in the average Amihud liquidity of a fund’s portfolio is 

consistent with the fund disproportionately selling its more liquid assets.

The commenter concludes that the analysis in the DERA Study does not demonstrate that 

funds are managing portfolios and redemptions in a manner that harms the interests of nonredeeming shareholders.1158 We acknowledge that the analysis does not establish a direct link 

between redemptions and quantifiable harm to non-redeeming shareholders; as discussed above, 

it was designed to inform the Commission more generally about the current state of fund 

liquidity. The commenter also states the DERA Study’s finding that municipal bond funds hold 

less cash following redemptions implies that a 40% outflow would be required to deplete the 

average municipal bond fund’s cash holdings. We acknowledge the commenter’s interpretation 

of the analysis, but note that the results do not imply that all municipal bond funds would 

necessarily require outflows of a similar magnitude to deplete a significant portion of their cash 

holdings.

The commenter makes several statements regarding results related to the volatility of 

fund flows. First, the commenter provides evidence that flow volatility declines with fund size, 

notes that the DERA Study’s use of simple averages to calculate average flow volatility in a 

given fund category overstates the highly volatile flows of small funds, and shows that assetweighted flow volatility measures are significantly smaller for all fund categories.1159 We 

 1158 ICI Comment Letter II.

1159 ICI Comment Letter II.
376

acknowledge that the simple average will overstate smaller funds relative to an asset-weighted 

average, but the opposite view holds too: asset-weighted averages will understate flow volatility 

for small funds, and the rule is concerned with the potential liquidity risk problems at all funds. 

The commenter also states that the relatively higher flow volatility of alternative funds may 

simply be attributable to the fact that they are generally smaller in size (because small funds 

generally tend to have more volatile flows as a percentage of their assets) and that, as they have 

grown, the volatility of their flows has, if anything, decreased. We acknowledge that the flow 

volatility of alternative funds may be a function of their smaller size, but also note that small 

funds are also subject to the rule and that other fund categories, such as foreign bond funds, 

exhibit higher flow volatility despite being relatively larger in size. The commenter also notes 

that, as the DERA Study acknowledged, the predictability of fund flows is likely understated. 

The purpose of analyzing the predictability of flows in the analysis was to determine, using a 

simple model of fund flows, the extent which flow volatility was predictable and whether, after 

accounting for predictability, the unexpected component of flow volatility varied across fund 

types in the same way as total flow volatility. While fund managers may be able to predict a 

larger fraction of flow volatility, the evidence in the DERA Study supports the notion that 

unexpected flow volatility varies proportionally with total flow volatility, and the relative 

ranking of unexpected flow volatility by fund type is not likely to change with a better model of 

flows. The commenter also states that the DERA Study provides evidence that funds already 

successfully manage volatile flows.1160 The proposal acknowledged that this evidence supports 

the view that funds do manage volatile flows by holding larger amounts of cash and liquid assets, 

and this evidence provides support for the rule’s inclusion of flow volatility as a factor for funds 

 1160 ICI Comment Letter II.
377

to consider when managing risk.1161 Finally, the commenter points out that, while the DERA 

Study finds smaller funds have more volatile flows, small funds may find it easier to trade assets 

with minimal price effects. We agree that small funds may have less price impact, but note that 

any fixed trading costs incurred via smaller trades will involve larger proportional trading costs.

The commenter also provides evidence on the relationship between fund flows and 

holdings of short-term assets for alternative strategy and high-yield bond funds. It finds no 

relationship between the two, asserting that the lack of a relationship shows funds are not 

systematically selling short-term assets to meet redemptions. However, this result is at the 

aggregate level, and does not necessarily preclude a relationship between the two quantities at 

the fund level for some funds. It also provides a fund-level analysis across high-yield bond 

funds in 5 separate months and also does not find a relationship between the two in four of the 

months. In one of the months, it does find statistically significant evidence that a decrease in 

short-term assets is associated with outflows, consistent with the DERA Study’s finding. The 

commenter’s inability to find a relationship is not evidence that there is no relationship per se: it 

is possible the commenter’s test simply had low statistical power. To the extent that the 

commenter’s evidence does support the claim that funds do not sell short-term assets in response 

to fund flows, the DERA Study used a different measure of liquidity and did not claim any 

evidence found using another measure, such as the short-term asset ratio used by the commenter, 

would produce the same result. More specifically, while funds may not sell their most liquid 

investments (which would be reflected in the short-term asset ratio used by the commenter), they 

could still be disproportionately selling their more liquid investments.

With respect to the liquidity measure used in the DERA Study, the commenter points out 

 1161 See Proposing Release, supra footnote 9, at n.631 and accompanying discussion.
378

that it only uses a single measure of market liquidity (Amihud illiquidity) and claims that the 

measure is not sufficient to support the interpretations the proposal draws from the study.1162 We 

acknowledge that the use of alternative measures could alter some of the results and 

interpretations in the DERA Study, but also emphasize that the DERA Study was intended to 

generally inform the Commission about the current state of fund liquidity, not to justify each 

policy choice made in the rule.

The commenter stated that the academic studies used in support of the DERA Study and 

the proposal are either (1) theoretical and ignore important institutional details or (2) based on 

empirical fund-level results which by their design cannot provide any commentary on marketwide concerns. With respect to the theoretical study cited in the proposal, it shows one 

mechanism by which mutual fund shareholders may have a first-mover incentive using a 

simplified model of the world for tractability; it is possible that in a model which captures more 

institutional details as proposed by the commenter—taxes, longer investor horizons, and 

reinvestment risk—this incentive is reduced or eliminated, but we are not aware of any other 

studies that reach such a conclusion. With respect to any empirical studies, the primary goal of 

the rule is to improve the fund-level management of liquidity and redemptions, which makes the 

cited fund-level academic studies relevant for the discussion. The commenter also points out 

that one of the empirical studies (Coval and Stafford), which provides evidence of negative price 

pressure due to forced selling by mutual funds, also states that the ex-ante probability of an 

equity mutual fund being affected by this risk is small because less than one percent of stocks are 

affected in a given quarter. The proposal did not claim that forced selling by mutual funds was a 

pervasive phenomenon, but did highlight that it is a possible risk that funds and their 

 1162 ICI Comment Letter II.
379

shareholders face.

2. Disclosure and Reporting Requirements Regarding Liquidity Risk and Liquidity 

Risk Management

a. Disclosure and Reporting Requirements 

We are adopting amendments to Form N-1A as well as adopting new items to Form NPORT, Form N-CEN, and adopting Form N-LIQUID, to enhance fund disclosure and reporting 

regarding liquidity and redemption practices. Specifically, amendments to Form N-1A will 

require a fund to disclose: (i) the number of days in which the fund typically expects to pay 

redemption proceeds to redeeming shareholders1163 and (ii) the methods the fund typically 

expects to use to meet redemption requests in stressed and non-stressed market conditions.1164 

New items on Form N-PORT will require a fund to confidentially disclose monthly: (i) 

the fund’s highly liquid investment minimum and the number of days a fund’s holdings in assets 

that are highly liquid investments fell below that minimum during a given reporting period;1165

(ii) the liquidity classification of each investment as determined pursuant to rule 22e-4(b)(2)(i) 

including the determination of whether the investment qualifies as an illiquid investment, and 

(iii) the percentage of the fund’s highly liquid investments that the fund has segregated to cover, 

or pledged to satisfy margin requirements in connection with, derivatives transactions in each of 

the other liquidity classification categories.

1166 Once per quarter, funds will be required to 

publicly disclose (with a 60-day delay): (i) the aggregated percentage of their portfolios invested 

in each of the four liquidity classification categories, but funds will not be required to publicly 

 1163 Item 11(c)(7) of Form N-1A.

1164 Item 11(c)(8) of Form N-1A.

1165 Item B.7 of Form N-PORT.

1166 Item C.7 of Form N-PORT.
380

disclose the liquidity classification of each individual position;1167 and (ii) the percentage of the 

fund’s highly liquid investments that it has segregated to cover, or pledged to satisfy margin 

requirements in connection with, derivatives transactions in each of other liquidity classification 

categories.1168

New items on Form N-CEN will require a fund to disclose certain information regarding 

the use of committed lines of credit and interfund borrowing and lending.1169 We have also 

adopted a new item on Form N-CEN that will require an ETF to report whether it qualifies as an 

In-Kind ETF.1170

The final form amendments differ from the proposal in several ways that may have 

potential economic consequences. In response to commenters’ suggestions, the rule does not 

require funds to file credit agreements as part of Form N-1A. While Form N-PORT requires 

funds to report position-level liquidity classifications to the Commission, these classifications 

will not be publicly released. Instead, a fund will only be required to publicly disclose the 

aggregate percentage of the fund’s holdings invested in each of the four liquidity classification 

categories and the percentage in each of the four liquidity classification categories of the fund’s 

highly liquid investments that are segregated to cover derivatives transactions. The adopted rule 

also incorporates commenters’ suggestions that the Commission be notified more quickly if a 

fund’s assets that are illiquid investments exceed 15% of its net assets by requiring funds to file 

Form N-LIQUID indicating such a breach immediately after it occurs. With respect to the highly 

liquid investment minimum, a fund is required to report any decline below the minimum that 

 1167 Item B.8 of Form N-PORT.

1168 Item B.8.b of Form N-PORT.

1169 Item C.20 of Form N-CEN.

1170 Item E.5 of Form N-CEN.
381

lasts more than 7 consecutive calendar days to the Commission by filing Form N-LIQUID, 

whereas the proposal would have required that a fund not purchase less liquid investments while 

below its minimum. Any significant economic effects of these changes are discussed below.

b. Benefits

The disclosure and reporting requirements will promote investor protection by improving 

the availability of information regarding funds’ liquidity risks and risk management practices, as 

well as funds’ redemption practices. As discussed above, funds’ disclosures to shareholders 

regarding their redemption practices are currently varied in content and comprehensiveness.1171 

To the extent that the requirement for funds to disclose the number of days in which the fund will 

pay redemption proceeds to redeeming shareholders fosters competition among funds to 

minimize the timing of redemptions, and assuming funds are able to meet redemptions in the 

time advertised, such competition could potentially be to the benefit of investors. Relative to the 

proposal, final Form N-1A requires that funds disclose estimated payment times for each 

payment method, which should reduce any potential investor confusion associated with the 

complexity of estimates based on funds’ distribution channels under the proposal.1172

While some funds voluntarily include disclosure regarding fund limitations on illiquid 

asset holdings that track the 15% guideline, a fund is not currently required to disclose 

information about the liquidity of its portfolio investments. In light of the relatively few 

disclosure requirements regarding funds’ liquidity risks, liquidity risk management practices, and 

redemption practices, as well as the current inconsistency in funds’ liquidity-related disclosures, 

we believe that the disclosure and reporting requirements would increase shareholders’ and the 

 1171 See supra section III.G.1.a.

1172 See Fidelity Comment Letter.
382

Commission’s understanding of particular funds’ liquidity-related risks and redemption policies. 

This in turn should assist investors in making investment choices that better match their risk 

tolerances.

We note that, while Form N-PORT and Form N-CEN are designed primarily to assist the 

Commission and its staff, we believe that the information in these forms (including the 

liquidity-related information to be included in these forms) also will be valuable to investors and 

other potential users.1173 In particular, we believe that both sophisticated institutional investors 

and third-party users that provide services to retail investors may find the publically disclosed 

liquidity-related information to be useful. And we believe that individual investors could benefit 

indirectly from the information collected on reports on Form N-PORT through analyses prepared 

by third-party service providers. 

The liquidity-related information that funds will be required to provide on Form N-PORT 

and Form N-CEN will enhance investor protection by improving the Commission’s ability to 

monitor funds’ liquidity using relevant and targeted data. This monitoring will permit us to 

analyze liquidity trends in individual funds, and, to the extent that liquidity profiles are 

comparable across funds, among certain types of funds and the fund industry as a whole, as well 

as to better understand funds’ liquidity risk management practices. As discussed in our release 

adopting rules and forms to modernize investment company reporting, the information we 

receive on these reports will facilitate the oversight of funds and will assist the Commission, as 

the primary regulator of such funds, to better effectuate its mission to protect investors, maintain 

fair, orderly, and efficient markets, and facilitate capital formation.1174 Some commenters 

 1173 See Investment Company Reporting Modernization Adopting Release, supra footnote 120.

1174 See id.
383

supported the reporting of asset-level liquidity classifications if such information was only 

provided to the Commission (i.e., made non-public),1175 although some did object to the 

disclosure regardless of whether or not it was made public.1176

Form N-LIQUID will complement rule 22e-4’s enhanced focus on the limits on illiquid 

investments and the highly liquid investment minimum discussed above by requiring reporting to 

the SEC every time: (1) a fund’s assets that are illiquid investments exceed 15% of its net assets 

(as well as additional reporting when the fund’s assets that are illiquid investments fall back to or 

below 15% of its net assets); and (2) a fund’s investments in highly liquid investments that are 

assets fall below its highly liquid investment minimum for more than 7 consecutive calendar 

days. This enhanced reporting could produce significant benefits. For example, the SEC’s 

market monitoring capacity could be enhanced, in that multiple close-in-time filings by similar 

types of funds may be an indication of market stress in a market segment. Similarly, multiple 

close-in-time filings by the same fund may be an indication that the fund is failing to adequately 

manage its liquidity.

Form N-PORT as adopted does not require that the asset-level liquidity classifications be 

publicly disclosed in order to address commenter concerns about the potential costs of such 

disclosure (which are discussed in the costs section below). This change reduces some of the 

proposal’s potential public disclosure benefits. Under the proposal, investors—by their own 

efforts or via third-party products—could have compared how assets were classified according to 

different funds’ subjective approaches and resolved discrepancies across funds to arrive at more 

 1175 See CFA Comment Letter; Dechert Comment Letter; State Street Comment Letter; Interactive Data 

Comment Letter; Nuveen Comment Letter; Oppenheimer Comment Letter; Charles Schwab Comment 

Letter; T. Rowe Comment Letter; Voya Comment Letter; Wellington Comment Letter.

1176 See Federated Comment Letter; Fidelity Comment Letter; Invesco Comment Letter; SIFMA Comment 

Letter I.
384

directly comparable fund liquidity profiles. Under the form as adopted, a fund will publicly 

disclose a new aggregate liquidity profile by reporting the percentage of its portfolio assigned to 

each of the four liquidity classification categories on Form N-PORT. This will provide a useful 

snapshot of fund liquidity to investors and will increase the amount of information available to 

investors about fund liquidity, but this snapshot may not be as informative as liquidity profiles 

under the proposed rule. The final form requires funds to confidentially report their investment 

liquidity classifications to the Commission via Form N-PORT. This maintains a major benefit of 

the proposal, allowing the Commission to monitor funds’ liquidity levels and take action when 

significant aberrations are discovered.

Similarly, the final form amendments do not require the public disclosure of a fund’s 

highly liquid investment minimum in order to address commenter concerns, but it is not likely 

that this change will significantly reduce the benefits of reporting this minimum: the primary 

investor protection benefit of reporting the minimum via Form N-PORT is to encourage funds’ 

holding of highly liquid investments that correspond to the liquidity risks of their strategies. By 

confidentially reporting the minimum, a fund will give the Commission the capability to monitor 

whether the minimum is an outlier relative to other funds with similar investment strategies. The 

oversight role of the fund’s board under rule 22e-4 is yet another safeguard in this respect.

Finally, Form N-PORT’s requirement that funds disclose the percentage of the fund’s 

highly liquid investments that it has segregated to cover or pledged to satisfy margin 

requirements in connection with derivatives transactions that are classified as moderately liquid 

investments, less liquid investments, and illiquid investments, should more accurately reflect the 

amount of highly liquid investments that are available to manage a fund’s liquidity risk. For 

example, without such a disclosure, investors might assume a fund whose highly liquid 
385

investments are all segregated to cover derivatives positions that are not highly liquid is better 

prepared to handle redemption requests than it actually is.

Because we cannot predict the extent to which the requirements will enhance investors’ 

awareness of funds’ portfolio liquidity and liquidity risk, influence investors’ investments in 

certain funds, or increase the Commission’s ability to protect investors, we are unable to quantify 

the potential benefits discussed in this section.

c. Costs

Funds will incur one-time and ongoing annual costs to comply with the disclosure and 

reporting requirements regarding liquidity and shareholder redemption practices. Commenters’ 

responses to the estimates of these costs are discussed in the PRA discussion below, and we have 

updated all estimates in this section to reflect changes in the PRA.1177

We estimate that the one-time costs to comply with the amendments to Form N-1A will 

be approximately $324 per fund (plus printing costs).1178 We estimate that each fund will incur 

an ongoing cost associated with compliance with the amendments to Form N-1A of 

approximately $81 each year to review and update the disclosure regarding redemptions.

The amendments to Form N-PORT will require funds to report on Form N-PORT the 

liquidity classification of each portfolio investment, and we estimate that the average one-time 

compliance costs associated with this reporting will be $15,576 per fund.1179 Furthermore, we 

 1177 See infra section V.

1178 This estimate is based on the following calculation: 1 (1 hour to update registration statement disclosure 

about redemption procedures) x $324 (blended rate for a compliance attorney ($340) and a senior 

programmer ($308)) = $324. This figure incorporates the costs we estimated for each fund to update its 

registration statement to include the required disclosure about: (i) the number of days in which the fund 

will pay redemption proceeds to redeeming shareholders; and (ii) the methods the fund uses to meet 

redemption requests in stressed and non-stressed market conditions. The costs associated with these 

activities are all paperwork-related costs and are discussed in more detail infra at section V.F.

1179 This estimate is based on the following calculation: (i) project planning and systems design (24 hours x 
386

estimate that 9,347 funds will be required to file, on a monthly basis, additional information on 

Form N-PORT as a result of the amendments.1180 Assuming that 35% of funds (3,271 funds) will

choose to license a software solution to file reports on Form N-PORT in house,1181 we estimate 

an upper bound on the initial annual costs to file the additional information associated with the 

amendments for funds choosing this option of $783 per fund1182 with annual ongoing costs of 

$261 per fund.1183 We further assume that 65% of funds (6,076 funds) will choose to retain a 

third-party service provider to provide data aggregation and validation services as part of the 

 

$264 (hourly rate for a senior systems analyst) = $6,336) and (ii) systems modification integration, testing, 

installation and deployment (30 hours x $308 (hourly rate for a senior programmer) = $9,240). $6,336 + 

$9,240 = $15,576. Estimates for drafting, integrating, implementing policies and procedures are addressed 

in the discussion of rule 22e-4. This figure incorporates the costs that we estimated associated with 

preparing the section of the fund’s report on Form N-PORT that will incorporate the information that will 

be required under Item C.7. The costs associated with these activities are all paperwork-related costs and 

are discussed in more detail infra at section V.E. As discussed in section V.E infra, we believe that any 

external annual costs associated with filing Form N-PORT will be only incrementally affected by 

compliance with Item C.7 of Form N-PORT, and thus Item C.7 does not affect our previous estimates of 

these costs. 

1180 There were 10,633 open-end funds (excluding money market funds, and including ETFs) as of the end of 

2015. See 2016 ICI Fact Book, supra footnote 11, at 22, 176, 183. As discussed in note 1253, infra, we 

assume that 75% of ETFs, or 1,196 ETFs, will identify as In-Kind ETFs, which are exempt from the 

classification requirement, thereby reducing the total number of funds filing classification information to 

9,347.

1181 This assumption tracks the assumption made in the Investment Company Reporting Modernization 

Adopting Release that 35% of funds will choose to license a software solution to file reports on Form 

N-PORT. See Investment Company Reporting Modernization Adopting Release, supra footnote 120.

1182 This estimate is based upon the following calculations: $783 in internal costs = ($783 = 3 hours x $261

(blended hourly rate for senior programmer ($308), senior database administrator ($312), financial 

reporting manager ($266), senior accountant ($192), intermediate accountant ($157), senior portfolio

manager ($306), and compliance manager ($283)). We do not anticipate any change to external annual 

costs as a result of the amendments. See infra at section V.E. The hourly wage figures in this and 

subsequent footnotes are from SIFMA’s Management & Professional Earnings in the Securities Industry 

2013, modified by Commission staff to account for an 1800-hour work-year and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits, and overhead.

1183 This estimate is based upon the following calculations: $261 in internal costs ($261 = 1 hour x $261

(blended hourly rate for senior programmer ($308), senior database administrator ($312), financial 

reporting manager ($266), senior accountant ($192), intermediate accountant ($157), senior portfolio 

manager ($306), and compliance manager ($283)). We do not anticipate any change to external annual 

costs as a result of the amendments. See infra at section V.E. 
387

preparation and filing of reports on Form N-PORT,1184 and we estimate an upper bound on the 

initial costs to file the additional information associated with the amendments for funds choosing 

this option of $1,044 per fund1185 with annual ongoing costs of $131 per fund.1186

Likewise, compliance with the amendments to Form N-CEN will involve ongoing costs 

as well as one-time costs. We estimate that 10,633 funds will be required to file responses on 

Form N-CEN as a result of the amendments to the form. We estimate that the one-time and 

ongoing annual compliance costs associated with providing additional responses to Form N-CEN 

as a result of the amendments will be approximately $162 per fund.1187

Based on these estimates, staff further estimates that the total one-time costs to comply 

with the disclosure and reporting requirements will be approximately $55 million for all funds 

that would file reports on Form N-PORT in house1188 and approximately $103 million for all 

 1184 This assumption tracks the assumptions made in the Investment Company Reporting Modernization 

Adopting Release that 65% of funds will choose to retain a third-party service provider to provide data 

aggregation and validation services as part of the preparation and filing of reports on Form N-PORT. See 

Investment Company Reporting Modernization Adopting Release, supra footnote 120.

1185 This estimate is based upon the following calculations: $1,044 in internal costs ($1,044 = 4 hours x $261

(blended hourly rate for senior programmer ($308), senior database administrator ($312), financial 

reporting manager ($266), senior accountant ($192), intermediate accountant ($157), senior portfolio 

manager ($306), and compliance manager ($283)). We do not anticipate any change to external annual 

costs as a result of the amendments. 

1186 This estimate is based upon the following calculations: $130.5 in internal costs ($130.5 = (0.5 hours x $261

(blended hourly rate for senior programmer ($308), senior database administrator ($312), financial 

reporting manager ($266), senior accountant ($192), intermediate accountant ($157), senior portfolio 

manager ($306), and compliance manager ($283)). We do not anticipate any change to external annual 

costs as a result of the amendments.

1187 This estimate is based on the following calculation: 0.5 hour x $324 (blended hourly rate for a compliance 

attorney ($340) and a senior programmer ($308)) = $162. This figure incorporates the costs that we 

estimated associated with preparing the section of the fund’s report on Form N-CEN that will incorporate 

the information that will be required under Item C.20. We do not estimate any additional costs in 

connection with proposed Item E.5 of Form N-CEN because the new item only requires a yes or no 

response. We do not estimate any change to the external costs associated with Form N-CEN. The costs 

associated with these activities are all paperwork-related costs and are discussed in more detail infra at 

section V.E. 

1188 This estimate assumes that 35% of funds (3,271 funds) would choose to file reports on proposed Form 

N-PORT in house (see infra section V.D) and is based on the following calculation: 3,271 funds x $16,845 
388

funds that will use a third-party service provider to prepare and file reports on Form N-PORT.1189 

In addition, staff estimates that the total ongoing annual costs associated with the disclosure and 

reporting requirements would be approximately $1.6 million for all funds that file reports on 

Form N-PORT in house1190 and approximately $2.3 million for all funds that use a third-party 

service provider to prepare and file reports on Form N-PORT.1191

Commenters expressed concern that it was not appropriate to require public disclosure of 

liquidity classifications by position via Form N-PORT, arguing that reporting position-level 

liquidity classifications creates significant costs which outweigh the potential benefits. For 

example, they suggested this disclosure could create potential litigation exposures, create 

investor confusion surrounding the perceived precision of the classifications, stifle innovation in 

liquidity risk management, or facilitate predatory trading and/or first-mover incentives, 

particularly during times of stress.1192 We agree that funds could have encountered costs related 

to the above concerns if they were required to follow the disclosure regime contemplated in the 

original proposal. While investors already have access to fund portfolio positions, to the extent 

that position-level liquidity classifications could have been valuable to professional traders, 

predatory trading opportunities could have increased under the proposal. The final form 

mitigates these costs by requiring that a fund’s most competitively-sensitive information—its 

 

($324 + $15,576 + $783 + $162) = $55,099,995.

1189 This estimate assumes that 65% of funds (6,076) would choose to file reports on proposed Form N-PORT 

with the assistance of third-party service providers (see infra section V.D) and is based on the following 

calculation: 6,076 funds x $17,106 ($324 + $15,576 + $1,044 + $ 162) = $103,850,526.

1190 This estimate is based on the following calculation: 3,271 funds x $502.63 ($79.63 + $261 + $162) = 

$1,644,102.73.

1191 This estimate is based on the following calculation: 6,071 funds x $372.63 ($79.63 + $131 + $162) = 

$2,262,236.73

1192 See, e.g., Federated Comment Letter; Dodge & Cox Comment Letter; PIMCO Comment Letter; Invesco 

Comment Letter. 
389

individual position liquidity classifications—be filed confidentially with the Commission.

The costs of the adopted form amendments differ from the proposal in several ways. 

First, as discussed above, the Form N-PORT only requires that funds publicly disclose an 

aggregate liquidity profile, which should significantly mitigate many of the potential costs 

associated with the potential front running of mutual funds by sophisticated investors. Second, 

Form N-PORT requires a fund to disclose the percentage of the fund’s highly liquid investments 

that it has segregated to cover or pledged to satisfy margin requirements in connection with 

derivatives transactions that are classified as moderately liquid investments, less liquid 

investments, and illiquid investments. By contrast, the proposed rules required a fund to pair 

each segregated asset with the derivative it was covering. The final rule’s approach should lower 

costs relative to the proposal. We also are not requiring funds to file credit agreements as 

exhibits to Form N-1A. Many commenters objected to the proposed requirement to file line of 

credit agreements1193 with some arguing that such filings would be unnecessary because lines of 

credit are often already disclosed under existing requirements of Form N-1A, in a fund’s 

statement of additional information, in footnotes to fund financial statements, and potentially in 

Form N-CEN.

1194 In addition, commenters stated that public disclosure of line of credit 

agreements could (1) weaken their ability to negotiate credit terms;1195 (2) make public 

proprietary and competitive information;

1196 and (3) discourage lending banks from granting 

certain lending terms to funds (out of a concern that terms granted would become standard in 

 1193 Fidelity Comment Letter; CRMC Comment Letter; Invesco Comment Letter; Oppenheimer Comment 

Letter; T. Rowe Comment Letter; Voya Comment Letter.

1194 Oppenheimer Comment Letter; T. Rowe Comment Letter; Voya Comment Letter.

1195 Oppenheimer Comment Letter; Fidelity Comment Letter.

1196 CRMC Comment Letter; Invesco Comment Letter; Oppenheimer Comment Letter; Voya Comment Letter.
390

other lending agreements).1197 Removing the requirement to file credit agreements as exhibits to 

Form N-1A should, if anything, lead to a reduction in the costs associated with filing that form, 

vis-à-vis the proposed rule.

The requirement to file Form N-LIQUID in three circumstances — if more than 15% of a 

fund’s net assets are, or become, illiquid investments that are assets; if the fund’s illiquid 

investments that are assets previously exceeded 15% of net assets and the fund determines that 

its illiquid investments that are assets have changed to be less than or equal to 15% of net assets; 

or if a fund’s holdings in highly liquid investments that are assets fall below the fund’s highly 

liquid investment minimum for more than 7 consecutive calendar days — may impose small 

incremental costs on funds. The adopted rule’s liquidity risk management framework should 

help encourage funds to avoid exceeding the 15% illiquid investment limit, but in cases where 

they must file Form N-LIQUID, there will be incidental costs associated with filing the form 

itself. There will be similar incidental costs associated with filing Form N-LIQUID should a 

fund breach its highly liquid investment minimum for more than 7 consecutive calendar days. 

We estimate these costs as $1,745 per filing, and estimate the total number of filings to be 

roughly 90 per year, for an aggregate cost of $157,050.1198 Finally, any potential indirect costs 

associated with filing the form, such as spillover effects or investor flight due to a breach, should 

be limited because Form N-LIQUID filings will not be publicly disclosed. Because Form NLIQUID filings will be triggered by events that are part of a fund’s periodic review of its 

investment classifications under rule 22e-4, the monitoring costs associated with Form NLIQUID are included in our estimates of the compliance costs for rule 22e-4 above.

 1197 Fidelity Comment Letter.

1198 See infra footnotes 1280-1287 and surrounding discussion for more details on these estimates.
391

d. Effects on Efficiency, Competition, and Capital Formation

We believe the final rules’ disclosure requirements could increase informational 

efficiency by providing additional information about the aggregate liquidity profile of funds’ 

portfolios to investors and third-party service providers. To the extent that aggregate liquidity 

profiles—the percentages a fund holds in each of the four liquidity classification categories—are 

comparable across funds, this could assist investors in evaluating the risks associated with certain 

funds, which could increase allocative efficiency by assisting investors in making more informed 

investment choices that better match their risk tolerances. However, because each fund has 

discretion in how it defines both the asset type and liquidity classification of its portfolio 

positions, the publicly disclosed aggregation of these classifications may not be directly 

comparable across funds; in this case, allocative efficiency may not be enhanced, and, if fund 

liquidity profiles are misinterpreted as being comparable, efficiency could be reduced. Enhanced 

disclosure regarding funds’ liquidity and liquidity risk management practices could positively 

affect competition by permitting investors to choose whether to invest in certain funds based on 

this information. However, if investors were to move their assets among funds as a result of the 

disclosure requirements (for example, if the disclosure made clear that a certain fund was able to 

generate higher returns than its peers only because of high exposures to relatively less liquid 

positions, which then led investors with limited risk tolerance to move assets out of this fund), 

this could negatively affect the competitive stance of certain funds.

Increased investor awareness of funds’ portfolio liquidity and liquidity risk management 

practices also could promote capital formation if investors find certain funds’ liquidity profiles or 

risk management practices, or both, attractive, and this awareness promotes increased investment 

in these funds (assuming these investments consist of assets that were not otherwise invested in 
392

the capital markets) and in turn in the assets in which the funds invest. On the other hand, 

disclosure which reveals liquidity risk could negatively impact capital formation if the disclosure 

causes investors to perceive that some funds pose too great an investment risk. Investors could 

consequently decide not to invest in these funds or to decrease their investment in these funds. If 

these foregone investments are not reinvested elsewhere in capital markets, capital formation 

would be negatively affected. Conversely, to the extent that investors assume that funds 

investing in relatively less liquid investments could obtain a liquidity risk premium in the form 

of higher returns over some period of time, the potential for higher returns could draw certain 

investors to funds investing in relatively less liquid asset classes, which could positively affect 

capital formation. If investors shift their invested investments between funds based on liquidity, 

there could be capital formation effects stemming from increased (or decreased) investment in 

the funds’ portfolio investments, even if the total capital invested in funds remains constant. For 

example, if fund investors move assets from an investment strategy that entails relatively high 

liquidity risk to one whose investment strategy involves relatively low liquidity risk, less liquid 

portfolio asset classes could experience an adverse impact on capital formation while the more 

liquid portfolio asset classes could experience a positive impact on capital formation, although 

the total capital invested in funds would remain constant.

Relative to the proposal, the final disclosure and reporting requirements do not 

significantly alter our assessment of the requirements’ impact on efficiency, competition, and 

capital formation. The exclusion of individual portfolio position classification from public 

disclosure requirements reduces the potential efficiency and capital formation gains that might 

accrue from better informed investors: position-level data could have been used (directly or via 

third-party vendor applications) to construct a detailed breakdown of a fund’s liquidity profile, 
393

but any public analysis is now limited to an aggregate liquidity profile for each fund to address 

the concerns of commenters regarding the potential costs of disclosing position-level liquidity 

data publicly. At the same time, to the extent position-level liquidity classifications could be 

valuable to professional traders, requiring less public disclosure may reduce any potential 

inefficiencies that could have resulted from predatory trading or front running associated with 

the disclosure of individual investment classifications.

In addition, while we are also imposing a new filing requirement via Form N-LIQUID, 

this form will be filed confidentially with the Commission and will only be necessary when a 

fund breaches the 15% illiquid investment limit, returns to compliance with the 15% illiquid 

investment limit, or breaches its highly liquid investment minimum for longer than 7 consecutive 

calendar days. Requiring notice to the Commission of these events may itself provide an 

incentive for funds to manage their liquidity in such a way as to avoid triggering the reporting 

obligation; where a reporting obligation is triggered, Form N-LIQUID will provide the 

Commission with timely information that may prompt the Commission to inquire further into the 

circumstances that gave rise to the requirement to file Form N–LIQUID. As discussed above, 

for example, if a number of similarly-situated funds each file a report in close temporal 

proximity to one another, or if a single fund files a series of reports, such information is likely to 

be of value to the Commission in taking appropriate action to protect investors, if required. If 

Form N-LIQUID provides an early warning of potential fund liquidity issues that is sufficiently 

timely and clear to permit Commission involvement when needed to respond to the potential for 

disruptive fund closures and associated negative consequences, including fund shareholder 

dilution and any spillover effects, Form N-LIQUID could enhance efficiency to the extent that 

negative price pressure on investments due to fire sales is avoided and, to the extent mutual fund 
394

investors associate this with lower liquidity risk in the mutual fund industry, Form N-LIQUID 

may promote capital formation.

e. Reasonable Alternatives

The following discussion addresses significant alternatives to the disclosure and reporting 

requirements. More detailed alternatives to the individual elements of the requirements are 

discussed in detail above.1199

The Commission considered requiring each fund to disclose information about the 

liquidity of its portfolio positions in the fund’s prospectus or on the fund’s website, in addition to 

in reports filed on Form N-PORT. For example, we could have required a fund to disclose its 

highly liquid investment minimum, or the percentage of the fund’s portfolio invested in each of 

the liquidity categories specified under rule 22e-4(b)(2)(i), in its prospectus or on its website. 

This additional disclosure could further increase transparency with respect to funds’ portfolio 

liquidity and liquidity-related risks. But this additional disclosure could inappropriately 

emphasize risks relating to a fund’s portfolio liquidity over other significant risks associated with 

an investment in the fund. In addition, funds are not precluded from voluntarily disclosing any 

of the information contained in the rule’s required disclosure forms on their websites, so it is 

likely more efficient to allow investor demand for this information to drive whether or not funds 

publicly disclose this information of their own volition. 

Conversely, the Commission also considered both limiting and expanding the 

enhancements to funds’ liquidity-related disclosures on Form N-PORT. As discussed above, we 

are sensitive to the possibility that any amendments to the form could facilitate front-running, 

predatory trading, and other activities that could be detrimental to a fund and its investors. We 

 1199 See supra sections III.G.1.a, III.G.1.b, III.G.2.d, and III.G.3.c.
395

likewise carefully considered costs and benefits with respect to the new liquidity-related 

disclosures required under Form N-PORT and concluded that these disclosures appropriately 

balance related costs with the benefits that could arise from the ability of the Commission, and 

members of the public, to monitor and analyze the liquidity of individual funds, as well as 

liquidity trends within the fund industry.

In response to the proposal, which would have required that certain position-level data be 

reported publicly (albeit with a 60 day delay) commenters suggested that the Commission 

require (1) no reporting of any kind, or (2) no public disclosure, in light of potential negative 

competitive effects of public reporting and the limited benefits of stale data in understanding 

current fund liquidity levels.1200 The Commission considered these alternatives, but rejected the 

first alternative because it would have provided no useful information to investors to permit them 

to better understand their funds’ liquidity profiles, and no useful information to the Commission 

to enable the Commission to better monitor funds’ liquidity. With regard to the second 

alternative, providing no information to investors would have the same defect of not permitting 

investors the opportunity to assess and make investment decisions based on better information 

about funds’ liquidity. However, recognizing commenters’ concern about voluminous, stale 

data, the final form provides investors with aggregated information — the percentage of the 

funds’ portfolio falling into each of the four liquidity categories — and reserves the more 

detailed data for confidential submission to the Commission. We believe the approach in the 

final form strikes an appropriate balance, by mitigating many of the concerns expressed by 

commenters while preserving significant benefits for investors (both directly, and through the 

Commission’s improved ability to monitor funds).

 1200 See supra section III.C.6.
396

V. PAPERWORK REDUCTION ACT ANALYSIS

A. Introduction

New rule 22e-4 contains “collections of information” within the meaning of the 

Paperwork Reduction Act of 1995 (“PRA”).1201 In addition, the amendments to Form N-1A will 

impact the collections of information burden under those rules and form. The new reporting 

requirements on Form N-CEN and Form N-PORT will impact the collections of information 

burdens associated with these forms described in the Investment Company Reporting 

Modernization Adopting Release.

1202 New rule 30b1-10 and new Form N-LIQUID also contain a 

collection of information within the meaning of the PRA.1203

The titles for the existing collections of information are: “Form N-1A under the 

Securities Act of 1933 and under the Investment Company Act of 1940, Registration Statement 

of Open-End Management Investment Companies” (OMB Control No. 3235-0307). In the 

Investment Company Reporting Modernization Adopting Release, we submitted new collections 

of information for Form N-CEN and Form N-PORT.1204 The titles for these new collections of 

information are: “Form N-CEN Under the Investment Company Act, Annual Report for 

Registered Investment Companies” and “Form N-PORT Under the Investment Company Act, 

Monthly Portfolio Investments Report.” 

We are submitting new collections of information for new rule 22e-4, new rule 30b1-10, 

and new Form N-LIQUID under the Investment Company Act of 1940. The titles for these new 

collections of information will be: “Rule 22e-4 Under the Investment Company Act of 1940, 

 1201 44 U.S.C. 3501 through 3521.

1202 See Investment Company Reporting Modernization Adopting Release, supra footnote 120.

1203 See rule 30b1-10 requiring certain funds to file Form N-LIQUID.

1204 See Investment Company Reporting Modernization Adopting Release, supra footnote 120.
397

Liquidity risk management programs,” “Rule 30b1-10 Under the Investment Company Act of 

1940, Current report for open-end management investment companies,” and “Form N-LIQUID, 

Current Report, Open-end Management Investment Company Liquidity.” The Commission is 

submitting these collections of information to the OMB for review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not 

required to respond to, a collection of information unless it displays a currently valid control 

number.

The Commission is adopting new rule 22e-4, new rule 30b1-10, new Form N-LIQUID,

and amendments to Form N-1A. The Commission also is adopting new items to Form N-CEN 

and Form N-PORT. The new rules and amendments are designed to promote effective liquidity 

risk management throughout the open-end fund industry and enhance disclosure and 

Commission oversight of fund liquidity and shareholder redemption practices. We discuss 

below the collection of information burdens associated with these reforms. In the Proposing 

Release, the Commission solicited comment on the collection of information requirements and 

the accuracy of the Commission’s statements in the Proposing Release.

B. Rule 22e-4

Rule 22e-4 requires a “fund” and an In-Kind ETF, each within the meaning of rule 22e4,

1205 to establish a written liquidity risk management program that is reasonably designed to 

assess and manage the fund’s or In-Kind ETF’s liquidity risk. This program includes policies 

and procedures that incorporate certain program elements, including: (i) for funds, the 

 1205 The term “funds” is defined under rule 22e-4(a)(4) to mean an open-end management investment company 

that is registered or required to be registered under section 8 of the Act and includes a separate series of 

such an investment company, but does not include a registered open-end management investment company 

that is regulated as a money market fund under § 270.2a-7 or an In-Kind ETF, as defined under rule 22e4(a)(9).
398

classification of the liquidity of a fund’s portfolio positions; (ii) for funds and In-Kind ETFs, the 

assessment, management, and periodic review of liquidity risk (with such review occurring no 

less frequently than annually); (iii) for funds that do not primarily hold assets that are highly 

liquid investments, the determination of and periodic review of the fund’s highly liquid 

investment minimum and establishment of policies and procedures for responding to a shortfall 

of the fund’s highly liquid investment minimum, which includes reporting to the fund’s board of 

directors; and (iv) for funds and In-Kind ETFs, the establishment of policies and procedures 

regarding redemptions in kind, to the extent that the fund engages in or reserves the right to 

engage in redemptions in kind. The rule also requires board approval and oversight of a fund’s 

or In-Kind ETF’s liquidity risk management program and recordkeeping. Rule 22e-4 also 

requires a limited liquidity review, under which a UIT’s principal underwriter or depositor 

determines, on or before the date of the initial deposit of portfolio securities into the UIT, that the 

portion of the illiquid investments that the UIT holds or will hold at the date of deposit that are 

assets is consistent with the redeemable nature of the securities it issues and retains a record of 

such determination for the life of the UIT and for five years thereafter.

The requirements under rule 22e-4 that a fund and In-Kind ETF adopt a written liquidity 

risk management program, report to the board, maintain a written record of how the highly liquid 

investment minimum was determined and written policies and procedures for responding to a 

shortfall of the fund’s highly liquid investment minimum, which includes reporting to the fund’s

board of directors (for funds that do not primarily hold highly liquid investments), establish 

written policies and procedures regarding how the fund will engage in redemptions in kind, and 

retain certain other records are all collections of information under the PRA. In addition, the 

requirement under rule 22e-4 that the principal underwriter or depositor of a UIT assess the 
399

liquidity of the UIT on or before the date of the initial deposit of portfolio securities into the UIT

and retain a record of such determination for the life of the UIT, and for five years thereafter, is 

also a collection of information under the PRA. The respondents to rule 22e-4 will be open-end 

management investment companies (including, under certain circumstances, In-Kind ETFs but 

excluding money market funds), and the principal underwriters or depositors of UITs under 

certain circumstances.

1. Preparation of Written Liquidity Risk Management Program

We believe that some open-end funds regularly monitor the liquidity of their portfolios as 

part of the portfolio management function, but they may not have written policies and procedures 

regarding liquidity management. Rule 22e-4 requires funds and In-Kind ETFs to have a written 

liquidity risk management program. We believe such a program will minimize dilution of 

shareholder interests by promoting stronger and more effective liquidity risk management across 

open-end funds and will reduce the risk that a fund or In-Kind ETF will be unable to meet 

redemption obligations. 

In the Proposing Release, we estimated that funds within 867 fund complexes would be 

subject to rule 22e-4.1206 Compliance with rule 22e-4 would have been mandatory for all such 

funds. We further estimated that a fund complex would incur a one-time average burden of 40 

hours associated with documenting the liquidity risk management programs adopted by each 

fund within the complex. Under the proposal, rule 22e-4 would have required fund boards to 

approve the liquidity risk management program and any material changes to the program, and we 

estimated a one-time burden of nine hours per fund complex associated with fund boards’ review 

 1206 See Proposing Release, supra footnote 9, at n.819 and accompanying text. This estimate excluded ETFs 

and UITs. See also 2016 ICI Fact Book, supra footnote 11, at Fig. 1.8.
400

and approval of the funds’ liquidity risk management programs and preparation of board 

materials. Amortized over a 3-year period, we estimated this would be an annual burden per 

fund complex of about 16 hours. Accordingly, we estimated that the total burden for initial 

documentation and review of funds’ written liquidity risk management program would be 42,483

hours.1207 We also estimated that it would cost a fund complex approximately $38,791 to 

document, review and initially approve these policies and procedures, for a total cost of 

approximately $33,631,797.

1208

We did not receive any comments on the estimated hour and costs burdens associated 

with the overall preparation of written liquidity risk management programs under rule 22e-4

discussed above. We did, however, receive comments on the costs associated with the 

classification of the liquidity of a fund’s portfolio positions, which we address below in 

connection with Form N-PORT. The Commission has modified the estimated increase in annual 

burden hours and total time costs that will result from the new written liquidity risk management 

requirements of rule 22e-4 based on certain modifications made to rule 22e-4 and updates to the 

industry data figures that were utilized in the Proposing Release. Based upon our review of 

industry data, we estimate that funds within 873 fund complexes would be subject to rule 22e-

 1207 This estimate was based on the following calculation: (40 + 9) hours x 867 fund complexes = 42,483 hours.

1208 These estimates were based on the following calculations: 20 hours x $301 (hourly rate for a senior 

portfolio manager) = $6,020; 20 hours x $455.5 (blended hourly rate for assistant general counsel ($426) 

and chief compliance officer ($485)) = $9,110; 5 hours x $4,465 (hourly rate for a board of 8 directors) = 

$22,325; 4 hours (for a fund attorney’s time to prepare materials for the board’s determinations) x $334 

(hourly rate for a compliance attorney) = $1,336. $6,020 + $9,110 + $22,325 + $1,336 = $38,791; $38,791

x 867 fund complexes = $33,631,797. The hourly wages used are from SIFMA’s Management & 

Professional Earnings in the Securities Industry 2013, modified to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. The staff previously 

estimated in 2009 that the average cost of board of director time was $4,000 per hour for the board as a 

whole, based on information received from funds and their counsel. Adjusting for inflation, the staff 

estimates that the current average cost of board of director time is approximately $4,465.
401

4,1209 updated from 867 in our proposal. Compliance with rule 22e-4 will be mandatory for all 

such funds and In-Kind ETFs, with certain program elements applicable to certain funds within a 

fund complex based upon whether the fund is an In-Kind ETF or does not primarily hold assets 

that are highly liquid investments, as noted above. We discuss mandatory compliance with rule

22e-4 with respect to principal underwriters and depositors of UITs in section V.B.5. below.

The Commission continues to estimate that a fund complex will incur a one-time average 

burden of 40 hours associated with documenting the liquidity risk management programs 

adopted by each fund within a fund complex. In light of the requirement that a fund subject to 

the highly liquid investment minimum requirement adopt and implement policies and procedures 

for responding to a shortfall of the fund’s highly liquid investment minimum, and responding to 

any potential excesses of the 15% illiquid asset limit, both of which include reporting to the 

fund’s board of directors, we estimate a one-time burden of 10 hours, rather than 9 hours, per 

fund complex associated with fund boards’ review and approval of the funds’ liquidity risk 

management programs and preparation of board materials. Amortized over a 3-year period, we 

estimate this will be an annual burden per fund complex of about 16.67 hours. Accordingly, we 

estimate that the total burden for initial documentation and review of funds’ written liquidity risk 

management program will be 43,650 hours.1210 We also estimate that it will cost a fund complex 

approximately $41,467.5 to document, review, and initially approve these policies and 

procedures, for a total cost of approximately $36,201,127.5.

1211

 1209 See 2016 ICI Fact Book, supra footnote 11, at Fig. 1.8.

1210 This estimate is based on the following calculation: (40 +10) hours x 873 fund complexes = 43,650 hours.

1211 These estimates are based on the following calculations: 20 hours x $306 (hourly rate for a senior portfolio 

manager) = $6,120; 20 hours x $463 (blended hourly rate for assistant general counsel ($433) and chief 

compliance officer ($493)) = $9,260; 5.5 hours x $4,465 (hourly rate for a board of 8 directors) = 

$24,557.5; 4.5 hours (for a fund attorney’s time to prepare materials for the board’s determinations) x $340
402

2. Reporting Regarding the Highly Liquid Investment Minimum

Rule 22e-4 requires any fund that does not primarily hold assets that are highly liquid 

investments to determine a highly liquid investment minimum for the fund, which must be 

reviewed at least annually, and may not be changed during any period of time that a fund’s assets 

that are highly liquid investments are below the determined minimum without approval from the 

fund’s board of directors.1212 The fund’s investment adviser or officers designated to administer

the liquidity risk management program must provide a written report to the fund’s board at least 

annually that describes a review of the adequacy and effectiveness of the fund’s liquidity risk 

management program, including, if applicable, the operation of the highly liquid investment

minimum.

1213 In addition, the fund must adopt and implement policies and procedures for 

responding 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 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, an explanation of 

how the fund plans to come back into compliance with its minimum within a reasonable period 

of time.1214

Similar to the highly liquid investment minimum, in the Proposing Release, we proposed 

 

(hourly rate for a compliance attorney) = $1,530. $6,120 + $9,260 + $24,557.5 + $1,530 = $41,467.5; 

$41,467.5 x 873 fund complexes = $36,201,127.5. The hourly wages used are from SIFMA’s Management 

& Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 

1800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee 

benefits, and overhead. The staff previously estimated in 2009 that the average cost of board of director 

time was $4,000 per hour for the board as a whole, based on information received from funds and their 

counsel. Adjusting for inflation, the staff estimates that the current average cost of board of director time is 

approximately $4,465.

1212 See rule 22e-4(b)(1)(iii)(A).

1213 See rule 22e-4(b)(3)(iii).

1214 See rule 22e-4(b)(1)(iii)(A)(3).
403

that funds be required to establish a three-day liquid asset minimum as part of a fund’s liquidity 

risk management program, subject to board review, and we estimated that, for each fund 

complex, compliance with this reporting requirement would entail: (i) five hours of portfolio 

management time, (ii) five hours of compliance time, (iii) five hours of professional legal time 

and (iv) 2.5 hours of support staff time, requiring an additional 17.5 burden hours at a time cost 

of approximately $5,193 per fund complex to draft the required report to the board.1215 We 

estimated that the total burden for preparation of the board report would be 15,173 hours, at an 

aggregate cost of $4,502,331.

1216

We received several comments addressing, in general, the potential costs associated with 

a fund establishing and implementing a liquid asset minimum. To minimize the costs of 

implementing a liquid asset minimum, one commenter recommended that funds that have 

demonstrated a history of investing in only three-day liquid assets be excluded from the proposed 

three-day liquid asset minimum requirements and thus not incur the costs of related board 

reporting requirements.

1217 Other commenters characterized the program requirements under the 

proposal as a one-size-fits-all approach to liquidity risk management and expressed the belief 

 1215 This estimate was based on the following calculation: 5 hours x $301 (hourly rate for a senior portfolio 

manager) = $1,505; 5 hours x $283 (hourly rate for compliance manager) = $1,415; 5 hours x $426 (hourly 

rate for assistant general counsel) = $2,130; and 2.5 hours x $57 (hourly rate for general clerk) = $143. 

$1,505 + $1,415 + $2,130 + $143 = $5,193. The hourly wages used were from SIFMA’s Management & 

Professional Earnings in the Securities Industry 2013, modified to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead. The hourly wage 

used for the general clerk was from SIFMA’s Office Salaries in the Securities Industry 2013, modified to 

account for an 1800-hour work-year and multiplied by 2.93 to account for bonuses, firm size, employee 

benefits, and overhead.

Because, under the proposal, each fund within a fund complex would be required to determine its own 

three-day liquid asset minimum, this estimate assumed that the report at issue would incorporate an 

assessment of the three-day liquid asset minimum for each fund within the fund complex. 

1216 These estimates were based on the following calculations: 867 fund complexes x 17.5 hours = 15,173

hours; and $5,193 x 867 fund complexes = $4,502,331.

1217 See CFA Comment Letter.
404

that such requirements were expensive and unsuitable for many funds.

1218 

As discussed above, the Commission has modified the proposed three-day liquid asset 

minimum requirement to a highly liquid investment minimum requirement that is tailored to 

apply only to funds that do not primarily hold highly liquid investments, thereby potentially 

reducing the number of funds required to establish, maintain, and report a highly liquid 

investment minimum. In addition, the final rule retains a role for the board in overseeing the 

fund’s liquidity risk management program, but eliminates certain of the more specific and 

detailed approval requirements originally proposed.1219 Unlike the proposal, however, rule 22e-4 

requires a fund that is subject to the highly liquid investment minimum requirement to also adopt 

and implement policies and procedures to respond to a shortfall of assets that are highly liquid 

investments below the fund’s highly liquid investment minimum, which includes reporting to the 

fund’s board of directors. 

In light of these modifications, we estimate that the burdens associated with board 

reporting will decrease overall in comparison to the proposal due to the elimination of certain 

board oversight requirements originally proposed and the potential reduction in the number of 

funds that would require board oversight of a highly liquid investment minimum. Therefore, we 

have modified the estimated annual burden hours and total costs that will result from the highly 

liquid investment minimum requirement under rule 22e-4.

1220 We estimate that, for each fund 

complex, compliance with the reporting requirement would entail: (i) 4 hours, rather than five 

 1218 See, e.g., Dechert Comment Letter; Federated Comment Letter.

1219 See supra section III.H.3.

1220 Under the proposal, because each fund within a fund complex would have been required to determine its 

own three-day liquid asset minimum, the estimate under the proposal assumed that the report at issue would 

incorporate an assessment of the three-day liquid asset minimum for each fund within the fund complex. 

As adopted, rule 22e-4 only requires the assessment of the highly liquid investment minimum for funds that 

do not primarily hold assets that are highly liquid investments.
405

hours, of portfolio management time; (ii) 4 hours, rather than five hours, of compliance time; (iii) 

4 hours, rather than five hours, of professional legal time; and (iv) 2 hours, rather than 2.5 hours,

of support staff time, requiring an additional 14 burden hours at a time cost of approximately 

$4,224 per fund complex to draft the required report to the board.1221 We estimate that fund 

complexes will have at least one fund that will be subject to the highly liquid investment

minimum requirement. Thus, we estimate that 873 fund complexes will be subject to this 

requirement under rule 22e-4 and that the total burden for preparation of the board report 

associated will be 12,222 hours, at an aggregate cost of $3,687,552.

1222 

3. Recordkeeping

Final rule 22e-4 requires a fund or In-Kind ETF to maintain a written copy of the policies 

and procedures adopted pursuant to its liquidity risk management program for five years in an 

easily accessible place.1223 The rule also requires a fund to maintain copies of materials provided 

to the board in connection with its initial approval of the liquidity risk management program and 

any written reports provided to the board, for at least five years, the first two years in an easily 

accessible place.1224 If applicable, a fund must also maintain a written record of how its highly 

liquid investment minimum and any adjustments to the minimum were determined, as well as 

 1221 The estimate is based on the following calculation: 4 hours x $306 (hourly rate for a senior portfolio 

manager) = $1,224; 4 hours x $288 (hourly rate for compliance manager) = $1,152; 4 hours x $433 (hourly 

rate for assistant general counsel) = $1,732; and 2 hours x $58 (hourly rate for general clerk) = $116. 

$1,224 + $1,152 + $1,732 + $116 = $4,224. The hourly wages used are from SIFMA’s Management & 

Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 

1800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee 

benefits, and overhead. The hourly wage used for the general clerk is from SIFMA’s Office Salaries in the 

Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and 

inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead.

1222 These estimates are based on the following calculations: 873 fund complexes x 14 hours =12,222 hours; 

and $4,224 x 873 fund complexes = $3,687,552.

1223 See rule 22e-4(b)(4)(i).

1224 See rule 22e-4(b)(4)(ii).
406

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.

1225 The retention of these records 

would be necessary to allow the staff during examinations of funds to determine whether a fund 

is in compliance with the liquidity risk management program requirements. 

Under the proposal, the recordkeeping requirements were substantially similar to those 

being adopted. In the Proposing Release, we estimated that the burden to retain these records 

would be five hours per fund complex, with 2.5 hours spent by a general clerk and 2.5 hours 

spent by a senior computer operator, with an estimated time cost per fund complex of $361.1226 

We also estimated that the total burden for recordkeeping related to the liquidity risk 

management program would be 4,335 hours, at an aggregate cost of $312,987.

1227 

We did not receive any comments on the estimated hour and cost burdens associated with 

the recordkeeping requirements of rule 22e-4. The Commission has modified the estimated 

increase in annual burden hours and total time costs that will result from these requirements in 

light of modifications to change those subject to the requirements to funds and In-Kind ETFs and 

to require them to maintain reports to boards concerning a shortfall of the fund’s highly liquid 

investment minimum and the new requirement to retain records submitted to the board related to 

shortfalls of the minimum. We believe that, on an annual basis, the burden to retain records in 

connection with rule 22e-4 will be four hours, rather than five hours per fund complex, with 2

hours, rather than 2.5 hours, spent by a general clerk, and 2 hours, rather than 2.5 hours, spent by 

a senior computer operator, with an estimated time cost per fund complex of $292, rather than 

 1225 See rule 22e-4(b)(4)(iii).

1226 This estimate was based on the following calculations: 2.5 hours x $57 (hourly rate for a general clerk) = 

$143; 2.5 hours x $87 (hour rate for a senior computer operator) = $218. $143 + $218 = $361. 

1227 This estimate was based on the following calculations: 867 fund complexes x 5 hours = 4,335 hours. 867 

fund complexes x $361 = $312,987. 
407

$361, based on updated data concerning funds and fund personnel salaries.

1228 In addition, we 

estimate that the total burden for recordkeeping related to the liquidity risk management program 

requirement of rule 22e-4 will be 3,492 hours, rather than 4,335 hours, at an aggregate cost of 

$254,916, rather than $312,987.

1229

4. Estimated Total Burden for Open-end Funds

Amortized over a three-year period, we estimate that the hour burdens and time costs 

associated with rule 22e-4 for open-end funds, including the burden associated with (1) funds’ 

initial documentation and review of the required written liquidity risk management program, (2) 

reporting to a fund’s board regarding the fund’s highly liquid investment minimum, and (3) 

recordkeeping requirements will result in an average aggregate annual burden of 26,190 hours, 

rather than 28,611 hours as proposed, and average aggregate time costs of $14,780,326.5, rather 

than $14,431,215 as proposed.

1230 We continue to estimate that there are no external costs 

associated with this collection of information.

5. UIT Liquidity Determination

As discussed above, we recognize that UITs may in some circumstances be subject to

liquidity risk (particularly where the UIT is not a pass-through vehicle and the sponsor does not 

maintain an active secondary market for UIT shares). We believe that UITs may not have 

written policies and procedures regarding liquidity management and are adopting a new 

requirement under rule 22e-4 with respect to UITs. On or before the date of initial deposit of 

 1228 This estimate is based on the following calculations: 2 hours x $58 (hourly rate for a general clerk) = $116; 

2 hours x $88 (hour rate for a senior computer operator) = $176. $116 + $176 = $292.

1229 This estimate is based on the following calculations: 873 fund complexes x 4 hours = 3,492 hours. 873

fund complexes x $292 = $254,916.

1230 These estimates are based on the following calculations: 43,650 hours (year 1) + (2 x 12,222 hours) (years 

2 and 3) + (3 x 3,492 hours) (years 1, 2 and 3) ÷ 3 = 26,190 hours; $36,201,127.5 (year 1) + (2 x 

$3,687,552) (years 2 and 3) + (3 x $254,916) (years 1, 2 and 3) ÷ 3 = $14,780,326.5.
408

portfolio securities into a registered UIT, the UIT’s principal underwriter or depositor is required 

to determine that the portion of the illiquid investments that the UIT holds or will hold at the date 

of deposit that are assets is consistent with the redeemable nature of the securities it issues, and 

maintain a record of that determination for the life of the UIT and for five years thereafter. The 

retention of these records would be necessary to allow the staff during examinations to determine 

whether a UIT is in compliance with the liquidity risk assessment required under rule 22e-4. 

This assessment would occur on or before the initial deposit of portfolio securities of a new UIT 

and thus would only need to occur once. Maintenance of the records would be required for the 

life of the UIT and for five years thereafter. 

We estimate that 1615 newly registered UITs will be subject to the UIT liquidity 

determination requirement under rule 22e-4 each year.

1231 Compliance with rule 22e-4(c) will be 

mandatory for all principal underwriters or depositors of such UITs. We estimate that the 

principal underwriter or depositor of a UIT will incur a one-time average burden of 10 hours to 

document its determination that the portion of the illiquid investments that the UIT holds or will 

hold at the date of deposit that are assets is consistent with the redeemable nature of the 

securities it issues. Amortized over a 3 year period, we estimate this would be an annual burden 

per UIT of about 3 hours. Accordingly, we estimate that the total burden for the initial 

documentation and review of funds’ written liquidity risk management program would be 16,150

hours.

1232 We also estimate that it will cost the principal underwriter or depositor of a UIT 

approximately $2,466 to perform and document this review, for a total cost of approximately 

 1231 This estimate is based upon staff review of new UIT registration statements and semi-annual reporting on 

Form N-SAR filed with the Commission and Monthly Unit Investment Trust Data released by the 

Investment Company Institute, available at https://www.ici.org/research/stats, for the months of January 

through December of 2015.

1232 This estimate is based on the following calculation: 10 hours x 1615 new UITs = 16,150 hours.
409

$3,982,590.

1233

We estimate that the burden to retain these records will be two hours per UIT, with 1 

hour spent by a general clerk and 1 hour spent by a senior computer operator, with an estimated 

time cost per UIT of $146.1234 We also estimate that the total burden for recordkeeping related to 

the liquidity risk management program will be 3,230 hours, at an aggregate cost of $235,790.

1235 

We estimate that there are no external costs associated with this collection of information.

C. Form N-PORT

Today, the Commission is adopting Form N-PORT, which will require funds to report 

information within thirty days after the end of each month about their monthly portfolio holdings 

to the Commission in a structured data format.1236 Preparing a report on Form N-PORT is 

mandatory and a collection of information under the PRA, and the information required by Form 

N-PORT will be data-tagged in XML format. Except for certain reporting items specified in the 

form, responses to the reporting requirements will be kept confidential for reports filed with 

respect to the first two months of each quarter; the third month of the quarter will not be kept 

confidential, but made public sixty days after the quarter end.

In the Investment Company Reporting Modernization Adopting Release, we estimate 

that, for the 35% of funds that would file reports on Form N-PORT in house, the per fund 

 1233 These estimates are based on the following calculations: 5 hours x $308 (hourly rate for a senior 

programmer) = $1540; 2 hours x $463 (blended hourly rate for assistant general counsel ($433) and chief 

compliance officer ($493)) = $926. $1,540 + $926 = $2,466; $2,466 x 1615 estimated new UITs = 

$3,982,590. The hourly wages used are from SIFMA’s Management & Professional Earnings in the 

Securities Industry 2013, modified by Commission staff to account for an 1800-hour work-year and 

inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead.

1234 This estimate is based on the following calculations: 1 hour x $58 (hourly rate for a general clerk) = $58; 1 

hours x $88 (hour rate for a senior computer operator) = $88. $58 + 88 = $146.

1235 This estimate is based on the following calculations: 1615 UITs x 2 hours = 3,230 hours. 1615 UITs x 

$146 = $235,790.

1236 See Investment Company Reporting Modernization Adopting Release, supra footnote 120.
410

average aggregate annual hour burden will be 144 hours per fund, and the average cost to license 

a third-party software solution will be $4,805 per fund per year.1237 For the remaining 65% of 

funds that would retain the services of a third party to prepare and file reports on Form N-PORT 

on the fund’s behalf, we estimate that the average aggregate annual hour burden will be 125

hours per fund, and each fund will pay an average fee of $11,440 per fund per year for the 

services of third-party service provider. In sum, we estimate that filing reports on Form NPORT will impose an average total annual hour burden of 144 hours on applicable funds, and all 

applicable funds will incur on average, in the aggregate, external annual costs of $103,787,680, 

or $9,118 per fund.

1238 

Today, we are also adopting amendments to Form N-PORT concerning liquidity 

information that require a fund to report information about the fund’s highly liquid investment

minimum (if applicable),

1239 the liquidity classification for each portfolio investment among four 

liquidity categories (with the fourth category covering investments that qualify as “illiquid 

investments” under the 15% illiquid investment limit),

1240 certain information on the percentage 

of the fund’s highly liquid investments that is segregated to cover, or pledged to satisfy margin 

requirements in connection with, fund’s derivatives transactions in each of the other liquidity 

categories,

1241 and the aggregate percentage of the fund representing each of the four liquidity 

 1237 See id. at n. 1426 and accompanying text.

1238 See id. at n. 1499 and accompanying text.

1239 See Item B.7 of Form N-PORT.

1240 See Item C.7.a of Form N-PORT.

1241 See Item C.7.b of Form N-PORT. The fourth classification category incorporates data that, under the 

proposal, would have been reported as a 15% standard asset in response to proposed Item C.7 of proposed 

Form N-PORT.
411

categories.1242 Unlike the proposal, the amendments adopted today will not require funds to 

indicate the dollar amount attributable to different classifications for different portions within a 

given holding.

1243 We believe that requiring funds to report information about the liquidity of 

portfolio investments will enhance the Commission’s ability to assess liquidity risk in the openend fund industry and assist in our regulatory oversight efforts. Moreover, we believe that this 

information will help investors and other potential users of information on Form N-PORT better 

understand the liquidity risks in funds.

1. Liquidity Classification

Under rule 22e-4(b)(1)(ii), an open-end management investment company (other than a 

money market fund or an In-Kind ETF) is required as part of its liquidity risk management 

program to classify the liquidity of each of its portfolio investments (including each of the fund’s 

derivatives transactions) as a highly liquid investment, moderately liquid investment, less liquid 

investment, or illiquid investment. 

Under the proposal, all open-end funds would be required to classify portfolio assets 

under a days-to-cash framework and report such classifications on Form N-PORT.1244 In the 

Proposing Release, we estimated that 8,734 funds would be required to file, on a monthly basis, 

additional information on Form N-PORT as a result of the proposed amendments to N-PORT to 

require funds provide additional liquidity information.

1245 We stated our expectation that funds 

would incur a one-time internal burden to initially classify a fund’s portfolio securities and 

 1242 See Item C.7.c of Form N-PORT. 

1243 See supra section III.C 

1244 See id.; see also Proposing Release, supra footnote 9, at section III.B. 

1245 See Proposing Release, supra footnote 9, at n.850 and accompanying text. This was based on estimates 

that there were 8,734 open-end funds (excluding money market funds, and including ETFs (for purposes of 

these calculations, we excluded non-1940 Act ETFs)) as of the end of 2014.
412

program existing systems to conduct the ongoing classifications and reviews required under the 

proposal for reporting purposes. We estimated that each fund would incur an average one-time 

burden of 54 hours at a time cost of $15,330.1246 Amortized over a three-year period, we 

estimated that this would result in an average annual hour burden of approximately 18 burden 

hours and a time cost of $5,110.1247

Many commenters expressed concerns over the operational costs associated with the 

assignment of liquidity classifications and the reporting of this information on Form N-PORT. 

Several commenters expressed the belief that the liquidity classification requirement could 

impose significant direct costs to a fund and its shareholders (e.g., new operational systems, trade 

order management systems, and other processes to handle complex classification schemes), 

which commenters anticipated to be in excess of the Commission’s estimates under the 

proposal.

1248 One commenter estimated that the costs associated with building a liquidity 

classification system could range in the millions of dollars for fund complexes that have large 

numbers of portfolio positions.1249 Another commenter estimated $2 million in initial 

implementation costs and more than $650,000 in annual recurring costs in connection with 

automating the classification process for over 63,000 portfolio positions.1250 This commenter 

also expressed the belief that substantial resources, including additional investment professionals 

 1246 See Proposing Release, supra footnote 9, n.851 and accompanying text. We estimated that these systems 

modifications would include the following costs: (i) project planning and systems design (24 hours x $260 

(hourly rate for a senior systems analyst) = $6,240) and (ii) systems modification integration, testing, 

installation and deployment (30 hours x $303 (hourly rate for a senior programmer) = $9,090. $6,240 + 

$9,090 = $15,330.

1247 $15,330 ÷ 3 = $5,110. See Proposing Release, supra footnote 9, at n.852 and accompanying text.

1248 See, e.g., CFA Comment Letter; Federated Comment Letter; ICI Comment Letter; Voya Comment Letter.

1249 See T. Rowe Comment Letter (noting that its fund complex has just under 44,000 portfolio positions 

combined as of December 31, 2015).

1250 See Invesco Comment Letter.
413

and compliance personnel, and additional expenses associated with third-party service providers 

would increase costs associated with the classification requirement.1251 Some commenters also 

expressed concern that the costs of diverting resources and key personnel were not considered in 

the Commission’s cost estimates.1252 

As discussed above, we are adopting a liquidity classification requirement under rule 

22e-4 with a number of modifications to address commenters’ concerns. Unlike the proposal 

which would have applied to all open-end funds, In-Kind ETFs are not subject to the 

classification requirements under rule 22e-4(b)(ii). The classification categories have been 

reduced from six to four and the timeframe for projections substantially reduced, with the fourth 

category designated for those investments that qualify as “illiquid investments” harmonized with

the codified 15% illiquid investment limit. Furthermore, a fund may classify portfolio 

investments based on asset class, rather than position-by-position, so long as the fund or its 

adviser does not have information about any market, trading, or investment-specific 

considerations that are reasonably expected to significantly affect the liquidity characteristics of 

an investment and would suggest a different classification for that investment. 

We believe that these modifications to the liquidity classification requirements will 

reduce the number of funds subject to the liquidity classification requirements and will address 

some of the costs commenters anticipate funds and fund shareholders would bear to establish 

new operational, trade, and other systems to process and report fund liquidity classification 

information. However, we recognize, as discussed above, that several commenters suggested 

that implementation of liquidity classification systems would be more costly than we estimated. 

 1251 Id.

1252 See, e.g., Dechert Comment Letter; ICI Comment Letter I; Nuveen Comment Letter; Wells Fargo 

Comment Letter. 
414

Accordingly, we believe, on balance, that the per fund estimates that we proposed are reasonable 

and are not reducing them, despite having adopted some modifications to rule 22e-4 that we 

believe reduce the burden relative to the proposal. 

We estimate that 9,347 funds, rather than 8,734 funds, will be required to file, on a 

monthly basis, additional information on Form N-PORT as a result of the modifications to Form

N-PORT to require additional liquidity information.1253 We continue to expect that funds will 

incur a one-time internal burden to initially classify a fund’s portfolio securities and program 

new and/or existing systems to conduct the ongoing classifications and reviews required under 

rule 22e-4 for reporting purposes. We continue to estimate that each fund will incur an average 

one-time burden of 54 hours, at a time cost of $15,576, rather than $15,330 based on updated 

data concerning funds and fund personnel salaries.

1254 Amortized over a three-year period, we 

estimate that this will result in an average annual hour burden of approximately 18 burden hours, 

and a time cost of $5,192, rather than $5,110.1255

2. Reporting on Form N-PORT

In addition to the classification and review of securities, we estimated in the Proposing 

Release that 8,7341256 funds would be required to file, on a monthly basis, additional information 

 1253 This is based on estimates that there are 9,039 open-end mutual funds (excluding money market funds) and 

1,594 ETFs as of the end of 2015. See supra footnote 1045 and accompanying text. Based on staff 

experience, we estimate that more than 75% of ETFs or 1,196 ETFs will identify as In-Kind ETFs and thus 

will not be subject to the classification requirement. 9,039 + (1,594 – 1,196) = 9,437. 

1254 We estimate that these systems modifications will include the following costs: (i) project planning and 

systems design (24 hours x $264 (hourly rate for a senior systems analyst) = $6,336) and (ii) systems 

modification integration, testing, installation and deployment (30 hours x $308 (hourly rate for a senior 

programmer) = $9,240. $6,336 + $9,240 = $15,576. 

1255 $15,576 ÷ 3 = $5,192.

1256 See Proposing Release, supra footnote 9, at section V.E. There were 8,734 open-end funds (excluding 

money market funds, and including ETFs) as of the end of 2014. See 2016 ICI Fact Book, supra footnote

11, at 177, 184.
415

on Form N-PORT. We estimated that each fund that files reports on Form N-PORT in house 

(35%, or 3,057 funds) would require an average of approximately 3 burden hours to compile 

(including review of the information), tag, and electronically file the additional information in 

light of the proposed additions regarding liquidity information for the first time and an average 

of approximately 1 burden hours for subsequent filings. Therefore, we estimated the per fund 

average annual hour burden associated with the incremental changes to Form N-PORT as a result 

of the proposed additions for these funds would be an additional 14 hours for the first year1257 and 

an additional 12 hours for each subsequent year.1258 Amortized over three years, we estimated 

that the average annual hour burden would be an additional 12.67 hours per fund.1259 

In the Proposing Release, we also estimated that 65% of funds (5,677) would retain the 

services of a third party to provide data aggregation, validation and/or filing services as part of 

the preparation and filing of reports on proposed Form N-PORT on the fund’s behalf.1260 For 

these funds, we estimated that each fund would require an average of approximately 4 hours to 

compile and review the information with the service provider prior to electronically filing the 

report for the first time and an average of 0.5 burden hours for subsequent filings. 

Therefore, in the Proposing Release, we estimated that the per-fund average annual hour 

burden associated with the incremental changes to proposed Form N-PORT as a result of the 

proposed additions related to liquidity information for these funds would be an additional 9.5

 1257 The estimate was based on the following calculation: (1 filing x 3 hours) + (11 filings x 1 hour) = 14 

burden hours in the first year. 

1258 This estimate was based on the following calculation: 12 filings x 1 hour = 12 burden hours in each 

subsequent year. 

1259 The estimate was based on the following calculation: (14 + (12 x 2)) ÷ 3 = 12.67.

1260 Proposing Release, supra footnote 9. 
416

hours for the first year1261 and an additional 6 hours for each subsequent year.1262 Amortized over 

three years, we estimated that the average aggregate annual hour burden would be an additional 

7.17 hours per fund.1263 In sum, we estimated that the proposed additions to Form N-PORT 

would impose an average total annual hour burden of an additional 79,436.28 hours on 

applicable funds.1264 We did not anticipate any change to the total external annual costs of 

$97,674,221 associated with Form N-PORT.

1265 

As discussed in section V.E.2 above, many commenters expressed concerns over the 

operational costs associated with the assignment of liquidity classifications and the reporting of 

this information on Form N-PORT. In addition, one commenter recommended that estimated 

costs to purchase third-party liquidity assessment data be included in the total estimated costs to 

comply with proposed rule given the likelihood that many funds will subscribe to such services 

to operationally comply with the rule 22e-4.1266

The Commission has modified the estimated increase in annual burden hours and total 

time costs that will result from Form N-PORT and the liquidity related amendments to Form NPORT in consideration of commenters’ concerns that the Commission underestimated the 

operational requirements for reporting and to reflect updates to the industry data figures that 

were utilized in the Proposing Release. We estimate that 9,347 funds would be required to file, 

 1261 The estimate was based on the following calculation: (1 filing x 4 hours) + (11 filings x 0.5 hour) = 9.5 

burden hours in the first year. 

1262 This estimate was based on the following calculation: 12 filings x 0.5 hour = 6 burden hours in each 

subsequent year. 

1263 The estimate was based on the following calculation: (9.5 + (6 x 2)) ÷ 3 = 7.17.

1264 The estimate was based on the following calculation: (3,057 funds x 12.67 hours) + (5,677 funds x 7.17 

hours) = 79,436.28 hours.

1265 See Proposing Release, supra footnote 9; see also Investment Company Reporting Modernization Adopting 

Release, supra footnote 120.

1266 See Interactive Data Comment Letter.
417

on a monthly basis, additional information on Form N-PORT as a result of the additional 

liquidity-related reporting items adopted today. 1267 

We estimate that each fund that files reports on Form N-PORT in house (35%, or 3,271) 

will require an average of approximately 6 burden hours, rather than 3 burden hours, to compile 

(including review of the information), tag, and electronically file the additional liquidity 

information required on Form N-PORT for the first time and an average of approximately 2

burden hours, rather than 1 burden hour, for subsequent filings. Therefore, we estimate the per 

fund average annual hour burden associated with the incremental changes to Form N-PORT as a 

result of the added liquidity information for these funds would be an additional 28 hours, rather 

than 14 hours for the first year1268 and an additional 24 hours for each subsequent year.1269 

Amortized over three years, the average annual hour burden would be an additional 25.33 hours 

per fund.1270 

We further estimate that 65% of funds (9,076) will retain the services of a third party to 

provide data aggregation, validation and/or filing services as part of the preparation and filing of 

reports on Form N-PORT on the fund’s behalf. For these funds, we estimate that each fund will 

require an average of approximately 8 hours, rather than 4 hours, to compile and review the 

added liquidity-related information with the service provider prior to electronically filing the 

report for the first time and an average of 1 burden hour, rather than 0.5 burden hours, for 

subsequent filings. Therefore, we estimate the per fund average annual hour burden associated 

 1267 See footnote 1253 and accompanying text. 

1268 The estimate is based on the following calculation: (1 filing x 6 hours) + (11 filings x 2 hour) = 28 burden 

hours in the first year. 

1269 This estimate is based on the following calculation: 12 filings x 2 hour = 24 burden hours in each 

subsequent year. 

1270 The estimate is based on the following calculation: (28 + (24 x 2)) ÷ 3 = 25.33.
418

with the liquidity-related changes to Form N-PORT for these funds would be an additional 19 

hours, rather than 9.5 hours, for the first year1271 and an additional 12 hours, rather than 6 hours, 

for each subsequent year.1272 Amortized over three years, the average aggregate annual hour

burden would be an additional 14.33 hours per fund, rather than 7.17 hours per fund.1273 

In sum, we estimate that the adopted additional liquidity reporting information on Form 

N-PORT will impose an average total annual hour burden of an additional 169,923.51 hours, 

rather than 79,436.28 hours, on applicable funds.1274 As we stated in the Proposing Release, we 

believe that the changes to Form N-PORT associated with reporting liquidity classifications will 

not result in third party service providers charging additional fees above those estimated in the 

Investment Company Modernization Proposing Release. Therefore, we have revised our 

estimates of number of funds affected as discussed previously, but are continuing to estimate the 

same external costs for hiring third party service providers as in the Investment Company 

Modernization Adopting Release. Accordingly, we estimate that the total external annual cost

burden of compliance with the information collection requirements of Form N-PORT will be 

$103,787,680, or $9,118 per fund.1275 

D. Form N-LIQUID and Rule 30b1-10

As discussed above, we are adopting a new requirement that open-end investment 

companies, including In-Kind ETFs but not including money market funds, file a current report 

 1271 The estimate is based on the following calculation: (1 filing x 8 hours) + (11 filings x 1 hour) = 19 burden 

hours in the first year. 

1272 This estimate is based on the following calculation: 12 filings x 1 hour = 12 burden hours in each 

subsequent year. 

1273 The estimate is based on the following calculation: (19 + (12 x 2)) ÷ 3 = 14.33.

1274 The estimate is based on the following calculation: (3,271 funds x 25.33 hours) + (6,076 funds x 14.33 

hours) = 169,923.51 hours.

1275 See Investment Company Reporting Modernization Adopting Release, supra footnote 120.
419

on Form N-LIQUID on a non-public basis when certain events related to their liquidity occur.1276 

Similar to Form 8-K under the Exchange Act,1277 or Form N-CR under the Investment Company 

Act for money market funds,1278 Form N-LIQUID requires disclosure, by means of a current 

report filed with the Commission, of certain specific reportable events. The information reported 

on Form N-LIQUID concerns events under which more than 15% of a fund’s or In-Kind ETF’s 

net assets are, or become, illiquid investments that are assets as defined in rule 22e-4 and when

holdings in illiquid investments are assets that previously exceeded 15% of a fund’s net assets 

have changed to be less than or equal to 15% of the fund’s net assets.

1279 The information 

reported on Form N-LIQUID also regards events under which a fund’s holdings in assets that are 

highly liquid investments fall below the fund’s highly liquid investment minimum for more than 

7 consecutive calendar days. A report on Form N-LIQUID is required to be filed, as applicable, 

within one business day of the occurrence of one or more of these events.

1280 

This reporting requirement on Form N-LIQUID is a collection of information under the 

PRA. The information provided on Form N-LIQUID will enable the Commission to receive 

information on fund liquidity events more uniformly and efficiently and will enhance the 

Commission’s oversight of funds when significant liquidity events occur and its ability to 

respond to market events. The Commission will be able to use the information provided on 

Form N-LIQUID in its regulatory, disclosure review, inspection, and policymaking roles. This 

 1276 This requirement will be implemented through our adoption of new rule 30b1-10, which requires funds to 

file a report on new Form N-LIQUID in certain circumstances. See rule 30b1-10; Form N-LIQUID. For 

purposes of the PRA analysis, therefore, the burden associated with the requirements of rule 30b1-10 is 

included in the collection of information requirements of Form N-LIQUID.

1277 17 CFR 249.308. 

1278 17 CFR 270.30b1-8.

1279 See Item C.1 and Item C.2 of Part A of Form N-LIQUID. 

1280 See General Instruction A.2 of Form N-LIQUID.
420

collection of information will be kept confidential.

The staff estimates that the Commission will receive, in the aggregate, an average of 30

reports1281 per year filed in response to an event specified on Part B (“Above 15% Illiquid 

Investments”), an average of 30 reports1282 per year filed in response to an event specified on Part 

C (“At or Below 15% Illiquid Investments”), and an average of 30 reports1283 per year filed in 

response to an event specified on Part D (“Highly Liquid Investments Below the Highly Liquid 

Investment Minimum”) of the form. 

When filing a report on Form N-LIQUID,1284 staff estimates that a fund will spend on 

average approximately 4 hours1285 of an in-house attorney’s time and one1286 hour of an in-house 

accountant’s time to prepare, review, and submit Form N-LIQUID, at a total time cost of 

$1,745.1287 Accordingly, in the aggregate, staff estimates that compliance with new rule 30b1-10

and Form N-LIQUID will result in a total annual burden of approximately 450 burden hours and 

total annual time costs of approximately $157,050.

1288 Given an estimated 10,633 funds will be 

 1281 Commission staff estimates this figure based, in part, by reference to the total of 28 Form N-CR filings 

received by the Commission from mid-July 2015 to mid-July 2016. We recognize that the circumstances 

under which money market funds report events on Form N-CR are not the same as the liquidity events 

reported on Form N-LIQUID and that reported occurrences may be less than or more than 30. We believe, 

however, that Form N-CR provides a helpful guidepost for estimation purposes and believe an estimation 

of 30 reports is appropriate for purposes of this PRA.

1282 See id.

1283 See id.

1284 For purposes of this estimate, the staff expects that it would take approximately the same amount of time to 

prepare and file a report on Form N-LIQUID, regardless under which Part of Form N-LIQUID it is filed.

1285 This estimate is derived in part from our current PRA estimate for Form N-CR and Form 8-K.

1286 Id.

1287 This estimate is based on the following calculations: (4 hours x $386/hour for an attorney = $1,544), plus 

(1 hour x $201/hour for a senior accountant = $201), for a combined total of 5 hours at total time costs of 

$1,745.

1288 This estimate is based on the following calculations: (30 reports filed per year with respect to Part B) + (30 

reports filed per year with respect to Part C) + (30 reports filed per year with respect to Part D) = 90 reports 

filed per year. 90 reports filed per year x 5 hours per report = approximately 450 total annual burden hours. 
421

required to comply with new rule 30b1-10 and Form N-LIQUID,

1289 this would result in an 

annual burden of approximately 0.04 burden hours and annual time costs of approximately $15

on a per-fund basis. Staff estimates that there will be no external costs associated with this 

collection of information.

E. Form N-CEN

On May 20, 2015, we proposed to amend rule 30a-1 to require all funds to file reports 

with certain census-type information on proposed Form N-CEN with the Commission on an 

annual basis. Proposed Form N-CEN would have been a collection of information under the 

PRA, and was designed to facilitate the Commission’s oversight of funds and its ability to 

monitor trends and risks. The collection of information under Form N-CEN would be mandatory 

for all funds, and responses would not be kept confidential.

In the Investment Company Reporting Modernization Proposing Release, we estimated 

that the average annual hour burden per response for proposed Form N-CEN for the first year 

would be 32.37 hours and 12.37 hours in subsequent years.1290 Amortizing the burden over three 

years, we estimated that the average annual hour burden per fund per year would be 19.04 and 

the total average annual hour burden would be 59,900 hours.1291 We also estimated that all 

applicable funds would incur, in the aggregate, external annual costs of $1,748,637, which would 

include the costs of registering and maintaining LEIs for funds. 

We are adopting, substantially as proposed, amendments to Form N-CEN to enhance the 

 

90 reports filed per year x $1,745 in costs per report = $157,050 total annual costs.

1289 This estimate is based on the number of funds the staff estimates will be required to file reports on Form NPORT with the Commission. For purposes of this PRA, the staff assumes that the universe of funds 

affected by rule 30b1-9 for Form N-PORT would be similar to the universe of funds affected by rule 30b1-

10 for Form N-LIQUID.

1290 Investment Company Reporting Modernization Proposing Release, supra footnote 120.

1291 Id. at n.765 and accompanying text.
422

reporting of a fund’s liquidity risk management practices. Specifically, the amendments to Form 

N-CEN will require a fund to report information about lines of credit, but in a modification to the 

proposal, funds will report about both committed and uncommitted lines of credit.1292 As 

proposed, funds will be required to report information such as the size of the line of credit, the 

number of days that the line of credit was used, and the identity of the institution with whom the 

line of credit is held.1293 The amendments to Form N-CEN also will require a fund to report 

whether it engaged in interfund lending or interfund borrowing.1294 In addition, amendments to 

Form N-CEN will require an ETF to report whether it qualifies as an “In-Kind ETF” for 

purposes of rule 22e-4.

1295 

In the Proposing Release, we estimated that 8,734 funds would be required to file

responses on Form N-CEN as a result of the proposed amendments to the form. We estimated

that the average annual hour burden per additional response to Form N-CEN as a result of the 

proposed amendments would be 0.5 hour per fund per year for a total average annual hour 

burden of 4,367 hours.1296 We did not estimate any change to the external costs associated with 

proposed Form N-CEN.

We did not receive any comments on these estimated hour and cost burdens. The 

Commission has modified the estimated increase in annual burden hours and total time costs that 

 1292 See Item C.20.a. of Form N-CEN.

1293 See Id.

1294 See Item C.20.b. of Form N-CEN.

1295 See Item E.5 of Form N-CEN. We do not estimate any change in burden as a result of Item E.5 of Form NCEN because the item only requires a yes or no response. In the Proposing Release, we also proposed to 

add to Form N-CEN a requirement for funds to report whether the fund required 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. We are adopting this requirement in the 

Reporting Modernization Release. See supra footnote 898. 

1296 This estimate was based on the following calculation: 8,734 funds x 0.5 hours = 4,367 hours.
423

will result from the amendments based on the modifications to the proposal to require funds to 

report information on uncommitted lines of credit in addition to committed lines of credit as well 

as in light of updated data concerning funds and fund personnel salaries. We estimate that 

10,633 funds, rather than 8,734 funds will be required to file responses on Form N-CEN as a 

result of the amendments to the form based on updates to the industry data figures that were 

utilized in the Proposing Release. 1297 We estimate that the average annual hour burden per 

additional response to Form N-CEN as a result of the adopted additions to Form N-CEN will be

one hour per fund per year, instead of 0.5 hour per fund per year, for a total average annual hour 

burden of 10,633, rather than 4,367 hours.1298 We do not estimate any change to the external 

costs associated with proposed Form N-CEN.

F. Form N-1A

Form N-1A is the registration form used by open-end investment companies. The 

respondents to the amendments to Form N-1A adopted today are open-end management 

investment companies registered or registering with the Commission. Compliance with the 

disclosure requirements of Form N-1A is mandatory, and the responses to the disclosure 

requirements are not confidential. We currently estimate for Form N-1A a total hour burden of 

1,579,974 hours, and the total annual external cost burden is $124,820,197.1299

We are adopting amendments to Form N-1A that require funds to disclose additional 

information concerning the procedures for redeeming a fund’s shares. Funds will be required to 

describe the number of days following receipt of shareholder redemption requests in which the 

 1297 See 2016 ICI Fact Book, supra footnote 11, at 22, 176, 183.

1298 This estimate is based on the following calculation: 10,633 funds x 1 hour = 10,633 hours.

1299 These estimates are based on the last time the rule’s information collections were submitted for PRA 

renewal in 2014.
424

fund reasonably expects to pay redemption proceeds to redeeming shareholders.1300 Funds also 

will be required to describe the methods used to meet redemption requests in stressed and 

non-stressed market conditions.1301 Funds, however, will not be required to file as exhibits to 

their registration statements credit agreements as originally proposed. Overall, we believe that 

requiring funds to provide this additional disclosure regarding redemption procedures will

provide Commission staff, investors, and market participants with improved information about 

the procedures funds use to meet their redemption obligations.

Form N-1A generally imposes two types of reporting burdens on investment companies: 

(i) the burden of preparing and filing the initial registration statement; and (ii) the burden of 

preparing and filing post-effective amendments to a previously effective registration statement 

(including post-effective amendments filed pursuant to rule 485(a) or 485(b) under the Securities 

Act, as applicable). In the Proposing Release, we estimated that each fund would incur a onetime burden of an additional 2 hours,1302 at a time cost of an additional $637,1303 to draft and 

finalize the required disclosure and amend its registration statement in response to the proposed 

Form N-1A disclosure requirements. In aggregate, we estimated that funds would incur a onetime burden of an additional 17,468 hours,

1304 at a time cost of an additional $5,563,558,1305 to 

comply with the Form N-1A disclosure requirements originally proposed. We estimated that 

 1300 See Item 11(c)(7) of Form N-1A.

1301 See Item 11(c)(8) of Form N-1A. 

1302 This estimate was based on the following calculation: 1 hour to update registration statement to include

swing pricing-related disclosure statements + 1 hour to update registration statement disclosure about 

redemption procedures = 2 hours.

1303 This estimate was based on the following calculation: 2 hours x $318.5 (blended rate for a compliance 

attorney ($334) and a senior programmer ($303)) = $637.

1304 This estimate was based on the following calculations: 2 hours x 8,734 funds = 17,468 hours.

1305 This estimate was based on the following calculation: 17,468 hours x $318.50 (blended rate for a 

compliance attorney ($334) and a senior programmer ($303)) = $5,563,558.
425

amortizing the one-time burden over a three-year period would result in an average annual 

burden of an additional 5,823 hours at a time cost of an additional $1,854,519.1306 

In the Proposing Release, we also estimated that each fund would incur an ongoing 

burden of an additional 0.25 hours, at a time cost of an additional $80,1307 each year to review and 

update the proposed disclosure in response to Item 11 and Item 28 of Form N-1A regarding the 

pricing and redemption of fund shares and the inclusion of credit agreements as exhibits, 

respectively. In aggregate, we estimated that funds would incur an annual burden of an 

additional 2,184 hours,1308 at a time cost of an additional $695,604,1309 to comply with the 

proposed Form N-1A disclosure requirements.

In the Proposing Release, we further estimated that amortizing these one-time and 

ongoing hour and cost burdens over three years would result in an average annual increased 

burden of approximately 0.50 hours per fund,1310 at a time cost of $265.42 per fund.1311 

In total, we estimated in the Proposing Release that funds would incur an average annual 

increased burden of approximately 8,007 hours,1312 at a time cost of approximately 

$2,550,123,

1313 to comply with the proposed Form N-1A disclosure requirements. We did not 

 1306 This estimate was based on the following calculation: 17,468 hours ÷ 3 = 5,823 average annual burden 

hours; $5,563,558 burden costs ÷ 3 = $1,854,519 average annual burden cost.

1307 This estimate was based on the following calculations: 0.25 hours x $318.50 (blended hourly rate for a 

compliance attorney ($334) and a senior programmer ($303)) = $79.63.

1308 This estimate was based on the following calculation: 0.25 hours x 8,734 funds = 2,183.5 hours.

1309 This estimate was based on the following calculation: 2,184 hours x $318.50 (blended hourly rate for a 

compliance attorney ($334) and a senior programmer ($303)) = $695,604.

1310 This estimate was based on the following calculation: 1 burden hour (year 1) + 0.25 burden hour (year 2) + 

0.25 burden hour (year 3) ÷ 3 = 0.50 hours.

1311 This estimate was based on the following calculation: $637 (year 1 monetized burden hours) + $79.63 (year 

2 monetized burden hours) + $79.63 (year 3 monetized burden hours) ÷ 3 = $265.42.

1312 This estimate was based on the following calculation: 5,823 hours + 2,184 hours = 8,007 hours.

1313 This estimate was based on the following calculation: $1,854,519 + $695,604 = $2,550,123.
426

estimate any change to the external costs associated with the proposed amendments to Form N1A.

One commenter stated that the cost estimates under the proposal were overly optimistic, 

including as an example our estimated $637 cost per fund to implement the proposed Form N-1A 

disclosure requirements.

1314 As discussed above, our amendments to Form N-1A include several 

modifications or clarifications from the proposal that address concerns raised by commenters and 

that are intended, in part, to decrease implementation burdens relative to the proposal. For 

example, we are not adopting the proposed requirement that funds file credit agreements as 

exhibits to their registration statements. Furthermore, instead of a requirement for funds to 

disclose the exact number of days in which a fund would pay redemption proceeds, including the 

number of days that apply for each distribution channel of the fund, funds are required to 

disclose the number of days a fund reasonably expects to pay redemption proceeds and are not 

required to account for all distribution channels, only varied payment methods, if applicable. We 

believe that these modifications will increase the quality of information provided to fund 

shareholders about the timing of their redemption proceeds and, at the same time, reduce the 

likelihood that disclosures regarding such timing will be overly granular and complex for 

investors and overly burdensome for registrants. 

We believe that certain modifications from and clarifications to the proposal that we are 

adopting today as well as the removal of the swing pricing disclosure requirements from this 

Release will generally reduce the estimated burden hours and costs associated with the adopted 

 1314 See FSR Comment Letter (noting that changes to a fund’s disclosure typically involve a number of 

stakeholders and several rounds of drafting and review, such that costs associated with even modest 

changes to fund disclosure can have a serious cost component). With the exception of this comment, we 

did not receive comments on the estimated hour and costs burdens associated with the disclosure 

amendments to Form N-1A under the proposal.
427

amendments to Form N-1A relative to the proposal. Furthermore, we have considered the 

concern expressed by one commenter that the burdens and costs estimated in the proposal were 

overly optimistic and believe that any possible underestimates in burdens and costs expressed in 

the proposal have been offset by the adopted modifications that reduce such burdens. For these 

reasons, we believe that the amendments to Form N-1A adopted today, including modifications 

from the proposal, will reduce the estimated burden hours and costs stated in the Proposing 

Release.

We estimate that each fund will incur a one-time burden of an additional hour, rather than 

2 hours, to draft and finalize the required disclosure and amend its registration statement,

1315 but 

at a time cost of an additional $324, rather than $637,1316 based on updated data concerning funds 

and fund personnel salaries and the removal of the swing pricing disclosure requirement. In 

aggregate, we estimate that funds will incur a one-time burden of an additional 11,114 hours, 1317

rather than 17,468 hours, at a time cost of an additional $3,600,936,

1318 rather than $5,563,558, to 

comply with the Form N-1A disclosure requirements as adopted. We estimate that amortizing 

the one-time burden over a three-year period will result in an average annual burden of an 

additional 3,705 hours, rather than 5,823 hours at a time cost of an additional $1,200,312, rather 

than $1,854,519.1319 

 1315 This estimate is based on the following calculation: 1 hour to update registration statement disclosure about 

redemption procedures = 1 hour.

1316 This estimate is based on the following calculation: 1 hour x $324 (blended rate for a compliance attorney

($340) and a senior programmer ($308)) = $324.

1317 This estimate was based on the following calculations: 1 hour x 11,114 funds (including money market 

funds and ETFs) = 11,114 hours.

1318 This estimate is based on the following calculation: 11,114 hours x $324 (blended rate for a compliance 

attorney ($340) and a senior programmer ($308)) = $3,600,936.

1319 This estimate is based on the following calculation: 11,114 hours ÷ 3 = 3,704.67 average annual burden 

hours; $3,600,936 burden costs ÷ 3 = $1,200,312 average annual burden cost.
428

In addition, we estimate that each fund will incur an ongoing burden of an additional 0.25 

hours, but at a time cost of an additional $81,

1320 each year to review and update disclosures 

required in response to the amendments to Form N-1A. In aggregate, we estimate that funds will

incur an annual burden of an additional 2,778.50 hours,1321 at a time cost of an additional 

$900,234,

1322 to comply with the Form N-1A disclosure requirements adopted today.

Furthermore, we estimate that amortizing these one-time and ongoing hour and cost 

burdens over three years will result in an average annual increased burden of approximately 0.50 

hours per fund,1323 at a time cost of $162 per fund.1324 

In total, we estimate that funds will incur an average annual increased burden of 

approximately 6,483.17 hours,1325 at a time cost of approximately $3,300,858,

1326 to comply with 

the Form N-1A disclosure requirements adopted today. We do not estimate any change to the 

external costs associated with these amendments to Form N-1A.

VI. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS

This Final Regulatory Flexibility Analysis has been prepared in accordance with section 

3 of the Regulatory Flexibility Act (“RFA”).1327 It relates to: new rule 22e-4; new Rule 30b-10,

Form N-LIQUID; and amendments to Form N-1A, Form N-PORT, and Form N-CEN. We 

 1320 This estimate is based on the following calculations: 0.25 hours x $324 (blended hourly rate for a 

compliance attorney ($340) and a senior programmer ($308)) = $81.

1321 This estimate is based on the following calculation: 0.25 hours x 11,114 funds = 2,778.50 hours.

1322 This estimate is based on the following calculation: 2,778.50 hours x $324 (blended hourly rate for a 

compliance attorney ($340) and a senior programmer ($308)) = $900,234.

1323 This estimate is based on the following calculation: 1 burden hour (year 1) + 0.25 burden hour (year 2) + 

0.25 burden hour (year 3) ÷ 3 = 0.50 hours.

1324 This estimate is based on the following calculation: $324 (year 1 monetized burden hours) + $81 (year 2 

monetized burden hours) + $81 (year 3 monetized burden hours) ÷ 3 = $162.

1325 This estimate is based on the following calculation: 3,704.67 hours + 2,778.50 hours = 6,483.17 hours.

1326 This estimate is based on the following calculation: $1,200,312 + $900,234= $2,100,546.

1327 5 U.S.C. 604.
429

prepared an Initial Regulatory Flexibility Analysis (“IRFA”) in conjunction with the Proposing 

Release in September 2015.

1328 The Proposing Release included, and solicited comment, on the 

IRFA. In the Proposing Release, we also proposed amendments to rule 22c-1, rule 31a-2, and 

Form N-1A as well as additions to Form N-CEN regarding the use of swing pricing.1329 

A. Need for the Rule

With the exception of money market funds, open-end funds (including both in-kind and 

other ETFs) and UITs are not currently subject to requirements under the federal securities laws 

or Commission rules that specifically require them to manage their liquidity risk,

1330 although

there are guidelines stating that such entities should limit their investments in illiquid assets.1331

In addition, funds are only subject to limited disclosure and reporting requirements concerning a 

fund’s liquidity risk and risk management.1332 We understand that funds today engage in a 

variety of different practices, with varying levels of comprehensiveness, for classifying the 

liquidity of their portfolio investments, assessing and managing liquidity risk, and disclosing 

information about their liquidity risk, redemption practices, and liquidity risk management 

practices to investors.1333

The Commission is adopting a new rule, amendments to current rules, a new form and 

amendments to current forms to promote effective liquidity risk management throughout the 

open-end fund industry and thereby reduce the risk that funds will be unable to meet redemption 

obligations and mitigate dilution of the interests of fund shareholders. The changes also seek to 

 1328 See Proposing Release, supra footnote 9, at section VI.

1329 See Proposing Release, supra footnote 9, at section III.G.1.b.

1330 See supra sections II.D and IV.B.1.a.

1331 See id.

1332 See supra sections II.D and IV.B.1.c.

1333 See supra sections II.D, IV.B.1.a and IV.B.1.c.
430

enhance disclosure regarding fund liquidity and redemption practices. Specifically, a primary 

objective of these liquidity regulations is to promote shareholder protection by elevating the 

overall quality of liquidity risk management across the fund industry, as well as by increasing 

transparency of funds’ liquidity risks and risk management. The liquidity regulations are also 

intended to lessen the possibility of investor dilution created by insufficient liquidity risk 

management. Finally, the liquidity regulations are meant to address recent industry 

developments that have underscored the significance of funds’ liquidity risk management 

practices. Each of these objectives is discussed in detail in section III above.

B. Significant Issues Raised by Public Comment

In the Proposing Release, we requested comment on the IRFA, requesting in particular 

comment on the number of small entities that would be subject to the proposed liquidity 

regulations and whether the proposed liquidity regulations would have any effects that have not 

been discussed. We requested that commenters describe the nature of any effects on small 

entities subject to the proposed liquidity regulations and provide empirical data to support the 

nature and extent of such effects. We also requested comment on the estimated compliance 

burdens of the proposed liquidity regulations and how they would affect small entities. We 

received a number of comments related to the impact of our proposal on small entities, with 

some commenters expressing concern that liquidity risk management programs, as proposed, 

would require building entirely new systems and/or maintaining parallel system, which certain of 

the commenters believed could generate disproportionate burdens on small funds.1334 We discuss

these costs in detail in section V., above, and conclude that such costs are justified by the 

benefits of liquidity risk management programs.

 1334 See Dechert Comment Letter; ICI Comment Letter I; SIFMA Comment Letter I; T. Rowe Comment Letter.
431

C. Small Entities Subject to the Rule

An investment company is a small entity if, together with other investment companies in 

the same group of related investment companies, it has net assets of $50 million or less as of the 

end of its most recent fiscal year.

1335 Commission staff estimates that, as of December 31, 2015, 

there were 78 small open-end investment companies (within 76 fund complexes) that would be 

considered small entities; this number includes open-end ETFs.

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

1. New Rule 22e-4

Rule 22e-4 generally requires each registered open-end fund (but not including money 

market funds), including each small entity, to establish a written liquidity risk management 

program.1336 A fund’s board will be required to approve the fund’s liquidity risk management 

program, as well as the fund’s designation of the fund’s investment adviser or officers as 

responsible for administering the fund’s liquidity risk management program, and review a report 

on the program’s effectiveness no less than annually. In addition, for funds that do not primarily 

hold assets that are highly liquid investments, the new rule requires the determination of and 

periodic review of the fund’s highly liquid investment minimum and establishment of policies 

and procedures for responding to a shortfall of the fund’s highly liquid investment minimum, 

which includes reporting to the fund’s board of directors. The new rule also requires a fund’s 

liquidity risk management program to incorporate certain specified elements.1337 Rule 22e-4 

includes tailored liquidity risk management program requirements for ETFs, intended to target 

ETFs’ unique risks while eliminating requirements that are largely inapplicable to ETFs that 

 1335 See rule 0-10(a) under the Act.

1336 See supra footnote 113.

1337 See id. and accompanying and preceding text.
432

redeem in kind.1338 The rule also includes liquidity-related requirements for UITs, intended to 

recognize the unmanaged structure of UITs while requiring that principal underwriters or 

depositors of UITs to determine, on or before the date of the initial deposit of portfolio securities

into a UIT, that the portion of the illiquid investments that the UIT holds or will hold at the date

of deposit that are assets is consistent with the redeemable nature of the securities that it

issues.1339 Rule 22e-4 also includes certain recordkeeping requirements.1340 We estimate that 76 

fund complexes are small fund groups that have funds that would be required to comply with the 

proposed liquidity risk management program requirement.1341 As discussed above, we estimate 

that a fund complex would incur one-time costs ranging from $0.8 million to $10.2 million, 

depending on the fund’s particular circumstances and current liquidity risk management 

practices, to establish and implement a liquidity risk management program.1342 We further 

estimate that a fund complex would incur ongoing annual costs associated with proposed rule 

22e-4 that would range from $40,000 to $3.3 million.

1343 Finally, we estimate that any UITs 

launched after the rule’s compliance date will incur one-time costs associated with rule 22e-4 of 

$8,000 to $52,000.

1344

2. Disclosure and Reporting Requirements Regarding Liquidity Risk and Liquidity 

Risk Management

New Form N-LIQUID, along with amendments to Form N-1A, Form N-PORT, and Form 

 1338 See id.

1339 See supra section III.K.

1340 See supra section III.I.

1341 Commission staff estimate as of December 31, 2015.

1342 See supra paragraph accompanying footnote 1101.

1343 See supra paragraph accompanying footnote 1104.

1344 See supra footnote 1116 and accompanying text.
433

N-CEN are intended to enhance fund disclosure and reporting regarding a fund’s redemption 

practices, portfolio liquidity, and certain liquidity risk management practices. New Form NLIQUID will require a fund to confidentially notify the Commission if the fund’s illiquid 

investment holdings exceed 15% of its net assets or if its highly liquid investments decline below 

its minimum for more than a brief period of time.1345 The amendments to Form N-1A require 

funds to disclose additional information concerning the procedures for redeeming a fund’s 

shares.1346 The amendments to Forms N-PORT and N-CEN require reporting of certain 

information regarding the liquidity of a fund’s holdings and the fund’s liquidity risk management 

practices. We estimate that 78 funds are small entities that would be required to comply with the 

proposed disclosure and reporting requirements.1347 

As discussed above, for each fund, including a fund that is a small entity, when filing a 

report on Form N-LIQUID, staff estimates that a fund will spend on average approximately 4 

hours1348 of an in-house attorney’s time and one1349 hour of an in-house accountant’s time to 

prepare, review, and submit Form N-LIQUID, at a total time cost of $1,745.

1350 Staff estimates 

that there will be no external costs associated with this collection of information.

As discussed above, we estimate that each fund, including funds that are small entities, would 

incur a one-time burden of an additional 1 hour,1351 at a time cost of an additional $324 (plus printing 

 1345 See supra section III.L.2.

1346 See supra section III.L.1.

1347 Commission staff estimate as of December 31, 2015.

1348 See supra footnote 1285 and accompanying text.

1349 Id.

1350 See supra footnote 1287 and accompanying text.

1351 See supra footnote 1302 and accompanying text.
434

costs), to comply with the amendments to Form N-1A.1352 We also estimate that each fund, including 

small entities, would incur an ongoing burden of an additional 0.25 hours, at a time cost of 

approximately an additional $81 each year associated with compliance with the amendments to Form 

N-1A.1353 We do not estimate any change to the external costs associated with the proposed 

amendments to Form N-1A.

We also estimate that each fund that files reports on Form N-PORT (35% of funds) in 

house will require an average of approximately 6 burden hours to compile (including review of 

the information), tag, and electronically file the additional liquidity information required on 

Form N-PORT for the first time and an average of approximately 2 burden hours, rather than 1 

burden hour, for subsequent filings. Therefore, we estimate the per fund average annual hour 

burden associated with the incremental changes to Form N-PORT as a result of the added 

liquidity information for these funds would be an additional 28 hours for the first year and an 

additional 24 hours for each subsequent year.1354 Amortized over three years, the average annual 

hour burden would be an additional 25.33 hours per fund.1355 We further estimate that 65% of 

funds will retain the services of a third party to provide data aggregation, validation and/or filing 

services as part of the preparation and filing of reports on Form N-PORT on the fund’s behalf. 

For these funds, we estimate that each fund will require an average of approximately 8 hours to 

compile and review the added liquidity-related information with the service provider prior to 

electronically filing the report for the first time and an average of 1 burden hour for subsequent 

filings. Therefore, we estimate the per fund average annual hour burden associated with the 

 1352 See supra footnote 1303 and accompanying text.

1353 See supra footnote 1307 and accompanying text.

1354 See supra footnote 1269 and accompanying paragraph.

1355 See supra footnote 1270 and accompanying text.
435

liquidity-related changes to Form N-PORT for these funds would be an additional 19 hours for 

the first year1356 and an additional 12 hours for each subsequent year.1357 Amortized over three 

years, the average aggregate annual hour burden would be an additional 14.33 hours per fund.1358 

We further estimate that the total external annual cost burden of compliance with the information 

collection requirements of Form N-PORT will be $9,118 per fund.1359

As discussed above, we also estimate that the average annual hour burden per additional 

response to Form N-CEN as a result of the adopted additions to Form N-CEN will be one hour 

per fund per year.

1360 We do not estimate any change to the external costs associated with 

proposed Form N-CEN.1361

E. Agency Action to Minimize Effect on Small Entities

The Regulatory Flexibility Act directs the Commission to consider significant 

alternatives that would accomplish the stated objective, while minimizing any significant impact 

on small entities. Alternatives in this category would include: (i) establishing different 

compliance or reporting standards that take into account the resources available to small entities; 

(ii) clarifying, consolidating, or simplifying the compliance requirements under the rules and 

amendments for small entities; (iii) using performance rather than design standards; and (iv) 

exempting small entities from coverage of the rules and amendments, or any part of the rules and 

amendments.

The Commission does not presently believe that these rules and amendments would 

 1356 See supra footnote 1271 and accompanying text.

1357 See supra footnote 1272 and accompanying text.

1358 See supra footnote 1273 and accompanying text.

1359 See supra footnote 1275 and accompanying text.

1360 See supra footnote 1298 and accompanying paragraph.

1361 Id.
436

require the establishment of special compliance requirements or timetables for small entities. 

These rules and amendments are specifically designed to reduce any unnecessary burdens on all 

funds (including small funds). To establish special compliance requirements or timetables for 

small entities may in fact disadvantage small entities by encouraging larger market participants

to focus primarily on the needs of larger entities when making the operational changes 

envisioned by certain of the rules and amendments, and possibly ignoring the needs of smaller

funds.

With respect to further clarifying, consolidating, or simplifying the compliance 

requirements of the rules and amendments, using performance rather than design standards, and 

exempting small entities from coverage of these rules and amendments or any part of the rules 

and amendments, we believe additional such changes would be impracticable. Small entities are 

as vulnerable to the risks of being unable to meet redemption obligations and of dilution of the 

interests of fund shareholders as larger funds. We believe that the rules and amendments are 

necessary to help mitigate these risks. Exempting small funds from coverage under these rules 

and amendments or any part of the rules and amendments could compromise the effectiveness of 

the rules and amendments or any part of the rules and amendments.

VII. STATUTORY AUTHORITY AND TEXT OF AMENDMENTS

The Commission is adopting new rule 22e-4 under the authority set forth in sections 

22(c), 22(e), 34(b) and 38(a) of the Investment Company Act [15 U.S.C. 80a-22(c), 80a-22(e), 

80a-35(b), and 80a-37(a)], the Investment Advisers Act, particularly, section 206(4) thereof [15 

U.S.C. 80b-6(4)], the Exchange Act, particularly section 10(b) thereof [15 U.S.C. 78a et seq.], 

the Securities Act, particularly section 17(a) thereof [15 U.S.C. 77a et seq.]. The Commission is 

adopting amendments to Form N-1A, Form N-PORT, and Form N-CEN under the authority set 
437

forth in the Securities Act, particularly section 19 thereof [15 U.S.C. 77a et seq.], the Trust 

Indenture Act, particularly, section 19 thereof [15 U.S.C. 77aaa et seq.], the Exchange Act, 

particularly sections 10, 15, and 23, and 35A thereof [15 U.S.C. 78a et seq.], and the Investment 

Company Act, particularly, sections 8, and 38 thereof [15 U.S.C. 80a et seq.].

TEXT OF RULES AND FORMS

List of Subjects

17 CFR Part 210

Investment companies, Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

Investment companies, Reporting and recordkeeping requirements, Securities.

For the reasons set out in the preamble, title 17, chapter II of the Code of Federal 

Regulations is amended as follows:

PART 210 - FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 

STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, 

INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, 

AND ENERGY POLICY AND CONSERVATION ACT OF 1975

1. The authority citation for part 210 continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 

77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 

80a-20, 80a-29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless otherwise 

noted.

PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

3. 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, 
438

sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.

* * * * *

4. Section 270.22e-4 is added to read as follows:

§270.22e-4 Liquidity risk management programs.

(a) Definitions. For purposes of this section: 

(1) Acquisition (or acquire) means any purchase or subsequent rollover.

(2) Business day means any day, other than Saturday, Sunday, or any customary business 

holiday.

(3) Convertible to cash means the ability to be sold, with the sale settled. 

(4) Exchange-traded fund or ETF means an open-end management investment company

(or series or class thereof), the shares of which are listed and traded on a national securities 

exchange, and that has formed and operates under an exemptive order under the Act granted by 

the Commission or in reliance on an exemptive rule adopted by the Commission.

(5) Fund means an open-end management investment company that is registered or 

required to register under section 8 of the Act (15 U.S.C. 80a-8) and includes a separate series of 

such an investment company, but does not include a registered open-end management

investment company that is regulated as a money market fund under § 270.2a-7 or an In-Kind 

ETF.

(6) Highly liquid investment means any cash held by a fund and any investment that the 

fund reasonably expects to be convertible into cash in current market conditions in three business

days or less without the conversion to cash significantly changing the market value of the 

investment, as determined pursuant to the provisions of paragraph (b)(1)(ii) of this section.
439

(7) Highly liquid investment minimum means the percentage of the fund’s net assets that 

the fund invests in highly liquid investments that are assets pursuant to paragraph (b)(1)(iii) of 

this section.

(8) Illiquid investment means any investment that the fund reasonably expects cannot be 

sold or disposed of in current market conditions in seven calendar days or less without the sale or 

disposition significantly changing the market value of the investment, as determined pursuant to 

the provisions of paragraph (b)(1)(ii) of this section.

(9) 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 cash and that publishes its portfolio holdings daily. 

(10) Less liquid investment means any investment that the fund reasonably expects to be 

able to sell or dispose of in current market conditions in seven calendar days or less without the 

sale or disposition significantly changing the market value of the investment, as determined 

pursuant to the provisions of paragraph (b)(1)(ii) of this section, but where the sale or disposition 

is reasonably expected to settle in more than seven calendar days. 

(11) Liquidity risk means the risk that the fund could not meet requests to redeem shares 

issued by the fund without significant dilution of remaining investors’ interests in the fund.

(12) Moderately liquid investment means any investment that the fund reasonably expects 

to be convertible into cash in current market conditions in more than three calendar days but in 

seven calendar days or less, without the conversion to cash significantly changing the market

value of the investment, as determined pursuant to the provisions of paragraph (b)(1)(ii) of this 

section.
440

(13) 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 fund 

or In-Kind ETF) responsible for administering the program and its policies and procedures

pursuant to paragraph (b)(2)(ii) of this section.

(14) Unit Investment Trust or UIT means a unit investment trust as defined in section 4(2) 

of the Act (15 U.S.C. 80a-4). 

(b) Liquidity Risk Management Program. Each fund and In-Kind ETF must adopt and 

implement a written liquidity risk management program (“program”) that is reasonably designed 

to assess and manage its liquidity risk. 

(1) Required program elements. The program must include policies and procedures 

reasonably designed to incorporate the following elements: 

(i) Assessment, Management, and Periodic Review of Liquidity Risk. Each fund and InKind ETF must assess, manage, and periodically review (with such review occurring no less 

frequently than annually) its liquidity risk, which must include consideration of the following 

factors, as applicable:

(A) The fund or In-Kind ETF’s investment strategy and liquidity of portfolio investments

during both normal and reasonably foreseeable stressed conditions, including whether the 

investment strategy is appropriate for an open-end fund, the extent to which the strategy involves 

a relatively concentrated portfolio or large positions in particular issuers, and the use of 

borrowings for investment purposes and derivatives; 

(B) Short-term and long-term cash flow projections during both normal and reasonably 

foreseeable stressed conditions;
441

(C) Holdings of cash and cash equivalents, as well as borrowing arrangements and other 

funding sources; and 

(D) For an ETF: 

(i) The relationship between the ETF’s portfolio liquidity and the way in which, 

and the prices and spreads at which, ETF shares trade, including, the efficiency of the 

arbitrage function and the level of active participation by market participants (including 

authorized participants); and

(ii) The effect of the composition of baskets on the overall liquidity of the ETF’s 

portfolio.

(ii) Classification. Each fund must, using information obtained after reasonable inquiry 

and taking into account relevant market, trading, and investment-specific considerations, classify 

each of the fund’s portfolio investments (including each of the fund’s derivatives transactions) as 

a highly liquid investment, moderately liquid investment, less liquid investment, or illiquid 

investment. A fund must review its portfolio investments’ classifications, at least monthly in 

connection with reporting the liquidity classification for each portfolio investment on Form NPORT in accordance with §270.30b1-9, and more frequently if changes in relevant market, 

trading, and investment-specific considerations are reasonably expected to materially affect one 

or more of its investments’ classifications. 

Note to paragraph (b)(1)(ii): If an investment could be viewed as either a highly liquid 

investment or a moderately liquid investment, because the period to convert the investment to 

cash depends on the calendar or business day convention used, a fund should classify the 

investment as a highly liquid investment. For a discussion of considerations that may be relevant 
442

in classifying the liquidity of the fund’s portfolio investments, see Investment Company Act 

Release No. IC-XXXXX (DATE). 

(A) The fund may generally classify and review its portfolio investments (including the 

fund’s derivatives transactions) according to their asset class, provided, however, that the 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-specific considerations that are 

reasonably expected to significantly affect the liquidity characteristics of that investment as 

compared to the fund’s other portfolio holdings within that asset class.

(B) In classifying and reviewing its portfolio investments or asset classes (as applicable), 

the fund 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, and if so, the fund must take this determination into 

account when classifying the liquidity of that investment or asset class.

(C) For derivatives transactions that the fund has classified as moderately liquid 

investments, less liquid investments, and illiquid investments, identify the percentage of the 

fund’s highly liquid investments that it has segregated to cover, or pledged to satisfy margin 

requirements in connection with, derivatives transactions in each of these classification 

categories.

Note to paragraph (b)(1)(ii)(C): For purposes of calculating these percentages, a fund 

that has segregated or pledged highly liquid investments and non-highly liquid investments to 

cover derivatives transactions classified as moderately liquid, less liquid, or illiquid investments 

first should apply segregated or pledged assets that are highly liquid investments to cover these 

transactions, unless it has specifically identified segregated non-highly liquid investments as 
443

covering such derivatives transactions.

(iii) Highly Liquid Investment Minimum. 

(A) Any fund that does not primarily hold assets that are highly liquid investments must:

(1) Determine a highly liquid investment minimum, considering the factors specified in 

paragraphs (b)(1)(i)(A) through (E) of this section, as applicable (but considering 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). The highly liquid investment

minimum determined pursuant to this paragraph may not be changed during any period of time 

that a fund’s assets that are highly 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; 

(2) Periodically review, no less frequently than annually, the highly liquid investment

minimum; and

(3) Adopt and implement policies and procedures for responding to a shortfall 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 the fund’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. 
444

(B) For purposes of determining whether a fund primarily holds assets that are highly 

liquid investments, a fund must exclude from its calculations the percentage of the fund’s assets 

that are highly liquid investments that it has segregated to cover all derivatives transactions that 

the fund has classified as moderately liquid investments, less liquid investments, and illiquid 

investments, or pledged to satisfy margin requirements in connection with those derivatives 

transactions, as determined pursuant to paragraph (b)(1)(ii)(C) of this section. 

(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. If a fund or In-Kind ETF holds more than 

15% of its net assets in illiquid investments that are assets: 

(A) It must cause the person(s) designated to administer the program to report such an 

occurrence to the fund’s board of directors within one business day of the occurrence, with an 

explanation of the extent and causes of the occurrence, and how the fund plans to bring its 

illiquid investments that are assets to or below 15% of its net assets within a reasonable period of 

time; and 

(B) If the amount of the fund’s illiquid investments that are assets is still above 15% of its

net assets 30 days from the occurrence (and at each consecutive 30 day period thereafter), the

fund or In-Kind ETF’s board of directors, including a majority of directors who are not interested 

persons of the fund or In-Kind ETF, must assess whether the plan presented to it pursuant to 

paragraph (b)(1)(iv)(A) continues to be in the best interest of the fund or In-Kind ETF. 

(v) Redemptions in Kind. A fund that engages in, or reserves the right to engage in, 

redemptions in kind and any In-Kind ETF must establish policies and procedures regarding how 

and when it will engage in such redemptions in kind.
445

(2) Board Oversight. A fund or In-Kind ETF’s board of directors, including a majority of 

directors who are not interested persons of the fund or In-Kind ETF, must: 

(i) Initially approve the liquidity risk management program;

(ii) Approve the designation of the person(s) designated to administer the program; and 

(iii) Review, no less frequently than annually, a written report prepared by the person(s) 

designated to administer the program that addresses the operation of the program and assesses its

adequacy and effectiveness of implementation, including, if applicable, the operation of the 

highly liquid investment minimum, and any material changes to the program. 

(3) Recordkeeping. The fund or In-Kind ETF must maintain:

(i) A written copy of the program and any associated policies and procedures adopted 

pursuant to paragraphs (b)(1) through (b)(2) of this section that are in effect, or at any time 

within the past five years were in effect, in an easily accessible place; 

(ii) Copies of any materials provided to the board of directors in connection with its 

approval under paragraph (b)(2)(i) of this section, and materials provided to the board of 

directors under paragraph (b)(2)(iii) of this section, for at least five years after the end of the 

fiscal year in which the documents were provided, the first two years in an easily accessible 

place; and

(iii) If applicable, a written record of the policies and procedures related to how the 

highly liquid investment minimum, and any adjustments thereto, were determined, including 

assessment of the factors incorporated in paragraphs (b)(1)(iii)(A) through (B) of this section and 

any materials provided to the board pursuant to paragraph (b)(1)(iii)(A)(3) of this section, for a 

period of not less than five years (the first two years in an easily accessible place) following the 

determination of, and each change to, the highly liquid investment minimum.
446

(c) UIT Liquidity. On or before the date of initial deposit of portfolio securities into a 

registered UIT, the UIT’s principal underwriter or depositor must determine that the portion of 

the illiquid investments that the UIT holds or will hold at the date of deposit that are assets is 

consistent with the redeemable nature of the securities it issues, and must maintain a record of 

that determination for the life of the UIT and for five years thereafter. 

* * * * *

5. Section 270.30b1-10 is added to read as follows:

§270.30b1-10 Current report for open-end management investment companies.

Every registered open-end management investment company, or series thereof but not a 

fund that is regulated as a money market fund under § 270.2a-7, that experiences any event 

specified on Form N-LIQUID, must file with the Commission a current report on Form NLIQUID within the period specified in that form.

PART 274 - FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 

1940

6. The general authority citation for part 274 continues to read, in part, as follows, 

and the sectional authorities for §§274.101 and 274.130 are removed:

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 Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless otherwise 

noted.

* * * * *

7. Amend Form N-1A (referenced in 274.11A) by:

a. In General Instruction A. Definitions, revising the definition of ExchangeTrade Fund;
447

b. In Item 11 removing paragraph (c)(3) and redesignating paragraphs (c)(4), 

(c)(5), (c)(6) and (c)(7) as paragraphs (c)(3), (c)(4), (c)(5) and (c)(6), respectively; and

c. In Item 11 adding new paragraph (c)(7) and paragraph (c)(8);

The revisions and additions read as follows:

Note: The text of Form N-1A does not, and this amendment will not, appear in the Code 

of Federal Regulations.

Form N-1A

* * * * *

General Instructions. 

A. Definitions * * *

“Exchange-Traded Fund” means a Fund or Class, the shares of which are listed and 

traded on a national securities exchange, and that has formed and operates under an exemptive 

order granted by the Commission or in reliance on an exemptive rule adopted by the 

Commission.

* * * * *

Item 11. Shareholder Information

(a) * * *

(c) * * *

(7) The number of days following receipt of shareholder redemption requests in which 

the fund typically expects to pay out redemption proceeds to redeeming shareholders. If the 

number of days differs by method of payment (e.g., check, wire, automated clearing house), then 

disclose the typical number of days or estimated range of days that the fund expects it will take 

to pay out redemptions proceeds for each method used.
448

(8) The methods that the fund typically expects to use to meet redemption requests, and 

whether those methods are used regularly, or only in stressed market conditions (e.g., sales of 

portfolio assets, holdings of cash or cash equivalents, lines of credit, interfund lending, and/or 

ability to redeem in kind). 

* * * * *

8. Amend Form N-CEN [(referenced in §274.101), as published elsewhere in this 

issue by:

a. In Part C, adding Item C.20; and

b. In Part E, adding Item E.5.

The additions read as follows:

FORM N-CEN

ANNUAL REPORT FOR REGISTERED INVESTMENT COMPANIES

* * * * *

Part C. Additional Questions for Management Investment Companies

* * *

Item C.20. Lines of credit, interfund lending, and interfund borrowing. For open-end 

management investment companies, respond to the following:

a. Does the Fund have available a line of credit? [Yes/No] If yes, for each line of credit, 

provide the information requested below:

i. Is the line of credit a committed or uncommitted line of credit? 

[committed/uncommitted]

ii. What size is the line of credit? [insert dollar amount]

iii. With which institution(s) is the line of credit? [list name(s)]
449

iv. Is the line of credit just for the Fund, or is it shared among multiple funds? 

[sole/shared]

1. If shared, list the names of other funds that may use the line of credit. [list names and 

SEC File numbers]

v. Did the Fund draw on the line of credit this period? [Yes/No]

vi. If the Fund drew on the line of credit during this period, what was the average amount 

outstanding when the line of credit was in use? [insert dollar amount]

vii. If the Fund drew on the line of credit during this period, what was the number of days 

that the line of credit was in use? [insert amount]

b. Did the Fund engage in interfund lending? [Yes/No] If yes, for each loan provide the 

information requested below:

i. What was the average amount of the interfund loan when the loan was outstanding? 

[insert dollar amount.]

ii. What was the number of days that the interfund loan was outstanding? [insert amount]

c. Did the Fund engage in interfund borrowing? [Yes/No] If yes, for each loan provide 

the information requested below:

i. What was the average amount of the interfund loan when the loan was outstanding? 

[insert dollar amount.]

ii. What was the number of days that the interfund loan was outstanding? [insert amount]

* * * * *

Part E. Additional Questions for Exchange-Traded Funds and Exchange-Traded 

Managed Funds

* * *
450

Item E.5.

* * *

In-Kind ETF. Is the Fund an “In-Kind Exchange-Traded Fund” as defined in rule 22e-4 

under the Act ? [Y/N]

* * * * *

9. Modify Form N-PORT (referenced in § 274.150), as published elsewhere in this 

issue by:

a. In the General Instructions E. Definitions, adding definitions of “Highly 

Liquid Investment Minimum” and “Illiquid Investment” in alphabetical order;

b. In the General Instructions, revising the second paragraph of F. Public 

Availability; 

c. In Part B, adding Item B.7 and Item B.8; and

d. In Part C, adding Item C.7.

The revisions and additions read as follows:

FORM N-PORT

MONTHLY PORTFOLIO INVESTMENTS REPORT

* * * * *

E. Definitions 

* * *

“Highly Liquid Investment Minimum” has the meaning defined in rule 22e-4(a)(7).

“Illiquid Investment” has the meaning defined in rule 22e-4(a)(8).

* * * * *

F. Public Availability

* * *
451

The SEC does not intend to make public the information reported on Form N-PORT for the first 

and second months of each Fund’s fiscal quarter that is identifiable to any particular Fund or 

adviser, or any information reported with regards to a Fund’s Highly Liquid Investment

Minimum (Item B.7 of this Form), country of risk and economic exposure (Item C.5.b), delta 

(Items C.9.f.5, C.11.c.vii, or C.11.g.iv), liquidity classification for portfolio investments (Item 

C.7), or miscellaneous securities (Part D of this Form), 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.

* * * * *

Part B: Information About the Fund

* * *
452

Item B.7 Highly Liquid Investment Minimum Information. 

a. If applicable, provide the Fund’s current Highly Liquid Investment Minimum.

b. If applicable, provide the number of days that the Fund’s holdings in Highly 

Liquid Investments fell below the Fund’s Highly Liquid Investment Minimum 

during the reporting period.

c. Did the Fund’s Highly Liquid Investment Minimum change during the reporting 

period? [Y/N]

1. If yes, provide any Highly Liquid Investment Minimums set by the fund

during the reporting period.

Item B.8 Liquidity aggregate classification information. For portfolio investments of openend management investment companies, provide the following information: 

a. 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 in rule 22e-4:

1. Highly Liquid Investments

2. Moderately Liquid Investments

3. Less Liquid Investments

4. Illiquid Investments

b. Derivatives Transactions. The percentage of the Fund’s highly liquid investments that it 

has segregated to cover or pledged to satisfy margin requirements in connection with 

derivatives transactions that are classified as:

1. Moderately Liquid Investments

2. Less Liquid Investments
453

3. Illiquid Investments

* * *

Part C: Schedule of Portfolio Investments

* * *

Item C.7. Liquidity classification information. For portfolio investments of open-end 

management investment companies, provide the liquidity classification for each portfolio 

investment among the following categories as specified in rule 22e-4: 

1. Highly Liquid Investments

2. Moderately Liquid Investments

3. Less Liquid Investments

4. Illiquid Investments

* * * * *

14. Section [274.___] is added to read as follows:

§[274.___] Form N-LIQUID, Current report, open-end investment company liquidity

This form shall be used by registered open-end management investment companies, or 

series thereof, but not including a company or series thereof that is regulated as a money market 

fund under §270.2a-7 of this chapter, to file reports pursuant to §270.30b1-10 of this chapter.

Note: The text of Form N-LIQUID will not appear in the Code of Federal Regulations.
454

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

FORM N-LIQUID

CURRENT REPORT

OPEN-END MANAGEMENT INVESTMENT COMPANY LIQUIDITY

Form N-LIQUID is to be used by a registered open-end management investment company, or 

series thereof (“fund”), under the Investment Company Act of 1940 [15 U.S.C. 80a] (“Act”) but not 

including a fund that is regulated as a money market fund under rule 2a-7 under the Act (17 CFR 

270.2A-7), to file current reports with the Commission pursuant to [rule 30b1-10] under the Act [(17 

CFR 270.30b1-10)]. The Commission may use the information provided on Form N-LIQUID in its 

regulatory, disclosure review, inspection, and policymaking roles.

GENERAL INSTRUCTIONS 

A. Rules as to Use of Form N-LIQUID.

(1) Form N-LIQUID is the reporting form that is to be used for current reports of open-end 

management investment companies (“registrants”) required by section 30(b) of the Act and rule 

30b1-10 under the Act. The Commission does not intend to make public information reported on 

Form N-LIQUID that is identifiable to any particular registrant, although the Commission may use 

Form N-LIQUID information in an enforcement action.

(2) Unless otherwise specified, a report on this Form N-LIQUID is required to be filed, as 

applicable, within one business day of the occurrence of the event specified in Parts B – D of this 

form. If the event occurs on a Saturday, Sunday, or holiday on which the Commission is not open 

for business, then the one business day period shall begin to run on, and include, the first business 

day thereafter.
455

B. Application of General Rules and Regulations

The General Rules and Regulations under the Act contain certain general requirements that 

are applicable to reporting on any form under the Act. These general requirements should be 

carefully read and observed in the preparation and filing of reports on this form, except that any 

provision in the form or in these instructions shall be controlling.

C. Information to Be Included in Report Filed on Form N-LIQUID

Upon the occurrence of the event specified in Parts B – D of Form N-LIQUID, a registrant

must file a report on Form N-LIQUID that includes information in response to each of the items in 

Part A of the form, as well as each of the items in the applicable Parts B – D of the Form.

D. Filing of Form N-LIQUID 

A fund must file Form N-LIQUID in accordance with rule 232.13 of Regulation S-T (17 CFR 

Part 232). Form N-LIQUID must be filed electronically using the Commission’s Electronic Data 

Gathering, Analysis and Retrieval System (“EDGAR”).

E. Paperwork Reduction Act Information

A registrant is not required to respond to the collection of information contained in Form NLIQUID unless the form displays a currently valid Office of Management and Budget (“OMB”) 

control number. Please direct comments concerning the accuracy of the information collection 

burden estimate and any suggestions for reducing the burden to the Secretary, Securities and 

Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. The OMB has reviewed 

this collection of information under the clearance requirements of 44 U.S.C. 3507.

F. Definitions
456

References to sections and rules in this Form N-LIQUID are to the Investment Company Act 

(15 U.S.C 80a), unless otherwise indicated. Terms used in this Form N-LIQUID have the same 

meaning as in the Investment Company Act or rule 22e-4 under the Investment Company Act, unless 

otherwise indicated. In addition, as used in this Form N-LIQUID, the term registrant means the 

registrant or a separate series of the registrant.
457

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549 

FORM N-LIQUID

CURRENT REPORT

OPEN-END MANAGEMENT INVESTMENT COMPANY LIQUIDITY

PART A. General Information

Item A.1. Report for [mm/dd/yyyy]. 

Item A.2. CIK Number of registrant. 

Item A.3. EDGAR Series Identifier. 

Item A.4. Securities Act File Number. 

Item A.5. Provide the name, e-mail address, and telephone number of the person authorized to 

receive information and respond to questions about this Form N-LIQUID.

PART B. Above 15% Illiquid Investments

If more than 15 percent of the registrant’s net assets are, or become, illiquid investments that 

are assets as defined in rule 22e-4, then report the following information: 

Item B.1. Date(s) on which the registrant’s illiquid investments that are assets exceeded 15 

percent of its net assets.

Item B.2. The current percentage of the registrant’s net assets that are illiquid investments that 

are assets.

Item B.3. Identification of Illiquid investments. For each investment that is an asset that is held 

by the registrant that is considered illiquid, disclose (1) the name of the issuer, the 

title of the issue or description of the investment, the CUSIP (if any), and at least one 

other identifier, if available (e.g., ISIN, Ticker, or other unique identifier (if ticker 
458

and ISIN are not available)) (indicate the type of identifier used), and (2) the 

percentage of the fund’s net assets attributable to that investment.

PART C. At or Below 15% Illiquid Investments

If a registrant that has filed part B of Form N-LIQUID determines that its holdings in illiquid 

investments that are assets have changed to be less than or equal to 15 percent of the registrant’s net 

assets, then report the following information:

Item C.1. Date(s) on which the registrant’s illiquid investments that are assets fell to or below 

15 percent of net assets.

Item C.2. The current percentage of the registrant’s net assets that are illiquid investments that 

are assets.

PART D. Assets that are Highly Liquid Investments Below the Highly Liquid Investment

Minimum

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, then report the following 

information:

Item D.1. Date(s) on which the registrant’s holdings of assets that are highly liquid investments

fell below the fund’s highly liquid investment minimum.

SIGNATURES 

Pursuant to the requirements of the Investment Company Act of 1940, the registrant has duly 
459

caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

______________________________________ 

(Registrant) 

Date ______________________________ 

________________________________________ 

(Signature)* 

*Print name and title of the signing officer under his/her signature.

By the Commission.

Dated: October 13, 2016

Brent J. Fields

Secretary