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Statement on Open-End Fund Liquidity Risk Management Programs and Swing Pricing

Commissioner Kara M. Stein 

Sept. 22, 2015

Like my fellow Commissioners, I want to thank the staff for all of their work.  I appreciate your efforts and engagement with me and my office during the months leading up to this proposal.   In particular, I want to thank David Grim, Diane Blizzard, Sarah ten Siethoff, Sarah Buescher, Melissa Gainor, Amanda Wagner and Naseem Nixon from the Division of Investment Management.  I also want to thank Mark Flannery and his team in the Division of Economic and Risk Analysis for their work on the proposal and the accompanying white paper, in particular Tim Riley and Christof Stahel.

Many working Americans can no longer rely on traditional pension plans and Social Security to fund their retirements and are increasingly investing in open-end funds.  U.S. mutual funds and ETFs hold over $18 trillion in assets under management.[1]  One out of three Americans owns shares in a mutual fund, often through a 401k plan for retirement or a 529 plan for college savings.  These funds matter more than ever before, and this importance is only going to increase.  Through 401k plans and various government initiatives, we see tax and other incentives encouraging Americans to invest in these open-end funds.  Because of this changing landscape, the Commission has a responsibility to the public to make sure that the infrastructure for these funds not only evolves with the times but also remains focused on investor protection. 

Nothing is more fundamental and important to open-end funds than redeemability.  It is a cornerstone of the Investment Company Act.  Every investor in a mutual fund or ETF expects that they will be able to get their money out of the fund quickly, if need be.  The heart of today’s proposal is updating the Commission’s regulatory regime to ensure that this expectation continues to be met. 

Today’s proposal certainly makes some important improvements.  Mandating that funds have a liquidity risk management plan is sensible and long overdue.  Funds will be required to monitor the liquidity of the assets in their portfolios on an ongoing basis.  Under the proposal, transparency will be dramatically increased by requiring funds to classify each of their portfolio assets into one of several liquidity buckets, depending on their assessment of how long it would take to convert an asset to cash.  Funds also will have to establish a minimum amount of assets that can be converted to cash within three days.  This should improve both the resiliency of these funds, and the chances that they can meet their redemption obligations with minimal disruption.

I am pleased this proposal leverages Form N-PORT, the proposed new monthly reporting form for mutual funds and ETFs.  It will allow the Commission, investors, and others to use structured data to analyze how funds are classifying assets.  Trends, outliers, and trouble spots will be more easily located.  Improved data and data collection can also be used to inform policymaking, examinations, and guidance for mutual funds and ETFs going forward. 

At the same time, I am concerned that the proposal does not go far enough in certain areas.[2]  In particular, we have seen a steady increase in the number of open-end funds pursuing more complex strategies focused on alternative investments and fixed income.  This has led to portfolio composition in mutual funds and ETFs that is far less liquid and more complex than what was ever envisioned under the Investment Company Act.  This proposal presents an opportunity to better understand such developments and reassess our regulatory framework for these types of funds.  I am especially interested in hearing from commenters on whether we should consider tailoring regulation for the funds that we know present the most concern from a redeemability perspective. 

For example, do certain funds simply fall outside the boundaries of what it means to be a mutual fund under the Investment Company Act and are therefore better suited to be a closed-end fund or a private fund?  Are there tools or additional measures in open-end funds that can be employed to ensure that investors’ fundamental expectations for liquidity continue to be met for these funds?  I hope that public comment and further staff consideration of these issues will lead to a strengthened approach at adoption.  I also hope that commenters will offer us additional insights into how the improvements today fit into the broader array of challenges that our financial markets face from an investor protection and financial stability perspective.

Despite these concerns, I support the proposal.  It contains several important improvements to our current regime, and overall it is a thoughtful approach to tackling a complicated area.  I look forward to receiving comments from market participants and all interested stakeholders regarding this proposal.  Thank you again to the staff for all of your hard work.  I have no questions. 

[1] See 2015 Investment Company Fact Book (“ICI 2015 Fact Book”), available at

[2] See Commissioner Kara M. Stein, “Mutual Funds – The Next 75 Years,” June 15, 2015, available at  

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