Document ID: SEC-2018-0342-0001
Agency: sec
Document Type: Rule
Title: Investment Company Liquidity Risk Management Programs: Commission Guidance for In-Kind ETFs
Posted Date: 2018-02-27T05:00Z

[Federal Register Volume 83, Number 39 (Tuesday, February 27, 2018)]
[Rules and Regulations]
[Pages 8342-8354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03917]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270 and 274

[Release No. IC-33010; File No. S7-03-18]
RIN 3235-AM26

Investment Company Liquidity Risk Management Programs; Commission 
Guidance for In-Kind ETFs

AGENCY: Securities and Exchange Commission.

ACTION: Interim final rule; request for comment; interpretation.

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SUMMARY: The Securities and Exchange Commission is adopting an interim 
final rule that revises the compliance date for the requirements of 
rule 22e-4 for classification, highly liquid investment minimum, and 
board approval, as well as related reporting requirements of Part D on 
Form N-LIQUID and liquidity disclosures on Form N-PORT under the 
Investment Company Act of 1940. The revised compliance date will be 
June 1, 2019, for larger entities (revised from December 1, 2018) and 
December 1, 2019, for smaller entities (revised from June 1, 2019). The 
Commission is not extending the compliance date for the other 
provisions of rule 22e-4 and Form N-LIQUID, and liquidity-related 
changes to Form N-CEN--which remain December 1, 2018 for larger 
entities and June 1, 2019 for smaller entities. The Commission also is 
not extending the compliance date for the liquidity-related provisions 
of Form N-1A, which has already passed. Finally, the Commission is 
providing guidance to assist funds that will not be engaging in full 
portfolio classification before the revised compliance date, and In-
Kind ETFs, which are not required to engage in full portfolio 
classification, in identifying illiquid investments for purposes of 
complying with the 15% illiquid investment limit.

DATES: 
    Effective Dates: The effective date of the interim final rule is 
March 29, 2018. The effective date for 17 CFR 270.22e-4 and 270.30b1-10 
and the amendments to Form N-PORT (referenced in 17 CFR 274.150) 
published at 81 FR 82267 (November 18, 2016) remains January 17, 2017, 
and the effective date for amendments to Form N-CEN (referenced in 17 
CFR 274.101) published at 81 FR 82267 (November 18, 2016) remains June 
1, 2018.
    Compliance Dates: The compliance date for 17 CFR 270.22e-
4(b)(1)(ii) except to the extent referenced in 17 CFR 270.22e-
4(a)(8),\1\ 17 CFR 270.22e-4(b)(1)(iii), 17 CFR 270.22e-4(b)(2)(i) and 
(iii), certain elements of 17 CFR 270.22e-4(b)(3) related to the 
delayed provisions of rule 22e-4, and the liquidity-related amendments 
to Form N-PORT (discussed in section I.C below) and Part D of Form N-
LIQUID have been extended until June 1, 2019 for larger entities, and 
December 1, 2019 for smaller entities, as defined in section I below.
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    \1\ See infra footnote 71.
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    Comment Date: Comments should be received on or before April 27, 
2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/interim-final-temp.shtml);
     Send an email to [email protected]. Please include 
File Number S7-03-18 on the subject line; or

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-03-18. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (http://www.sec.gov/rules/interim-final-temp.shtml). 
Comments are also available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Zeena Abdul-Rahman, Senior Counsel, or 
Thoreau Bartmann, Senior Special Counsel, at (202) 551-6792, Division 
of Investment Management, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is extending the compliance dates associated with 
following provisions of rule 22e-4 [17 CFR 270.22e-4]: Rule 22e-
4(b)(1)(ii) [17 CFR 270.22e-4(b)(1)(ii)] except to the extent it is 
referenced in rule 22e-4(a)(8) [17 CFR 270.22e-4(a)(8)]; rule 22e-
4(b)(1)(iii) [17 CFR 270.22e-4(b)(1)(iii)];

[[Page 8343]]

rule 22e-4(b)(2)(i) [17 CFR 270.22e-4(b)(2)(i)]; rule 22e-4(b)(2)(iii) 
[17 CFR 270.22e-4(b)(2)(iii)]; and certain elements of rule 22e-4(b)(3) 
[17 CFR 270.22e-4(b)(3)] under the Investment Company Act of 1940 [15 
U.S.C. 80a-1 et seq.] (``Investment Company Act'' or ``Act''). The 
Commission also is extending the compliance dates associated with Part 
D of Form N-LIQUID [referenced in 17 CFR 274.223] as well as amendments 
to Form N-PORT [referenced in 17 CFR 274.150] under the Investment 
Company Act.

I. Discussion

    On October 13, 2016, the Commission adopted rule 22e-4 and related 
rule and form amendments to enhance the regulatory framework for 
liquidity risk management of registered open-end investment companies 
(``funds'').\2\ Specifically, we adopted rules 22e-4 and 30b1-10, new 
Form N-LIQUID, as well as amendments to Forms N-1A, N-PORT, and N-CEN 
(collectively, the ``Liquidity Rule Requirements'').\3\ We designed 
these rules and forms to promote effective liquidity risk management 
throughout the fund industry and to enhance disclosure regarding fund 
liquidity and redemption practices.\4\
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    \2\ The term ``funds'' used in this release includes open-end 
management companies, including exchange-traded funds (``ETFs'') 
that do not qualify as In-Kind ETFs (as defined in rule 22e-
4(a)(9)), and excludes money market funds.
    \3\ Investment Company Liquidity Risk Management Programs, 
Investment Company Act Release No IC-32315 (Oct. 13, 2016) [81 FR 
82142 (Nov. 18, 2016)] (``Adopting Release'').
    \4\ See id., at text accompanying n.112.
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    The compliance date for the amendments to Form N-1A was June 1, 
2017. For the remainder of the Liquidity Rule Requirements, the 
Commission established a tiered set of compliance dates based on a fund 
group's asset size. Specifically, for larger entities,\5\ we adopted a 
compliance date of December 1, 2018. For smaller entities, we adopted a 
compliance date of June 1, 2019. As discussed in more detail below, the 
Commission believes it is appropriate to revise the compliance date for 
certain elements of the Liquidity Rule Requirements until June 1, 2019 
for larger entities and December 1, 2019 for smaller entities.\6\
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    \5\ ``Larger entities'' are defined as 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 of the fund. ``Smaller entities'' are 
defined as 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 its most recent fiscal year. 
See Adopting Release, supra footnote 3, at n.997. We adopted this 
tiered set of compliance dates based on asset size because we 
anticipated that smaller groups would benefit from this extra time 
to comply and from the lessons learned by larger investment 
companies. See Adopting Release, supra footnote 3, at n.1009 and 
accompanying text.
    \6\ The effective date of January 17, 2017 for these elements is 
unchanged. As described in this release, the Commission is revising 
compliance dates associated with certain aspects of rule 22e-4, Form 
N-PORT and Form N-LIQUID.
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A. Summary of the Liquidity Rule Requirements

Rule 22e-4--Liquidity Risk Management Programs
    Rule 22e-4 requires each fund to adopt and implement a written 
liquidity risk management program reasonably designed to assess and 
manage the fund's liquidity risk. A fund's liquidity risk management 
program must incorporate certain specified 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, as well as at least monthly reviews of the fund's 
liquidity classifications (``portfolio classification'' or 
``classification''); (iii) determining and periodically reviewing a 
highly liquid investment minimum (the ``HLIM''); (iv) limiting the 
fund's investment in illiquid investments that are assets to no more 
than 15% of the fund's net assets (``15% illiquid investment limit''); 
and (v) for funds that engage in, or reserve the right to engage in, 
redemptions in-kind, the establishment of policies and procedures 
regarding how they will engage in such redemptions in-kind.
    The rule requires each fund to adopt a liquidity risk management 
program and obtain board approval of such program. Fund boards must 
also approve an administrator for the program (``program 
administrator''), and review annual reports from the fund's program 
administrator on the operation of the program and the program's 
adequacy and effectiveness of implementation, including, if applicable, 
the operation of the HLIM, and any material changes to the program.
    The portfolio classification requires a fund to classify each 
portfolio investment into one of four defined liquidity categories, 
known as ``buckets'': Highly liquid investments, moderately liquid 
investments, less liquid investments, and illiquid investments.\7\ 
These buckets are intended to take into account relevant market-, 
trading-, and investment-specific considerations, as well as market 
depth and whether sales of an investment would significantly change the 
market value of the investment.\8\ While the rule permits a fund to 
classify portfolio investments based on asset class, it requires the 
fund to implement a ``reasonable exceptions process'' for investments 
that should be classified separately from their class.\9\ Finally, 
portfolio classification requires a fund to review its portfolio 
investments' classifications monthly unless a ``reasonable exceptions 
process'' requires a more frequent review.\10\
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    \7\ Rule 22e-4(b)(1)(ii). This classification is based on the 
number of days in which a fund 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 
significantly changing the market value of the investment.
    \8\ Rule 22e-4(b)(1)(ii).
    \9\ Rule 22e-4(b)(1)(ii)(A) (``The fund may generally classify 
and review its portfolio investments . . . 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.'').
    \10\ Rule 22e-4(b)(1)(ii)(``A fund must review its portfolio 
investments' classifications, at least monthly in connection with 
reporting the liquidity classification for each portfolio investment 
on Form N-PORT . . . 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.'').
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    The HLIM requires a fund to determine the minimum amount of net 
assets that it will invest in highly liquid investments that are 
assets.\11\ This requirement relies on the portfolio classification 
process to identify which investments are bucketed as highly liquid.
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    \11\ Rule 22e-4(a)(7).
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    The 15% illiquid investment limit prohibits a fund (as well as an 
In-Kind ETF) from acquiring any illiquid investment if, immediately 
after such acquisition, it would have invested more than 15% of its net 
assets in illiquid investments that are assets.\12\ This limit on 
illiquid investments also refers to the classification element of the 
rule, but we are providing guidance on how funds may comply with this 
requirement without engaging in full portfolio classification. In-Kind 
ETFs, which are exempt from the classification requirement, may look to 
this guidance to assist them in complying with the 15% illiquid 
investment limit on a permanent basis.
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    \12\ Rule 22e-4(b)(1)(iv).
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Disclosure Amendments
    In addition to rule 22e-4, the Commission adopted certain public 
disclosure requirements to provide shareholders and other users with 
additional information on fund liquidity

[[Page 8344]]

risk. It also adopted certain non-public reporting requirements to 
assist the Commission in its monitoring efforts.\13\ Specifically:
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    \13\ See Adopting Release, supra footnote 3, at n.120.
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     Rule 30b1-10 and related Form N-LIQUID provide non-public 
notification to the Commission whenever a fund's illiquid investments 
exceed 15% of its net assets and if its amount of highly liquid 
investments declines below its HLIM for more than seven days.
     Amendments to Form N-PORT generally require a fund to 
report monthly to the Commission, on a non-public basis, the portfolio 
investments in each of the defined buckets and the fund's HLIM.\14\ The 
form also requires a fund to disclose publicly the aggregated 
percentage of its portfolio representing each of the four liquidity 
classification categories as of the end of each of its fiscal 
quarters.\15\
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    \14\ Items B.7 and C.7 of Form N-PORT.
    \15\ Item B.8 of Form N-PORT.
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     The amendments to Form N-1A require a fund to disclose 
publicly certain information regarding the fund's redemption 
procedures.\16\
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    \16\ Item 11(c)(7) and (8) of Form N-1A.
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     The amendments to Form N-CEN require funds to provide 
public disclosure about funds' use of lines of credit and interfund 
lending.\17\
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    \17\ Item C.20 of Form N-CEN.
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B. Monitoring and Compliance Date Extension Requests

    The Commission has received numerous requests to extend the 
compliance date for the Liquidity Rule Requirements.\18\ Some have 
requested that the Commission delay compliance with the entire 
rule,\19\ while others requested that the Commission only delay 
compliance with the portfolio classification and related 
requirements.\20\ Several industry members, including trade 
associations (on behalf of their members) and funds, have expressed 
concerns regarding the difficulties that funds are facing in preparing 
to comply in a timely manner (i.e., by the December 1, 2018 compliance 
date for larger entities).\21\ They requested that the Commission 
extend the compliance date for these elements for an additional period 
of time ranging from six months to one year.\22\
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    \18\ These comment letters (File No. S7-03-18) are available at 
https://www.sec.gov/comments/s7-03-18/s70318.htm.
    \19\ See, e.g., Letter from Wellington Management Company LLP 
(Nov. 17, 2017) (``Wellington Letter'').
    \20\ See Letter from the Investment Company Institute to The 
Honorable Jay Clayton (July 20, 2017) (``ICI Letter I'').
    \21\ See, e.g., Supplemental Comments on Investment Company 
Liquidity Risk Management Programs from the Investment Company 
Institute (Nov. 3, 2017) (``ICI Letter II''); Letter from SIFMA AMG 
to Chairman Jay Clayton, Commissioner Stein, and Commissioner 
Piwowar (Sept. 12, 2017) (``SIFMA AMG Letter''); Letter from TCW to 
Chairman Jay Clayton, Commissioner Stein, and Commissioner Piwowar 
(Sept. 15, 2017); Letter from Vanguard on Investment Company 
Liquidity Risk Management Programs (Nov. 8, 2017) (``Vanguard 
Letter''); and Letter from Nuveen LLC to Chairman Jay Clayton (Nov. 
22, 2017) (``Nuveen Letter'').
    \22\ Id.
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    Since the Commission adopted rule 22e-4 and the related rule and 
form amendments, Commission staff has engaged actively with funds to 
discuss complex compliance and implementation challenges and evaluate 
operational issues relating to portfolio classification. The staff also 
has met with third-party service providers (``service providers'') who 
expect to assist fund groups in implementing the classification 
requirements of the rule. Based on this staff engagement, we have 
observed that: (1) Due to a lack of readily available market data for 
certain asset classes (e.g., fixed income), the implementation of the 
portfolio classification requirement will be heavily dependent on 
service providers to provide funds with scalable liquidity models and 
assessment tools that are necessary for bucketing and reporting (see 
``Role of Service Providers'' below); (2) fund groups believe that full 
implementation of service provider and fund systems will require 
additional time for further refinement and testing of systems, 
classification models, and liquidity data, as well as for finalizing 
certain policies and procedures (see ``Systems Readiness'' below); and 
(3) funds are facing compliance challenges due to questions that they 
have raised about the Liquidity Rule Requirements that may require 
interpretive guidance (see ``Interpretive Questions'' below).\23\
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    \23\ As of the date of this release, the staff has responded to 
some requests for interpretive guidance the Commission received. The 
staff is also publishing additional interpretive guidance in 
conjunction with this release. Due to the tiered nature and 
complexity of the rule's implementation process, we expect to 
receive additional requests for guidance in the future, and will 
respond to them accordingly.
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Role of Service Providers
    Based on our staff's engagement, we understand that market data 
gaps and the need to develop efficient and effective systems for 
liquidity classification and reporting are leading many fund groups to 
rely extensively on technology tools developed by service 
providers.\24\ It is our understanding that these tools will collect 
relevant data, feed that data and other related information into 
liquidity models and assessment tools, and then provide the resulting 
information to the funds. To reasonably rely on these tools, fund 
groups have told our staff they expect to conduct significant diligence 
before determining which service provider systems to use and whether to 
build out some form of proprietary liquidity assessment and 
classification systems.\25\ In the Adopting Release, we discussed the 
appropriate role of service providers in funds' liquidity risk 
management programs, and provided guidance on the type of due diligence 
and oversight we expect that funds would provide when using such 
service providers.\26\ This diligence and oversight would take time to 
accomplish upon inception and on an ongoing basis.
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    \24\ See ICI Letter II (reporting a survey of its members that 
found that a large majority of respondents (91%) are considering 
using a service provider).
    \25\ For example, we understand that fund groups expect to 
conduct extensive classification system testing and model 
validation, including the installation of cybersecurity and disaster 
recovery protections, before these systems are usable for compliance 
with Commission rules.
    \26\ See Adopting Release, supra footnote 3, at text following 
n.323 (encouraging program administrators for funds that choose to 
rely on service providers for liquidity risk management to maintain 
oversight of these service providers by: (1) Reviewing the quality 
of the liquidity data received from service providers; (2) reviewing 
the relevant methodologies and metrics used by service providers to 
determine the effectiveness of the data to inform or supplement the 
fund's consideration of its portfolio holdings' liquidity 
characteristics, and (3) assessing whether any modifications to an 
``off-the-shelf'' service provider liquidity model are necessary to 
accurately reflect the liquidity characteristics of the fund's 
portfolio investments).
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    While the fund groups with whom our staff has met vary in their 
degree of dependency on service providers for classification, we 
understand that virtually all will rely on such service providers to a 
significant degree. It is our understanding that many will rely heavily 
on the liquidity data and tools provided by these service providers, 
while others may use service providers largely as a source of trading 
and other market information that will feed into the funds' internal 
classification systems. We also understand that many fund groups will 
use service providers to assist with the reporting obligations under 
the rule, which may be accomplished more efficiently through third 
party systems, where funds benefit from the service provider's 
technology and economies of scale. Similarly, we understand that even 
for those funds that may be able to gather market data on their own or 
develop liquidity assessment tools internally, they may rely on service 
provider systems and tools to the extent it is more cost-

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effective to do so. We also understand that, because service providers 
vary in the level of data they currently have about different asset 
classes, some funds may need to contract with multiple service 
providers to gain access to the trading and market information 
necessary to classify all of their investments or assume responsibility 
for certain investments for which service providers do not currently 
provide classification data. In sum, we expect that virtually all fund 
groups will rely on service providers to some extent in meeting their 
obligations under the Liquidity Rule Requirements.
Systems Readiness
    As a consequence of this heavy reliance on service providers, those 
requesting a later compliance date have focused primarily on the 
readiness of service providers to deploy fully-functional products to 
assist funds with their classification obligations.\27\ In meeting with 
funds and service providers, the staff has learned that most of the 
service providers that plan on offering liquidity data and assessment 
tools to assist with classification still have gaps in the investments 
that they cover. For example, most do not currently have the ability to 
assess effectively the liquidity of certain asset classes, such as 
over-the-counter derivatives and certain fixed income securities.\28\ 
For most of these remaining asset classes, market and trading data is 
more limited or unavailable and thus many plan to create models to 
evaluate the liquidity of these investments based on the limited data 
available and other information, such as the structural characteristics 
of the asset and analysis of comparable securities. Accordingly, we 
understand that under current timelines, most service providers' 
products will not provide full coverage for all asset classes until the 
end of the first quarter of 2018 or perhaps later.\29\ Two trade 
associations expressed concern that, without a compliance date 
extension, the challenges in building classification systems would 
shorten the time for liquidity model validation, testing, service 
provider oversight, and implementing cybersecurity and disaster 
recovery protections for the new technology-dependent liquidity risk 
management programs.\30\
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    \27\ See ICI Letter I (noting that most funds will engage third-
party service providers to help with classification and that those 
service providers will not have mature products for fund groups to 
evaluate for some time); see also SIFMA AMG Letter (noting that the 
lack of readiness on the part of service providers makes it 
difficult for funds to make ``build or buy'' decisions regarding 
their classification systems).
    \28\ See ICI Letter II (noting that certain investment types not 
yet covered by one or more service providers include asset-backed 
securities, mortgage-backed securities, preferred securities, bank 
loans, and to-be-announced (TBA) securities).
    \29\ See ICI Letter II (discussing a survey of members which 
found that 73% of respondents did not believe that service 
providers' offerings will be sufficiently mature for funds to make 
an informed selection until 2018, with 37% of respondents believing 
that it will take until the second quarter of 2018 or beyond).
    \30\ See SIFMA AMG Letter (arguing that a compliance date 
extension is necessary to give funds time to implement cybersecurity 
and disaster recovery protections). See also ICI Letter II 
(discussing the need for a compliance date extension in order to 
test the classification models of service providers).
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    Fund groups have informed our staff that they are not able to 
evaluate fully the liquidity assessment tools and market data offered 
by these service providers until the buildout of coverage for asset 
classes and related models is complete.\31\ In addition, even for asset 
classes where service provider offerings are currently available, fund 
groups have informed us that different service providers' liquidity 
assessments of certain securities have been unexpectedly disparate.\32\ 
This has led to further delays as fund groups seek to evaluate the 
cause of the differences between service providers' data and assessment 
tools (including underlying models and assumptions), and attempt to 
determine whether such tools are reliable and effective.\33\ As a 
consequence, our staff understands that many fund groups have not been 
able to make significant progress in finalizing the selection of their 
service provider(s), and do not expect to be able to do so in the near 
term.\34\ Once service provider selection is completed, fund groups 
then expect to evaluate the need for additional internal systems to 
implement their classification programs, and then to build out those 
systems as needed.
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    \31\ See ICI Letter II (noting that it will take two to six 
months for fund complexes to select a service provider once they can 
evaluate their offerings, and an additional three to nine months to 
``onboard'' the vendor; also noting that fund complexes will not be 
in position to complete other critical implementation work (e.g., 
conducting an initial liquidity risk assessment for all funds, 
determining whether a fund qualifies as a ``primarily highly liquid 
fund,'' and determining an appropriate HLIM for applicable funds). 
Only when all of this work is complete will fund complexes be in a 
position to present substantially complete liquidity risk management 
programs (able to perform full classification) to their boards for 
approval, which funds expect will take place over multiple meetings 
with final approval occurring after the program is substantially 
complete, adding additional months to the process).
    \32\ See ICI Letter II (noting an evaluation of sample output 
from five service providers' current offerings, which showed a 
fund's liquidity classifications, when run through multiple service 
providers' models, may differ widely, and pointing in particular to 
scenarios where, depending on the vendor used, analysis of a large 
high yield bond fund's portfolio resulted in ranges from 7% to 95% 
for the fund's highly liquid bucket).
    \33\ See ICI Letter II (describing its September 2017 survey 
results of selected members where the majority of respondents cited 
multiple areas in which service providers need to do additional 
work, including gaps in asset coverage, improving the quality of 
underlying methodologies, improving the depth, breadth and quality 
of data, and improving the user interface/delivery of data).
    \34\ Id. The ICI also stated that, beyond the survey results, 
additional factors suggested even more time would be necessary due 
to challenges that may emerge in the coming months, given that 
hundreds of fund complexes will be performing due diligence on and 
attempting to onboard the same handful of service providers at the 
same time. Providing the requested delay will allow for a smoother 
onboarding of the new services for both funds and service providers.
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    In general, the service providers with whom the staff has met have 
indicated that they expect to have tools and market data for all asset 
classes available before the current compliance date of the rule, 
though they are not complete yet. They also generally indicated that 
they expected to have products with complete asset coverage by the 
first or second quarter of 2018. They also informed our staff that 
entering into contracts and onboarding fund groups are progressing at 
different paces and that fund group classification systems similarly 
are in various stages of development and readiness. The service 
providers have also acknowledged that significant disparities can exist 
between service providers in assessing the liquidity of the same 
security as a result of different models, market data, or assumptions 
used. The service providers informed our staff that they believed their 
products generally would be ready in time for most funds to meet the 
current compliance date of the rule, though some of the fund groups 
with whom they have engaged suggested that additional time may be 
needed to implement the required classification process and related 
program and reporting requirements.
    Fund groups have also told our staff that they generally plan to 
develop processes and/or systems to provide service providers with 
fund-specific portfolio information relevant to classification and to 
provide ongoing input and oversight over any classification information 
derived from service provider tools. These data provision and oversight 
elements require additional processes or system modifications, or both, 
that are currently being evaluated as the service providers' offerings 
near completion and also may require some customization by service

[[Page 8346]]

providers or fund groups.\35\ Finally, for asset classes where trading 
and market data is constrained, some fund groups and service providers 
have told our staff that they are building models to more qualitatively 
assess liquidity, which may take additional time to develop and test. 
The ability for a fund to classify its assets is a foundation for other 
aspects of the rule, such as establishing the HLIM, and thus funds 
generally need to establish a classification system before finalizing 
policies and procedures for other aspects of the rule.\36\
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    \35\ See ICI Letter II (noting because the liquidity rule is 
new, funds will need to complete an extensive assessment of the new 
services and how they will be incorporated into existing oversight 
programs).
    \36\ See supra footnote 30.
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    One association also noted that additional complexity and time 
pressures exist for fund groups that engage sub-advisers for portfolio 
management, relating to sharing and reconciling classification 
information across multiple sub-advisers each of whom may have their 
own liquidity classification methodologies and systems.\37\ We also 
understand that additional complexity results when a fund group uses 
multiple sub-advisers for portfolio management of certain funds and 
that funds with sub-advisers require additional coordination (and thus 
additional technology infrastructure) for portfolio classification and 
to potentially reconcile classification information that may be 
distributed among various investment advisory firms.
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    \37\ See SIFMA AMG Letter. See also Wellington Letter, noting 
that more time is necessary and appropriate due to the additional 
complications that sub-advised funds face in implementing the rule.
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Interpretive Questions
    In meeting with fund groups and service providers, our staff has 
learned that many of the most difficult interpretive questions relating 
to the rule have only become apparent as funds have worked through the 
design, evaluation, and testing of the new and complex systems that 
will support compliance with their liquidity risk management programs. 
As a consequence, funds are still in the process of identifying certain 
issues that may need interpretive guidance in order to complete the 
build-out of their classification systems and to design and draft 
policies and procedures implementing their programs.\38\ One 
association has requested that Commission staff provide interpretive 
guidance on certain questions relating to classification, and stated 
that any such interpretive guidance may shape how its members design 
certain aspects of their classification systems.\39\ Funds have 
indicated that they will need time to evaluate and incorporate any such 
guidance as they implement the new systems and policies and procedures 
for managing liquidity risk required under the rule.
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    \38\ See supra footnote 22.
    \39\ See SIFMA AMG Letter.
---------------------------------------------------------------------------

    In addition, fund groups have cautioned that if no compliance date 
extension is provided, fund groups may have to incur the expense of 
implementing classification once now and then again to make any 
necessary changes to classification systems after any interpretive 
guidance on new questions has been issued.\40\ However, if an extension 
is provided, funds could take the time to evaluate any guidance 
provided in connection with building their systems, thereby avoiding 
the costs of rushed builds or redone systems.
---------------------------------------------------------------------------

    \40\ See SIFMA AMG Letter. As noted above, Commission staff is 
publishing guidance today on the classification process and may 
publish additional guidance in the future if it deems it 
appropriate.
---------------------------------------------------------------------------

    Finally, as we discussed in the Adopting Release, we understood 
that service providers may have some role in assisting funds in 
complying with the liquidity rule requirements, especially in providing 
data and collating data for reporting.\41\ Nonetheless, we believed 
that many fund groups would build and create their own classification 
methodologies, considering that funds have significant practical 
experience in observing the liquidity of the assets that they 
trade.\42\ As discussed above, however, our staff has learned that with 
respect to most funds, implementation is more complex than anticipated 
and the role for service providers is going to be more extensive than 
we had originally understood, thereby resulting in even more complexity 
and raising interpretive questions.
---------------------------------------------------------------------------

    \41\ See Adopting Release, supra footnote 3, at n.323 and 
accompanying text.
    \42\ See Adopting Release, supra footnote 3, at text following 
n.709.
---------------------------------------------------------------------------

    We believe that the interpretive guidance our staff has provided, 
and any additional guidance it may provide in the future, should ease 
the complexity of compliance, and may result in more funds refining 
their classification systems and liquidity assessment models, whether 
developed internally or when using vendor-provided tools. Our staff 
also will consider providing future interpretive guidance as needed to 
assist funds as they comply with the requirements of the rule.

C. Extension of Certain Elements of the Rule

    Today, we are extending by six months the compliance date for the 
rule's portfolio classification and certain related requirements. Based 
on the staff's engagement with fund groups and service providers, as 
well as the representations of the commenters discussed above, we 
believe that a six-month extension of the compliance date for the 
portfolio classification and certain related requirements that are 
dependent on the classification requirement is appropriate. We believe 
this additional time will allow fund groups and service providers to 
adequately address these complex and technology-dependent requirements 
and promote a smooth and efficient implementation of the rule.
    In providing this extension, we considered not only the issues 
discussed above, but also the objective of the Liquidity Rule 
Requirements more generally in advancing effective liquidity risk 
management across the fund industry. As a result, while we are 
extending the compliance date for the portfolio classification and 
certain related requirements, we are limiting such extension to six 
months, and we are maintaining the existing compliance dates for the 
other aspects of the rule. Indeed, two provisions of the rule that are 
at the heart of the investor protection benefits that the rule seeks to 
achieve--the requirement that a fund institute a liquidity risk 
management program and the 15% illiquid investment limit--will go into 
effect as planned.
1. Extension of Portfolio Classification, HLIM, and Related Reporting 
Compliance Dates
    In light of the concerns discussed above, the Commission believes 
that it is appropriate to extend the compliance date for the portfolio 
classification requirement of rule 22e-4 and the HLIM requirement. Rule 
22e-4 defines ``highly liquid investments'' that count towards the HLIM 
requirement by referencing the broader classification framework. For a 
fund to establish and monitor an HLIM, it will need to determine which 
investments meet the definition of highly liquid investments as defined 
by the rule and then determine and monitor its HLIM as compared to that 
bucket of investments.\43\ Therefore, a

[[Page 8347]]

fund's ability to comply with the HLIM requirement is dependent on the 
fund's ability to classify its highly liquid investments under the 
rule. Funds have experience following the 15% guideline restricting 
purchases of illiquid assets when considering whether to purchase 
additional illiquid assets. By contrast, the HLIM is a new requirement 
that funds have not previously been required to establish and about 
which funds have not received previous Commission guidance. In order to 
implement the HLIM independent of the full classification requirements, 
funds would have to establish policies, procedures, and systems to 
determine their highly liquid investments so that they may be able to 
determine and monitor their HLIM. In addition, in adopting the 15% 
illiquid investment limit, we specifically recognized that it was 
possible to comply with such limit without classification for a 
category of funds, the In-Kind ETFs.\44\ The HLIM, on the other hand, 
is a new requirement specifically tied to classification for which 
there has been no previous Commission guidance. As a result, we believe 
that even with guidance, implementing the HLIM and identifying highly 
liquid investments would be more likely to require funds to either 
incur significant expenses to build out an interim system or redo 
certain elements of their systems as they implement the full portfolio 
classification requirements, or both. Therefore, we believe it is 
appropriate to extend consistently the compliance date for both the 
portfolio classification and HLIM requirements.
---------------------------------------------------------------------------

    \43\ See Rule 22e-4(a)(6) (defining highly liquid investments as 
``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 rule 22e-4(b)(1)(ii)).
    \44\ See Adopting Release, supra footnote 3, at nn.745 and 836 
and accompanying text.
---------------------------------------------------------------------------

    As a consequence of the delay in portfolio classification and HLIM, 
the Commission is also extending the compliance date for the 
classification and HLIM reporting requirements of Forms N-PORT and N-
LIQUID.\45\ Form N-PORT requires a fund to disclose information 
regarding the fund's HLIM and individual portfolio holding liquidity 
classifications on a non-public basis.\46\ Currently, it also requires 
a fund to disclose publicly the aggregate percentage of its portfolio 
that is highly liquid, moderately liquid, less liquid, and illiquid on 
a quarterly basis.\47\ Part D of Form N-LIQUID requires non-public 
notifications to the Commission when the fund's HLIM is breached for 
more than a specified period of time.\48\ Because the information 
required by these items of Form N-PORT is related to the fund's 
classification of its investments, a delay in the classification 
requirement would also require a delay for these items. Similarly, 
because notifications on Part D of Form N-LIQUID are tied to the HLIM, 
the Commission believes that revising the compliance date for these 
notifications is also necessary.\49\
---------------------------------------------------------------------------

    \45\ We are not delaying reporting to the Commission information 
required by Form N-CEN related to lines of credit, and inter-fund 
lending and borrowing. It is our understanding that information 
related to lines of credit and inter-fund lending and borrowing 
activities is currently readily available to funds. Therefore, we do 
not believe that a delay is necessary and are not revising the 
compliance date for Form N-CEN. Because we are delaying compliance 
with the classification requirement of rule 22e-4(b)(1)(ii) and the 
HLIM requirement of rule 22e-4(b)(1)(iii), the in-kind status of 
certain ETFs may be noted as ``N/A'' on Form N-CEN until funds are 
required to comply with those requirements.
    \46\ Items B.7 and C.7 of Form N-PORT.
    \47\ Item B.8 of Form N-PORT.
    \48\ Part D of Form N-LIQUID.
    \49\ We are not delaying the implementation of rule 30b-10 (the 
obligation to file Form N-LIQUID or the other parts of the form). 
The parts of the form that are not being delayed (parts A, B, and C) 
relate to breaches of the 15% illiquid investment limit, which as 
discussed below is not being delayed. Accordingly, funds should file 
Form N-LIQUID reports related to such incidents as scheduled.
---------------------------------------------------------------------------

    Finally, we are providing a six-month extension of the compliance 
date for the recordkeeping requirements related to the elements of rule 
22e-4 we are delaying today,\50\ though we are not delaying the 
recordkeeping requirement related to the liquidity risk management 
program itself, the 15% illiquid investments restriction, or the board 
designation of the program administrator.\51\
---------------------------------------------------------------------------

    \50\ We are extending the compliance date for the recordkeeping 
requirements of rule 22e-4(b)(3)(i) that relate to classification as 
well as the recordkeeping requirements of rule 22e-4(b)(3)(iii) 
related to the HLIM requirements. Similarly, we are delaying the 
recordkeeping requirements of rule 22e-4(b)(3)(ii) related to the 
materials provided to the fund's board regarding the liquidity risk 
management program.
    \51\ Rule 22e-4(b)(3)(i).
---------------------------------------------------------------------------

    The Commission seeks comment on the delay in the classification, 
HLIM, and related reporting and recordkeeping requirements.
     Should the Commission provide an extension in the 
compliance dates for the classification requirement? Why or why not?
     Should the Commission provide an extension in the 
compliance dates for the requirements related to classification such as 
the HLIM requirement? Is it feasible to let the HLIM requirement go 
into effect without the related classification requirement?
     Should we delay the liquidity-related reporting 
requirements of Form N-PORT and Part D of Form N-LIQUID?
2. Length of Extension
    In light of the staff's monitoring and conversations with service 
providers and fund groups, as well as the commenters' statements 
regarding the projected timelines to effectively implement the 
classification requirement, we believe that a six-month extension is 
more appropriate than a one-year extension. One association stated that 
a compliance date extension of at least six months is necessary for the 
portfolio classification and related elements of the rule,\52\ and the 
other requested that the Commission extend the compliance date at least 
one year for these requirements.\53\
---------------------------------------------------------------------------

    \52\ See SIFMA AMG Letter.
    \53\ See ICI Letters I and II. Several fund groups supported the 
ICI's one-year extension request. See, e.g., the Nuveen and Vanguard 
Letters.
---------------------------------------------------------------------------

    We believe that a six-month period should provide sufficient time 
for funds to comply with the elements of the rule we are extending 
today. Specifically this should provide enough time to allow for 
service providers to provide effective classification tools and data, 
as well as for funds to integrate and implement these tools and certain 
related requirements into their programs and gain board approvals. We 
considered delaying the compliance date for one year rather than six 
months. As discussed above, many funds believe that service providers 
will have sufficiently mature offerings for funds to make informed 
service provider selections by approximately the second quarter of 
2018. If funds select their service providers by June of 2018, we 
believe that they will be able to effectively comply with all of the 
Liquidity Rule Requirements, including classification, by the revised 
compliance dates. Therefore, we do not believe a one-year extension is 
necessary.\54\
---------------------------------------------------------------------------

    \54\ See supra footnote 28.
---------------------------------------------------------------------------

    We previously adopted temporary rule 30b1-9(T), which will require 
larger entities to maintain in their records the information that is 
required to be included in Form N-PORT, in lieu of filing reports with 
the Commission, until April 2019. As a result, larger entities that 
previously would have been required to submit their first reports on 
Form N-PORT on Electronic Data Gathering, Analysis, and Retrieval 
(``EDGAR'') by July 30, 2018 would submit their first reports on EDGAR 
by April 30, 2019.\55\ Because we are revising the compliance date for 
the disclosures related to liquidity on Form N-PORT, larger entities 
will not need to

[[Page 8348]]

include those disclosures in their reports on Form N-PORT until July 
30, 2019.\56\
---------------------------------------------------------------------------

    \55\ See Investment Company Reporting Modernization, Investment 
Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 
2017)] (``N-PORT Release'').
    \56\ Smaller entities will be subject to classification, HLIM, 
and the related requirements we are delaying today on December 1, 
2019, but would not be required to file that information through 
EDGAR on Form N-PORT until April 30, 2020.
---------------------------------------------------------------------------

    We request comment on the six-month compliance period extension 
that we are adopting today.
     Is six months a sufficient amount of time for funds to 
implement classification and other related requirements we are delaying 
today? If not, how much additional time would funds need to comply and 
why?
     Should we provide a shorter compliance date extension, 
such as three months, or none? If so, why?
     Should we provide an additional six-month (or other 
period) extension in the compliance date for smaller entities, so that 
their liquidity classification obligations also align with their N-PORT 
filing requirements?
3. Board Oversight
    We are providing a six-month extension of the compliance date for 
board approval of the liquidity risk management program and the related 
annual review requirements.\57\ Although funds will need to implement 
liquidity risk management programs as originally scheduled, these 
programs need not, for now, include the rule's classification or HLIM 
requirements. Other than the elements that are not being delayed, funds 
may implement a program that achieves the goals laid out in the rule 
using any additional elements they view as reasonable during the period 
of the compliance date extension, but need not get board approval of 
that program until the end of the extension period. Because the 
Commission is granting funds additional time to incorporate the delayed 
elements into their programs, we believe that it would be unnecessarily 
burdensome to require the board to review the fund's program before 
funds incorporate all elements of the program. Similarly, we believe it 
is unnecessarily burdensome to require the board to conduct annual 
reviews of the program prior to the complete development of the fund's 
program.
---------------------------------------------------------------------------

    \57\ Rule 22e-4(b)(2)(i) and (iii).
---------------------------------------------------------------------------

    However, as we stated in the Adopting Release and as we continue to 
believe, requiring that the board designate a program administrator 
independent from portfolio management is necessary for the program to 
be administered with sufficient independence.\58\ We also expect that 
having a designated program administrator will better enable funds to 
create and operate the liquidity risk management program, and 
facilitate implementation of the delayed aspects of the rule when they 
go into effect. Accordingly, we are not delaying the requirement for 
the board to designate the program administrator.
---------------------------------------------------------------------------

    \58\ See Adopting Release, supra footnote 3 at n.814 and 
accompanying text. Rule 22e-4(b)(2)(ii).
---------------------------------------------------------------------------

    The Commission seeks comment on the delay of these board oversight 
requirements.
     Should we provide this delay to the board approval 
requirements? Why or why not?
     Should we instead require the board to approve the initial 
programs without the classification and related requirements? If so, 
why?
     Should we provide the delay to the board's annual review 
requirement?
4. Liquidity Risk Management Programs
    We are not extending the compliance date for the general obligation 
that each fund implement a liquidity risk management program, including 
the required assessment, management, and periodic review of the fund's 
liquidity risk.\59\ We believe that implementing a liquidity risk 
management program, even in the absence of the classification and HLIM 
requirements, will enhance fund liquidity risk management practices and 
provide protection to investors.\60\
---------------------------------------------------------------------------

    \59\ Rule 22e-4(b) requires each fund and In-Kind ETF to adopt 
and implement a program that is reasonably designed to assess and 
manage its liquidity risk. See rule 22e-4(b)(1)(i).
    \60\ Accordingly, by December 1, 2018, larger entities will be 
required to adopt and implement a written liquidity risk management 
program that is reasonably designed to assess and manage its 
liquidity risk. See rule 22e-4(b). Smaller entities will be required 
to comply on June 1, 2019. The program must include policies and 
procedures reasonably designed to incorporate the elements 
articulated in rule 22e-4(b)(1)(i) related to a fund's assessment, 
management, and periodic review of its liquidity risk. The fund's 
board must also designate a program administrator pursuant to rule 
22e-4(b)(2)(ii).
---------------------------------------------------------------------------

    While we understand that there are issues with the classification 
requirement, we are unaware of any claims that funds are or anticipate 
experiencing difficulties in implementing a liquidity risk management 
program by the original compliance date.\61\ We understand that many 
funds already have in place systems to assess and manage the liquidity 
of their funds. In addition, both trade associations that commented 
indicated that they believed that compliance with the overall 
obligation to implement a liquidity risk management program under the 
rule was feasible by the original compliance date.\62\ We believe that 
funds can establish a program that assesses, manages, and reviews their 
liquidity risk without the elements we are delaying today, using 
elements they view as reasonable to achieve these goals during the 
period of the compliance date extension.
---------------------------------------------------------------------------

    \61\ The requirement for funds that engage in redemptions in-
kind to implement policies and procedures under rule 22e-4(b)(1)(v) 
(and their related recordkeeping requirements in rule 22e-4(b)(3)) 
and the requirements for unit investment trusts (``UITs'') to comply 
with rule 22e-4(c) related to a UIT's liquidity assessment and 
related recordkeeping requirements will go into effect as originally 
scheduled. We do not believe that these requirements pose a burden 
on funds such that a delay in compliance would be necessary or 
appropriate, and some commenters suggested that they could go into 
effect as scheduled. See, e.g., SIFMA AMG Letter.
    \62\ See SIFMA AMG Letter and ICI Letter I.
---------------------------------------------------------------------------

5. 15% Illiquid Investment Limit and Guidance
    We are not extending the compliance date for the 15% illiquid 
investment limit of rule 22e-4, or the related board and Commission 
reporting requirements.\63\ Limiting the amount of illiquid investments 
held by open-end funds is critical to effective liquidity risk 
management and is a cornerstone of rule 22e-4. As stated in the 
Adopting Release, ``a limit on funds' illiquid investments should be a 
central element of managing open-end funds' liquidity risk, which in 
turn would further the protection of investors.'' \64\
---------------------------------------------------------------------------

    \63\ Rule 22e-4(b)(1)(iv); Parts A, B, and C of Form N-LIQUID.
    \64\ Adopting Release, supra footnote 3, at text following 
n.757.
---------------------------------------------------------------------------

    While we agree that additional time is necessary to efficiently and 
effectively comply with the portfolio classification and certain 
related requirements of the rule, we do not believe that complying with 
the 15% illiquid investment limit presents challenges that warrant a 
similar delay in compliance. Funds have experience following the 
previous guideline to limit an open-end fund's aggregate holding of 
illiquid assets to no more than 15% of the fund's net assets.\65\ 
Although the final rule's definition of illiquid investments differs in 
some respects from the previous 15% guideline definition of illiquid 
asset, we believe funds have gained significant experience in 
evaluating and identifying illiquid assets consistent with the prior 
guidance, and should be able to apply that experience and associated 
systems in complying with the 15% limit in rule 22e-4.\66\ In addition, 
the guidance we

[[Page 8349]]

provide below on complying with the 15% illiquid investment limit for 
funds that do not engage in full portfolio classification during the 
compliance extension period should assist such funds in their 
compliance with this requirement, and reduce the challenges associated 
with its implementation.
---------------------------------------------------------------------------

    \65\ Adopting Release, supra footnote 3, at n.38 and 
accompanying text.
    \66\ Adopting Release, supra footnote 3, at n.836 and 
accompanying text (noting that In-Kind ETFs are exempt only from the 
classification and HLIM requirements of rule 22e-4).
---------------------------------------------------------------------------

    While this limit on illiquid investments refers to the 
classification element of the rule, as we discuss below, we are 
providing guidance on how funds can comply with this requirement 
without engaging in full portfolio classification during the period of 
the extension we are providing today.\67\ As noted above, In-Kind ETFs 
are required to abide by the 15% illiquid investment limit but are not 
required to classify their investments.\68\ We expect many In-Kind ETFs 
will rely on the guidance provided below, or use other reasonable 
methods, to identify and monitor their illiquid investments during the 
period of the compliance date extension and thereafter. Accordingly, we 
believe that funds can effectively comply with the 15% illiquid 
investment limit during the compliance extension period.
---------------------------------------------------------------------------

    \67\ Rule 22e-4(b)(1)(iv).
    \68\ Rule 22e-4(b)(1)(ii).
---------------------------------------------------------------------------

    We are providing the following guidance to assist In-Kind ETFs and 
funds not engaging in full portfolio classification during the 
compliance extension period in identifying illiquid investments as a 
part of their application of the 15% illiquid investment limit.\69\ We 
believe one reasonable method for a fund to comply with these 
requirements is to preliminarily identify certain asset classes or 
investments that the fund reasonably believes are likely to be illiquid 
(``preliminary evaluation''). We expect that the fund could base this 
reasonable belief on its previous trading experience (including its 
experience in the investment's typical market depth and price impact 
when trading), on its understanding of the general characteristics of 
the asset classes it is preliminarily evaluating, or through other 
means. A fund could choose to determine that certain investments 
identified in such asset classes that it purchases are illiquid based 
solely on this preliminary evaluation, and not engage in any further 
analysis under the rule at that time.\70\ This evaluation need not 
occur prior to the trade being placed. Alternatively, if the 
preliminary evaluation establishes a reasonable basis for believing 
that an investment is likely to be illiquid, but the fund wishes to 
further evaluate its status, the fund may then, as a secondary step, 
determine whether that investment is illiquid through the full 
classification process set forth in the rule (``secondary 
evaluation''). Investments in asset classes the fund acquires that it 
does not reasonably believe are likely to be illiquid would not need to 
be classified when performing this preliminary analysis.
---------------------------------------------------------------------------

    \69\ See Rule 22e-4(b)(1)(iv) (``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. . . 
.'').
    \70\ Rule 22e-4(b)(1)(ii).
---------------------------------------------------------------------------

    Funds could automate such a preliminary evaluation of asset classes 
or investments, and they could base that evaluation on the general 
characteristics of the investments the fund purchases. For example, in 
establishing the list of asset classes or investments that the fund 
believes have a reasonable likelihood of being illiquid, the fund could 
take into account the trading characteristics of the investment (for 
example, whether it is a restricted security or has structural 
liquidity limitations, the trading history of the asset class, or 
whether the investment typically requires significant negotiations to 
trade) and use such characteristics to form the reasonable belief of 
illiquidity. We expect that a fund making use of preliminary evaluation 
would conduct periodic testing of the results of the preliminary 
evaluations to determine whether they continue to be accurate as part 
of their required review of the adequacy and effectiveness of the 
liquidity risk management program's implementation.
    In evaluating the likelihood of an asset class or investment being 
illiquid, we do not believe it would be reasonable to assume that a 
fund is only selling a single trading lot when looking at the market 
depth of the asset or class. However, a fund would not need to evaluate 
the actual size of its holdings in the asset class or engage in the 
full process of evaluating its reasonably anticipated trading size for 
the asset class under the rule. Instead, a fund could use any 
reasonable method in evaluating the market depth of the asset classes 
or investments it identifies as likely being illiquid in the 
preliminary evaluation.
    Although the illiquidity status of an investment is generally 
evaluated upon acquisition (and then at least monthly thereafter),\71\ 
certain events may lead an In-Kind ETF or fund not yet subject to the 
classification requirement to re-evaluate the liquidity status of an 
investment more frequently. For example, a reasonable approach for a 
fund to re-evaluate the liquidity of an investment might be by 
identifying in its policies and procedures in advance certain events 
that it reasonably expects would materially affect the investment's 
classification. Reasonable policies and procedures could limit such 
events to those that are objectively determinable (e.g., a trading halt 
or delisting of a security, an issuer or counterparty default or 
bankruptcy, significant macro-economic developments (such as a 
sovereign default), or events like extraordinary natural disasters or 
political upheavals, for funds with concentrated geographic exposures). 
This intra-month review would not create a de facto ongoing review 
requirement for classification. However, a fund generally should 
regularly monitor the amount of its illiquid investments to ensure that 
it does not exceed the limit as a result of the purchase or redemption 
activity of the fund or changes in the value of the fund's holdings.
---------------------------------------------------------------------------

    \71\ See rule 22e-4(a)(8) which references rule 22e-4(b)(1)(ii). 
An ``illiquid investment'' is defined as being determined, in part, 
through the classification process, which requires at least monthly 
review. Though we are revising the compliance date for the 
classification provisions of the rule, we are not revising the 
compliance date for those provisions related to the 15% illiquid 
investment limit, including the related monthly (or more frequent) 
review requirement in rule 22e-4(b)(1)(ii) referenced in 22e-
4(a)(8), subject to the guidance in this release.
---------------------------------------------------------------------------

    We believe that the method discussed in the guidance above would be 
a reasonable approach for a fund to help assure itself that it has not 
violated the 15% illiquid investment limit during the intra-month 
period between scheduled classifications. However, funds may use 
reasonable approaches other than the one described in this guidance as 
well.

D. Compliance Date Extension Chart

    The following chart identifies the provisions of the Liquidity Rule 
Requirements that we are delaying and those we are not. For the items 
subject to the six-month extension, the compliance date will be June 1, 
2019 for larger entities and December 1, 2019 for smaller entities. For 
the provisions that we are not delaying, the original compliance dates 
of December 1, 2018 for larger entities and June 1, 2019 for smaller 
entities remain in effect.

[[Page 8350]]

------------------------------------------------------------------------
                                             Requirements subject to
 Requirements not subject to extension              extension
------------------------------------------------------------------------
Rule 22e-4: \72\                         Rule 22e-4: \73\
     Liquidity Risk Management       Classification
     Program [paragraph (b)].                [paragraph (b)(1)(ii)].\74\
    [cir] Assessment, management, and     Highly liquid
     periodic review of liquidity risk    investment minimum [paragraph
     [paragraph (b)(1)(i)].               (b)(1)(iii)].
    [cir] Illiquid investments            Board Oversight.
     [paragraph (b)(1)(iv)].             [cir] Initial approval of the
    [cir] Redemptions in Kind             liquidity risk management
     [paragraph (b)(1)(v)].               program [paragraph (b)(2)(i)].
    [cir] Board Designation of Program   [cir] Annual Board Reporting
     Administrator [paragraph             [paragraph (b)(2)(iii)].
     (b)(2)(ii)].
     UIT Liquidity [paragraph
     (c)].
N-LIQUID                                 N-LIQUID
     Part A. General                 Part D. Assets that
     Information.                            are Highly Liquid
     Part B. Above 15% Illiquid      Investments Below the HLIM.
     Investments.
     Part C. At or Below 15%
     Illiquid Investments.
N-CEN:                                   N-PORT:
     Item C.20. Lines of             Item B.7. Highly
     credit, interfund lending, and          Liquid Investment Minimum.
     interfund borrowing.                 Item B.8. Liquidity
     Part E.5. In-Kind ETF.       aggregate classification
                                          information.
                                          Item C.7. Liquidity
                                          Classification Information.
------------------------------------------------------------------------

II. Procedural and Other Matters

    The Administrative Procedure Act (``APA'') generally requires an 
agency to publish notice of a rulemaking in the Federal Register and 
provide an opportunity for public comment.\75\ This requirement does 
not apply, however, if the agency ``for good cause finds . . . that 
notice and public procedure thereon are impracticable, unnecessary, or 
contrary to the public interest.'' \76\
---------------------------------------------------------------------------

    \72\ The recordkeeping requirements of rule 22e-4(b)(3) related 
to these elements are similarly not subject to extension. See supra 
footnote 50 and accompanying text.
    \73\ The recordkeeping requirements of rule 22e-4(b)(3) related 
to these elements are similarly subject to extension. See supra 
footnote 49.
    \74\ As discussed in footnote 71, we are not delaying the 
aspects of classification that relate to the implementation of the 
illiquid investment limit, subject to the guidance in this release.
    \75\ See 5 U.S.C. 553(b)-(c).
    \76\ 5 U.S.C. 553(b)(3)(B).
---------------------------------------------------------------------------

    We have determined to adopt this interim final rule delaying 
certain of the Liquidity Rule Requirements. Specifically, the 
Commission is extending the compliance date for the classification 
requirement of rule 22e-4(b)(1)(ii) except to the extent referenced in 
rule 22e-4(a)(8).\77\ The Commission also is extending the compliance 
date for rule 22e-4(b)(1)(iii) pertaining to the HLIM. Furthermore, the 
Commission is extending the compliance date for rule 22e-4(b)(2)(i) and 
(iii) pertaining to the requirement that fund boards initially approve 
the fund's liquidity risk management program as well as the requirement 
that the fund's board review annual reports on the operation of the 
program and the program's adequacy and effectiveness of implementation 
from the fund's program administrator. Finally, the Commission is 
extending the compliance date for the liquidity-related reporting 
requirements of Form N-PORT as well as Part D of Form N-LIQUID.
---------------------------------------------------------------------------

    \77\ See supra footnote 71.
---------------------------------------------------------------------------

    The trade associations expressed concern that, because of the 
significant investment funds will have to incur and the time commitment 
involved, funds will have to continue to build their classification 
technology infrastructure well before the compliance date of the 
Liquidity Rule Requirements, and they therefore requested that the 
Commission make any extension in the compliance date as quickly as 
possible. The SIFMA AMG Letter argued that a prompt extension of the 
compliance date for the classification requirement of the rule will 
``provide the industry with the breathing room it needs to build, 
implement and test the necessary systems in an orderly and prudent 
manner'' and the ICI Letter I echoed the sentiment, asking for 
``[q]uick and decisive action--with respect to delaying the rule's 
classification requirements.''
    The Commission has determined that funds are encountering 
significant challenges in their efforts to achieve timely compliance 
with the classification and related requirements of rule 22e-4 and 
related forms. Most notably, as discussed in detail in section I.B 
above, compliance with these requirements entails service providers and 
funds building complex, technology-dependent liquidity classification 
systems. These systems are not yet complete nor are they projected to 
be fully developed and tested by the current compliance date. We are 
basing this judgment on Commission staff outreach to funds and service 
providers, and information they have provided us discussed above. Based 
on this information, we believe the projected timelines for completing 
the development of classification tools, along with the time necessary 
to effectively evaluate, implement and test new systems and 
infrastructure, further enhance liquidity programs, and obtain approval 
from fund boards justify a six-month delay limited to the 
classification and related requirements. The scope of the difficulties 
that are being experienced in developing liquidity classification 
systems, the extent of fund reliance on external service providers to 
provide liquidity classification solutions, and the substantial number 
of implementation questions that have been posed, are matters that were 
not anticipated in the Adopting Release.
    As discussed previously, providing immediate certainty regarding 
this compliance date extension is critical because funds currently are 
evaluating and making decisions on the source and structure of their 
classification systems in an effort to meet the original compliance 
date. By providing an extension, funds may take the time to evaluate 
the staff interpretive guidance that is being issued along with this 
release in connection with building their systems, thereby avoiding the 
costs of expediting the construction of their systems (in dollar value 
and/or reduced quality) after having reviewed the staff interpretive 
guidance or revising their systems as may be occasioned by any 
additional subsequently-issued staff or Commission guidance. Because 
funds are making decisions now as to the structure of their programs 
and the service providers they will use, funds need to have certainty 
that there will be a six-month delay of the classification and related 
requirements so that they can take this time to evaluate and design the 
necessary systems and infrastructure and evaluate the need for and 
choice of a service provider to assist in this process. This certainty 
will allow them time to adjust their implementation process accordingly 
and avoid costs of rushed implementation and potential revisions to 
their programs and use or

[[Page 8351]]

choice of service providers after service providers complete their 
product offerings, which costs could be passed on to the fund's 
investors. Waiting until after the notice and comment period to make 
the necessary delay effective would undermine this effort to give 
certainty for these complex technology infrastructure timelines and 
thus we believe it would be impracticable, unnecessary, and contrary to 
the public interest.
    For these reasons, the Commission finds that good cause exists to 
dispense with advance notice and comment regarding the delay of the 
classification and related requirements outlined above.\78\ The 
Commission and its staff will continue to monitor implementation of the 
Liquidity Rule Requirements to determine if further action is necessary 
to address questions or issues that may arise in addition to the delay 
in compliance we are providing today and to address interpretive issues 
as they arise.
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    \78\ See section 553(b)(3)(B) of the Administrative Procedure 
Act (5 U.S.C. 553(b)(3)(B)) (an agency may dispense with prior 
notice and comment when it finds, for good cause, that notice and 
comment are ``impracticable, unnecessary, or contrary to the public 
interest''). This finding also satisfies the requirements of 5 
U.S.C. 808(2) (stating that if a federal agency finds that notice 
and public comment are impractical, unnecessary or contrary to the 
public interest, a rule shall take effect at such time as the 
federal agency promulgating the rule determines). This section would 
allow the rule amendment to become effective notwithstanding the 
requirement of 5 U.S.C. 801. The interim final rule also does not 
require analysis under the Regulatory Flexibility Act. See 5 U.S.C. 
604(a).
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III. Economic Analysis

A. Introduction

    The Commission is sensitive to the potential economic effects of 
extending the compliance date for certain provisions of the Liquidity 
Rule Requirements. These effects include the benefits and costs to 
funds, their investors and investment advisers, issuers of the 
portfolio securities in which funds invest, and other market 
participants potentially affected by fund and investor behavior as well 
as any effects on efficiency, competition, and capital formation.

B. Economic Baseline

    The costs and benefits of the compliance date extension as well as 
any impact of the extension on efficiency, competition, and capital 
formation are considered relative to an economic baseline. For the 
purposes of this economic analysis, the baseline is the regulatory 
framework and liquidity risk management practices currently in effect, 
any systems and processes that funds have already implemented in order 
to comply with the Liquidity Rule Requirements as adopted, and the 
expected changes to liquidity risk management practices assuming the 
compliance dates established in the Adopting Release remain in effect.
    The economic baseline's regulatory framework consists of the 
Liquidity Rule Requirements adopted by the Commission on October 12, 
2016. With respect to current liquidity risk management market 
practices, the baseline remains as described in the Adopting Release, 
with two exceptions. First, funds are already complying with Form N-
1A's requirement that they make additional disclosures about redemption 
practices.\79\ Second, we expect that funds will rely more extensively 
on third-party service providers to comply with the classification 
requirement relative to the baseline in the Adopting Release.\80\ Under 
the baseline, larger entities must comply with the Liquidity Rule 
Requirements by December 1, 2018, while smaller entities must comply by 
June 1, 2019.\81\ The baseline also includes funds' efforts to develop 
the systems and processes necessary to comply with the Liquidity Rule 
Requirements since the rule was adopted, but we do not have data 
sufficient to quantify the extent to which funds have already invested 
in such systems and processes.\82\
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    \79\ See section IV.B of the Adopting Release for a detailed 
discussion of funds' current liquidity risk management practices. 
See section III.L of the Adopting Release for a discussion of the 
enhanced disclosure requirements regarding redemption practices on 
Form N-1A.
    \80\ See supra footnote 23 and surrounding text for a discussion 
of how funds will rely on service providers in complying with the 
Liquidity Rule Requirements.
    \81\ See supra footnote 5 for a detailed description of larger 
and smaller entities.
    \82\ We received comment letters providing certain information, 
including a survey of funds, regarding fund reliance on vendor 
solutions and vendor readiness, see supra footnote 20. While these 
letters indicate that the funds surveyed are still in the early 
stages of developing their classification systems because of vendor 
readiness issues, they do not provide concrete estimates of the 
extent to which funds have invested in implementing portfolio 
classification systems. In addition, while a large number of funds 
with significant assets under management responded to the survey, 
the survey was self-reported by members of the commenter's 
organization and may not necessarily reflect the state of the entire 
fund industry.
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    The primary SEC-regulated entities affected by this interim final 
rule are mutual funds and ETFs. As of the end of 2016, there were 9,090 
mutual funds managing assets of approximately $16 trillion,\83\ and 
there were 1,716 ETFs managing assets of approximately $2.5 
trillion.\84\ Other potentially affected parties include investors, 
investment advisers that advise funds, issuers of the securities in 
which these funds invest, and other market participants that could be 
affected by fund and investor behavior.
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    \83\ See 2017 ICI Fact Book, available at https://www.ici.org/pdf/2017_factbook.pdf, at 22, 170, 174. The number of open-end 
mutual funds includes funds that primarily invest in other mutual 
funds but excludes 421 money-market funds.
    \84\ See 2017 ICI Fact Book, available at https://www.ici.org/pdf/2017_factbook.pdf, at 180, 181.
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C. Economic Impacts

    We are mindful of the costs and benefits of this interim final 
rule. The Commission, where possible, has sought to quantify the 
benefits and costs, and effects on efficiency, competition and capital 
formation expected to result from the compliance date extension for 
certain provisions of the Liquidity Rule Requirements. However, as 
discussed below, the Commission is unable to quantify certain of the 
economic effects because it lacks information necessary to provide 
reasonable estimates.
Impacts on Funds
    The compliance date extension provides funds with the option to 
delay the implementation of a full portfolio classification system. 
This option allows funds to forgo some or all of the additional costs 
that may be associated with implementing a classification system by the 
compliance date in the Adopting Release,\85\ depending on how they 
choose to comply with the 15% illiquid investment limit during the 
compliance date extension period.\86\ The option to delay may also be 
valuable to funds because it permits them to adjust the manner in which 
they comply with the classification related elements of the Liquidity 
Rule Requirements in response to new information about implementation 
choices, including new technologies or

[[Page 8352]]

classification software.\87\ The value of the option to delay the 
implementation of a full portfolio classification system for a given 
fund will depend on the extent to which the fund has already invested 
in implementing a full classification system, the remaining costs the 
fund expects to incur by implementing such a system by the compliance 
date in the Adopting Release, and the manner in which the fund would 
comply with the 15% illiquid investment limit during the compliance 
period if it chooses to exercise the option to delay.
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    \85\ See supra section I.B for a discussion of the issues funds 
may face in complying with the rule by the compliance date in the 
Adopting Release.
    \86\ For example, as discussed above (see supra footnote 70 and 
surrounding text), some funds that delay the implementation of a 
full portfolio classification system might comply with the 15% 
illiquid investment limit through the preliminary evaluation process 
discussed in the guidance above, which allows them to forgo most of 
the costs associated with the implementation of a classification 
system. Alternatively, some funds may choose to comply with the 15% 
illiquid investment limit by supplementing such an evaluation with 
the secondary evaluation discussed in the guidance. Funds making 
this compliance choice will still incur the costs of implementing 
systems that assess whether a given holding is an illiquid 
investment according to the portfolio classification requirement but 
will not incur the costs associated with implementing systems 
associated with the other portfolio classification categories.
    \87\ See supra footnote 39 and surrounding text for an example 
of how funds might modify their implementation of portfolio 
classification systems in response to new information.
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    Under the interim final rule, funds will also be able to amortize 
the costs of establishing systems associated with the elements of the 
Liquidity Rule Requirements for which the compliance date is being 
extended over an additional six months. As above, any change in the 
amortization of these costs relative to the baseline will vary with the 
extent to which a fund has already invested in building systems and 
processes to comply with these elements, whether it opts to delay its 
implementation of a full portfolio classification system under the 
interim final rule, and the manner in which the fund would comply with 
the 15% illiquid investment limit during the compliance date extension 
period. We cannot quantify these because we do not have sufficient data 
and cannot anticipate how funds will choose to comply with the 15% 
illiquid investment limit during the compliance date extension period. 
Funds will also save six months' worth of any ongoing costs associated 
with the elements of the Liquidity Rule Requirements being delayed.
    In the Adopting Release, we estimated aggregate costs associated 
with some of these elements. First, some portion of the aggregate 
onetime cost of approximately $641 million associated with the 
establishment of liquidity classification systems that has not already 
been incurred by funds will be amortized over an additional six months 
for funds that opt to delay the implementation of their classification 
systems, and those funds will not incur some portion of six months' 
worth of the associated ongoing annual costs, which we estimated to 
range from $30,000 to $2.5 million per fund complex.\88\ Second, while 
we did not individually estimate the costs associated with implementing 
other elements of the Liquidity Rule Requirements that are being 
delayed such as the establishment of an HLIM, they constitute some 
fraction of the $214 million we estimated as being associated with 
implementing the liquidity risk management program. Funds have the 
option to amortize the portion of these costs that has not yet been 
incurred over an additional six months. Funds will also not incur six 
months' worth of the ongoing costs associated with the delayed elements 
of the liquidity risk management program if they opt to delay 
implementation of those elements, which we estimated as ranging from 
$10,000 to $0.8 million depending on the size of a given fund complex. 
Third, the portion of the aggregate onetime costs of approximately $158 
million associated with the rule's disclosure and reporting 
requirements on Form N-PORT that has not already been incurred by funds 
will be amortized over an additional six months. Funds will also not 
incur six months' worth of the associated aggregate ongoing annual 
costs, which we estimated as being approximately $3.9 million.\89\ 
Finally, funds will not have to incur six months' worth of the annual 
aggregate costs associated with filing Part D of form N-LIQUID, which 
we estimated as being $52,350.\90\
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    \88\ See Adopting Release, supra footnote 3, at n.1101. We 
assumed the classification process constitutes 75% of both onetime 
and ongoing costs. Estimated onetime aggregate costs of $855 million 
consist of approximately $641 million (75%) associated with a 
classification system and approximately $214 million associated with 
the remaining elements of rule 22e-4. Similarly, the range of 
ongoing costs, estimated to be $40,000 to $3.3 million, imply a 
range of $30,000 to $2.5 million associated with the classification 
system and $10,000 to $0.8 million associated with the remaining 
elements of rule 22e-4. We do not have sufficient data to estimate 
the portion of these costs that has already been incurred.
    \89\ See Adopting Release, supra footnote 3, at n.1188-1191. We 
estimated the total one-time costs associated with the rule's 
disclosure and reporting requirements on Form N-PORT as being 
approximately $55 million for funds that will file reports on Form 
N-PORT in house and approximately $103 million for funds that will 
use a third-party service provider. Similarly, we estimated the 
total ongoing annual costs as being approximately $1.6 million for 
funds filing reports in house and $2.3 million for funds that will 
use a third-party service provider.
    \90\ See Adopting Release, supra footnote 3, at n.1287-1288. We 
estimated that an average of 30 reports would be filed per year in 
response to an event specified on Part D of Form N-LIQUID at a total 
cost of $1,745 per filing, resulting in an aggregate cost of 30 x 
$1,745 = $52,350.
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    As a result of the compliance date extension, some funds that do 
not already have a liquidity risk management program in place and opt 
to delay the implementation of a full portfolio classification system 
may incur additional costs, relative to the baseline, associated with 
the development of interim systems and processes that allow for 
compliance with those elements of the Liquidity Risk Requirements that 
are not being delayed. For example, funds that intended to base their 
implementation of a liquidity risk management program on portfolio 
classification but opt to delay the implementation of a classification 
system will need to establish other interim systems and processes to 
assess, manage, and periodically review the fund's liquidity during the 
compliance date extension period.\91\ In addition, funds that opt to 
delay the implementation of their classification system under the 
interim final rule will have to develop systems and processes to comply 
with the 15% limit in the absence of a classification system. In 
deciding whether they should exercise their option to delay, funds will 
weigh the costs of implementing any interim systems and processes 
during the compliance date extension period if they opt to delay the 
implementation of a full portfolio classification system against the 
costs of implementing a full portfolio classification system by the 
original compliance date if they do not.
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    \91\ See supra footnote 62 and surrounding text for a discussion 
of liquidity risk management program implementation in the absence 
of a portfolio classification system.
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Impacts on Investors and Other Market Participants
    As discussed above, the compliance date extension provides funds 
with the option to delay the implementation of a full portfolio 
classification system. The compliance date extension for certain of the 
Liquidity Rule Requirements will delay benefits to fund investors and 
other market participants who otherwise would have benefited from those 
portions of the rule during the compliance date extension period. These 
delayed benefits include, for example, the increased likelihood that 
funds would be able to effectively meet redemption obligations by 
establishing an HLIM and any benefits associated with the Commission's 
ability to monitor and analyze trends in fund liquidity based on the 
portfolio holding classifications reported on Form N-PORT.\92\ However, 
because smaller entities will not begin filing Form N-PORT until April 
30, 2020 and the compliance date for larger entities filing Form N-PORT 
has been delayed until

[[Page 8353]]

April 30, 2019, the only delayed benefits associated with disclosures 
on Form N-PORT would be for larger entities during the three-month 
period between April 30, 2019 and the extended compliance date of July 
30, 2019.\93\ In addition, to the extent that funds would not have been 
able to effectively comply with the provisions of the Liquidity Risk 
Requirements that are being extended as of the original compliance 
date, such benefits would not have existed under the baseline, and thus 
the diminution of the expected benefits would be not be attributable to 
the compliance date extension.
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    \92\ See section IV.C of the Adopting Release for a 
comprehensive discussion of the benefits associated with the 
Liquidity Rule Requirements. See Adopting Release, supra footnote 3, 
at n.1089 and surrounding text for a discussion of why we are unable 
to quantify these benefits.
    \93\ See N-PORT Release, supra footnote 55.
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Efficiency, Competition, and Capital Formation
    In the Adopting Release, we discussed the effects of the Liquidity 
Rule Requirements on efficiency, competition, and capital formation. In 
general, the interim final rule will delay, for six months, those 
effects that are associated with the elements of the Liquidity Rule 
Requirements that we are delaying today. For example, funds may shift 
their portfolios away from less liquid assets and towards more liquid 
assets as a result of the HLIM. Some of the potential economic effects 
associated with such a shift, as discussed in the Adopting Release, 
include a potentially lower yield on the funds available to investors, 
a decrease in the investment options available to investors, an 
additional decrease in the liquidity of less liquid securities, and an 
additional increase in the liquidity of more liquid securities.\94\ 
With respect to capital formation, any shift by funds or investors away 
from less liquid assets and towards more liquid assets could discourage 
new issuance of illiquid securities or a shift in the capital structure 
of issuers away from less liquid assets such as bonds and towards more 
liquid asset such as equities.\95\
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    \94\ See section IV.C of the Adopting Release for a detailed 
discussion of the Liquidity Rule Requirements' effect on efficiency, 
competition, and capital formation.
    \95\ See Adopting Release, supra footnote 3, at n.1128 and 
surrounding text for a discussion of the effects of a shift away 
from illiquid assets on capital formation.
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    The compliance date extension may disadvantage some funds that have 
already invested in systems and processes to implement the Liquidity 
Rule Requirements and would be able to effectively comply with those 
requirements as of the compliance date established in the Adopting 
Release. To the extent that the capital invested by these funds makes 
them less able to invest in other aspects of their business, the rule 
may put them at a competitive disadvantage relative to funds that have 
not invested as heavily in complying with the Liquidity Rule 
Requirements. However, to the extent that investors have a preference 
for funds with complete liquidity risk management programs, some funds 
may prefer to comply with the Liquidity Rule Requirements by the 
compliance date in the Adopting Release, and may perceive having 
significant capital invested already as a competitive advantage. In 
addition, to the extent that funds have complete liquidity risk 
management programs, they would not have to implement systems for 
complying with the 15% illiquid investment limit under the guidance 
provided in this release, which would diminish any potential 
competitive differential. As is the case with the amortization of one-
time costs over an additional six months discussed above, this effect 
will vary with the extent to which a fund has already invested in 
implementing systems and processes to comply with these elements, which 
we cannot quantify.
    As discussed above, funds that opt to delay the implementation of a 
full classification system may choose different ways of complying with 
the 15% illiquid investment limit during the compliance date extension 
period. The manner in which funds choose to comply with the 15% 
illiquid investment limit may lead otherwise similar funds to have 
different capacities for holding illiquid investments. For example, two 
otherwise identical funds could perform the same preliminary evaluation 
discussed in the guidance above, while only one of the funds might 
perform the secondary evaluation under the guidance. Any secondary 
evaluation in which it is determined that some investments are not 
illiquid results in the fund that performs the secondary evaluation 
holding a lower percentage of illiquid assets than the otherwise 
identical fund that only performs a preliminary evaluation. If having a 
higher capacity to invest in illiquid investments allows some funds to 
increase the expected return of their portfolios, these funds will 
consider this potential competitive advantage when determining how they 
will comply with the 15% illiquid investment limit. In-kind ETFs will 
consider this potential competitive advantage on an ongoing basis. 
Other types of funds will consider this potential competitive advantage 
in determining how they will comply with the 15% illiquid investment 
limit during the compliance date extension period if they opt to delay 
the implementation of a classification system and whether it is worth 
exercising their option to delay.

D. Reasonable Alternatives

    The Commission considered several alternatives to the interim final 
rule's six-month compliance date extensions. First, the compliance date 
could have been extended for a shorter or longer period of time. A 
shorter extension would have reduced the extent to which investors and 
other market participants will forgo any benefits associated with the 
delayed elements of the Liquidity Rule Requirements, but may not have 
provided ample time to fully mitigate the concerns raised by the 
commenters regarding the industry's ability to effectively comply with 
the elements of the rule related to classification. A longer extension 
would provide more time to mitigate commenters' concerns but also would 
have further delayed any potential benefits associated with the 
Liquidity Rule Requirements.
    Second, the Commission could have delayed all of the Liquidity Rule 
Requirements. Delaying all of the Liquidity Rule Requirements would 
have saved funds from incurring the costs associated with any interim 
systems or processes required to implement a liquidity risk management 
program (rule 22e-4(b)(1)(i)) and to comply with the 15% illiquid 
investment limit during the compliance date extension period. It also 
would have allowed funds to amortize startup costs for the rest of the 
elements of the Liquidity Rule Requirements that are not being delayed 
over an additional six months and would have saved the ongoing costs 
associated with those elements for six months. However, delaying all of 
the Liquidity Rule Requirements would also delay any of the benefits to 
investors and market participants associated with the general liquidity 
risk management program and the 15% illiquid investment limit, such as 
the reduced risk that funds are unable to meet their redemption 
obligations.
    Third, the compliance date extension could have been applied to all 
elements of the Liquidity Rule Requirements that refer to the 
classification requirement, including the 15% illiquid investment 
limit, the associated board reporting requirement, and the associated 
reporting requirements on Form N-PORT. This alternative would have 
saved funds from incurring the costs associated with any interim 
systems required to perform a preliminary evaluation of whether an 
asset is likely to be illiquid and, to the extent funds opt to 
implement classification systems during the interim period to allow for 
a

[[Page 8354]]

secondary evaluation of asset liquidity in the context of the 15% 
illiquid investment limit, the costs associated with building such 
interim systems by the compliance date in the Adopting Release. 
Delaying all of the classification-related elements would have also 
delayed any benefits associated with the 15% illiquid investment limit, 
such as the increased likelihood that a fund's portfolio is not overly 
concentrated in illiquid investments and the decreased likelihood that 
a fund's portfolio remains overly concentrated in illiquid investments 
for an extended period of time as result of the requirements that funds 
report violations of their 15% illiquid investment limit to their 
boards and the Commission on Form N-LIQUID.
    Finally, the Commission could have chosen not to delay the 
compliance date for the HLIM requirement, and instead provided guidance 
as to how funds could comply with that requirement during the period 
that portfolio classification requirements are extended. Maintaining 
the original compliance date for the HLIM requirement also would have 
maintained any benefits associated with the HLIM during the compliance 
date extension period such as the increased likelihood that funds would 
be able to effectively meet redemption obligations. However, as 
discussed previously, not delaying the HLIM requirement may have caused 
funds that opted to delay the implementation of a portfolio 
classification system to incur costs in developing any interim systems 
required to comply with the HLIM requirement absent a portfolio 
classification system, or redo certain elements of their systems when 
they implement full portfolio classification. Because HLIM is a new 
requirement for which there has been no previous Commission guidance 
and the establishment of an HLIM may depend more heavily on a full 
portfolio classification system, implementing interim systems to comply 
with HLIM could be more costly to funds than implementing interim 
systems to comply with the 15% illiquid investment limit.

E. Request for Comment

    We are requesting comment on our analysis of the potential economic 
effects of the interim final rule delaying the compliance date for 
those elements of the Liquidity Rule Requirements associated with the 
classification requirement:
     Are there any other costs or benefits we should consider 
in our analysis? If so please explain why those costs or benefits are 
relevant and provide quantitative estimates where possible.
     Are there other reasonable alternatives to the interim 
final rule's delayed compliance date that we should consider?

IV. Paperwork Reduction Act Analysis

    We do not believe that the revision of the compliance date for Part 
D of Form N-LIQUID, amendments to Form N-PORT, and certain provisions 
of rule 22e-4 make any substantive modifications to any existing 
collection of information requirements or impose any new substantive 
recordkeeping or information collection requirements within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\96\
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    \96\ 44 U.S.C. 3501 et seq.
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    We believe that the current burden and cost estimates for the 
existing collection of information requirements remain appropriate.\97\ 
We are only delaying certain burdens for six months. Thus, we believe 
that there are no new substantive burdens imposed on the overall 
population of respondents and the current overall burden estimates for 
the relevant forms are not affected.\98\ Accordingly, we are not 
revising any burden and cost estimates in connection with the revision 
of the compliance date. We request comment on whether our belief is 
correct.
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    \97\ The titles for the existing collections of information are: 
``Rule 22e-4 (17 CFR 270.22e-4) under the Investment Company Act of 
1940'' (OMB Control No. 3235-0737); ``Rule 30b1-10 (17 CFR 270.30b1-
10) under the Investment Company Act of 1940, `Current report for 
open-end management investment companies' and Form N-LIQUID, 
`Current report, open-end investment company.' '' (OMB Control No. 
3235-0754); ``Rule 30b1-9 and Form N-PORT'' (OMB Control No. 3235-
0730).
    \98\ See section III above.

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    By the Commission.

    Dated: February 22, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-03917 Filed 2-26-18; 8:45 am]
BILLING CODE 8011-01-P