There have been multiple developments suggesting that Rule 22e-4 (“the liquidity rule”) is likely to be significantly watered down or, at least, delayed. Earlier this month, ICI sent a letter to the SEC urging the regulator to delay the compliance date by a year to ensure firms are well prepared. This postponement would appear to be in the industry’s best interest, given that a recent survey of 220 CCOs across the industry revealed that 90% of them were less than halfway through preparations to comply with the rule.
A lot of attention has been paid to this recent letter penned by ICI and other industry organizations, like SIFMA, that have sent input to the SEC about the rule along the way. SIFMA in particular requested that the SEC remove key provisions of the rule, essentially replacing the bucketing system with asset class mapping without exceptions. Removing the exceptions kills the need for fund managers to generate a quantitative understanding of their funds’ liquidity landscapes (bucketing). Of course, the exceptions are significant when understanding a fund’s liquidity.
The Treasury’s asset management section of the “A Financial System That Creates Economic Opportunities” report is a bit more balanced. The Treasury assessed systemic risks from the mutual fund industry and saw that there was little risk that mutual funds would derail the greater financial system. Although the Treasury dislikes bucketing due to the unnecessary costs passed on to investors, it likes required liquidity management programs and the codification of the 15% rule, which are both supported by quantitative classification.
Washington sources report that the SEC staff has little interest in substantially altering the bucketing system since a large change would trigger another notice and comment period. Although this decision belongs to the commissioners, indications are that the rulemaking process will not be reopened. However, tweaks through no-action letters are still possible and an early announcement of a delay seems increasingly probable.
While we think a delay is fairly likely and could be announced in the coming months, we also reckon that changes to the rule that neuter the “bucketing” requirement are unlikely. We believe the SEC is very focused on avoiding dilutive outcomes for fund shareholders, such as those that occurred with the Third Avenue Focused Credit Fund, and that it will continue to insist on quantitative classification of fund liquidity. We agree with this reasoning and believe bucketing should aid portfolio managers in managing redemptions in the context of avoiding dilutive sales.
What does this mean for firms working feverishly to finish liquidity rule projects? Stay the course. We are helping clients with these projects and recommend a heads-down approach, focusing on the lowest denominator of compliance – data. Similar to our musings on the DOL Fiduciary Rule, delay or no delay, changes or no changes, the moral of the story is, ignore the noise, and focus on your data.
Contact us for more information about how we can help you stay ahead of the change in preparation for the liquidity rule.