Strengthening Open-End Fund Resiliency and Liquidity in Stressed Markets

Today, the Commission is proposing reforms designed to enhance the resiliency and liquidity of the $26 trillion mutual funds and exchange-traded funds (ETFs) market during periods of market stress. This proposal addresses key investor protection issues and I am pleased to support it.  

During the COVID-19 pandemic, our capital markets faced heightened volatility. Many open-end funds experienced significant outflows. In the wake of market instability, the Federal Reserve stepped in to inject liquidity into the system.

All market volatility events force us to reflect on the steps we can take to strengthen the system’s resiliency and to reduce the likelihood of government bailouts. More robust liquidity risk management that ensures funds can satisfy redemption requests in the timeframe required by law is an essential component of today’s reforms.

In 2016, the Commission first adopted liquidity risk management rules to reduce the risk that a fund would be unable to meet its redemption obligations and to minimize the potential dilution of shareholder interests. Those reforms were designed to address the increasingly complex and growing asset management industry. The market instability and stressed conditions at the onset of the COVID-19 pandemic tested liquidity risk management programs and revealed weaknesses that warrant our attention. 

Today’s release offers several enhancements to manage a fund’s liquidity during times of market stress. For instance, the proposal would require all funds to determine and maintain a minimum amount of highly liquid assets, which can help funds better meet investor redemptions. Together, these reforms would promote transparency and increased investor protection.  

I am hopeful to see robust feedback from all stakeholders, particularly on whether our proposed reforms will strengthen funds’ resiliency and liquidity risk management during stressed conditions.

I would like to thank the staff in the Division of Investment Management, and other Commission staff involved, for their hard work on this proposal.