In a letter to the Securities and Exchange Commission, CFA’s Director of Investor Protection Micah Hauptman offered support for proposed changes to the open-end fund liquidity risk management framework but voiced strong opposition to a proposed swing pricing framework. Specifically, the letter voiced support for: requiring funds to incorporate stress into their liquidity classifications; treating less liquid investments and assets whose fair value is measured using unobservable inputs as illiquid assets under the rule; and requiring funds to hold a minimum amount of highly liquid assets; among other modifications. According to the letter, “By improving the quality and consistency of liquidity classifications, these targeted changes would help funds better prepare for and weather future stress events and periods of high levels of redemptions.”
While the letter voiced support for proposed changes to the open-end fund liquidity risk management framework and urged the Commission to adopt those changes, the letter encouraged the Commission to go a step further to strengthen the proposal. Specifically, the letter advocated for lowering the 15% limit on illiquid assets to 10% or requiring funds that hold more than 10% illiquid assets to also hold at least 15% highly liquid assets to counterbalance the fund’s illiquid sleeve and the accompanying risk that such funds may have difficulty meeting redemption requests during times of stress without causing significant dilution of remaining investors’ interests in the fund.
In addition, the letter voiced strong opposition to a proposed swing pricing framework because it would create a two-tier market, putting investors who are able to structure their transactions so as to avoid being subject to swing pricing at an advantage relative to those who are unable to structure their transactions so as to avoid swing pricing. This would be particularly detrimental to retail investors saving for a secure and dignified retirement. According to the letter, “the proposed swing pricing framework cannot be operationalized without causing significant collateral damage to the open-end fund market and to retail investors. Furthermore, it is unlikely that the proposal would accomplish its objectives.” Accordingly, the letter urged the Commission to dispense with the proposed swing pricing framework and forego any regulatory approach that causes retail investors to disproportionately shoulder any costs and delays associated with liquidity risk management.