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Statement at Open Meeting on Investment Company Liquidity Disclosure Adopting Release

June 28, 2018

Thank you, Chairman Clayton.

I want to start by thanking the Division of Investment Management. At today’s meeting we are considering three different recommendations, at least in part, from the Division—a reflection of the Division’s impressive work ethic in carrying out an important agenda. Since my arrival here in January, the Division has been busy addressing issues with which the Commission has been grappling for a long time, including the roles and duties of advisers and brokers in assisting retail investors in their investment decisions, fund liquidity, internet availability of shareholder reports, the operation of exchange-traded funds, and the Volcker rule. As someone who started her career at the Commission in a rulemaking office in the Division, I know how unusual it is to put together so many recommendations in such a short period of time, let alone on such significant matters, particularly because the Division did not relax its high standards in the process. I also want to thank the Division of Economic and Risk Analysis (“DERA”) and the Office of General Counsel. DERA and the Office of General Counsel are deeply involved in every rulemaking undertaken by the Commission.

The amendments to Forms N-PORT and N-1A we are considering today would rescind the requirement that certain open-end funds disclose aggregate liquidity classification information about their portfolios, replace that disclosure with a new requirement to disclose information about the operation and effectiveness of funds’ liquidity risk management programs in their reports to shareholders, allow funds to assign multiple liquidity classification categories for a single position, and require reporting of holdings of cash and cash equivalents. These changes are sensible.

I am especially glad to see that the adopting release invites “funds that believe they would have to maintain dual liquidity classification programs as part of their liquidity risk management . . . to seek an exemption from the Commission from the classification requirements of rule 22e-4 if they believe their existing systems would effectively accomplish the Commission’s stated goals.”[1] Maintaining two systems or changing current systems that already accomplish or exceed the Commission’s goals is a waste of fund dollars and is not consistent with acting in the fund’s best interest.

I would have preferred to amend rule 22e-4 at this time to eliminate the classification requirement altogether. At the very least, we could have taken the step recommended by the Department of the Treasury (“Treasury”) in its recent Asset Management report by adopting “a principles-based approach to liquidity risk management rulemaking and any associated bucketing requirements.”[2]

Some others would like to forge ahead with the original plan to make funds’ aggregate bucketing information public. A bucketing schema that is inherently arbitrary, however, does not produce the type of data that informs investors, let alone lends itself to cross-fund comparisons. Providing investors a set of imprecisely generated percentages would not empower them, but might mislead them. We may not all agree on how much disclosure is the right amount, but certainly all of us can agree that we ought not force funds to provide their shareholders with information that is empty of meaningful content. I do not see much point in forcing funds to provide such information to the Commission either, but the government has been known to collect data and ignore it.

In formulating the approach we are adopting today, we took into account the implementation experience to date. That experience has provided us new insights into how bucketing might work in practice and has made more apparent the potential that the rule would generate less-than-useful information. Although I am a proponent of investor testing, I cannot see why we would need to ask investors whether they want to receive data that is neither useful in understanding any particular fund’s liquidity requirement nor comparable across funds. It is better to refine a rule before it goes into effect, as we are doing today, than to cling with polyannish tenacity to the rule as we originally adopted it.

Thank you again to the staff. I have no questions.

[1] See Investment Company Liquidity Disclosure, Investment Company Act Release No. 33142 (June 28, 2018) at text accompanying note 120.

[2] See U.S. Dep’t of the Treasury, A Financial System that Creates Economic Opportunities, Asset Management and Insurance (Oct. 2017) at 34.

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