SEC Proposes Changes to Liquidity Risk Management and Swing Pricing Rules

Client Alert
November 8, 2022

On November 2, 2022, the Securities and Exchange Commission (“SEC”) proposed  amendments to the current rules relating to liquidity risk management and swing pricing (the “Proposal”).[1] 


Proposed Amendments to Liquidity Risk Management (Rule 22e-4)

In-Kind ETFs would continue to be exempt from the liquidity classification and HLIM requirements.  However, the exclusion from the HLIM requirement for funds that primarily invest in highly liquid investments would be eliminated.

Proposed Amendments to Swing Pricing (Rule 22c-1)

The Proposal also includes more frequent and detailed reporting by funds on Form N-PORT to the SEC and the public.

The Proposal is subject to a 60-day comment period after the Proposing Release’s publication in the Federal Register.

Proposed Amendments to Liquidity Risk Management Programs

The Proposal includes certain amendments to the liquidity classification framework:

While Rule 22e-4 currently requires classification to take place monthly, the Proposal would require classification to take place each business day.

The Proposal also would make changes to the HLIM requirements:

Additionally, in calculating a fund’s illiquid investments, a fund must treat as illiquid nay margin or collateral it has posted in connection with a derivatives transaction that is classified as an illiquid investment and that the fund would receive if it exited the derivatives transaction.

Proposed Amendments to Swing Pricing

Under the Proposal, every registered open-end fund (other than money market funds and ETFs[2]) would be required to establish and implement swing pricing policies and procedures that adjust the fund’s current NAV per share by a swing factor if the fund has: (1) net redemptions or (2) if it has net purchases that exceed an identified threshold. 

The framework for determining swing thresholds under the Proposal includes the following:

Determining Investor Flows

Under the Proposal, and consistent with the existing rule, the swing price administrator must review investor flow information to determine: (1) if the fund has net purchases or net redemptions; and (2) the amount of such net purchases or net redemptions. Although the “Hard Close” aspect of the Proposal (discussed below) should help the fund to get timely flow information, Rule 22c-1 would continue to permit the swing price administrator to make these determinations based on reasonable, high confidence estimates as to whether it has crossed a swing threshold.

Calculating the Swing Factor

The Proposal would require the swing price administrator to make good faith estimates of the costs incurred by the fund if it purchased or sold a pro rata amount of each investment in its portfolio to satisfy the amount of net purchases or net redemptions (a “vertical slice”) to satisfy that day’s redemptions or to invest the proceeds from that day’s purchases. The Proposing Release notes that analyzing costs based on an assumed purchase or sale of a vertical slice of the fund’s portfolio would more fairly reflect the costs imposed by redeeming or purchasing investors then selecting specific investments.  

The swing factor calculation would differ depending on whether the fund is experiencing net purchases or net redemptions.

The Proposing Release provides that the market impact for each investment is determined by:

The Proposing Release also notes that the swing price administrator may apply the same estimate costs and market impact factors for all investments with the same or substantially similar characteristics.  The swing price administrator would be required to keep records documenting the market impact factors. 

Funds would be required to report their swing factor adjustments publicly on Form N-PORT.

The Proposal would also remove the upper limit on the swing factor from Rule 22c-1.

Hard Close

The Proposal includes amendments to Rule 22c-1 under the Act to require a hard close for funds that are required to implement swing pricing.  Under the Proposal, purchase or redemption orders are only eligible to receive the current day’s prices if the fund or its designated transfer agent, or a registered securities clearing agency (collectively, “designated parties”) receives the order before the time the fund computes its NAV, which is typically 4pm EST.

Pricing Requirements

The Proposal establishes the following defined terms:

Under the Proposal, eligible orders would receive the price based on the current NAV as of the next pricing time. Funds would calculate investor flows in part by using the required information in the eligible order about the size of an investor’s intended trade. Eligible orders would be irrevocable as of the next pricing time after a designated party receives the order, primarily to avoid the cancellations of orders, and thereby modifications to the investor flow information used to make swing pricing decisions. The Proposing Release further notes that the irrevocability provision will prevent late trading that might otherwise occur when investors learn of new market information after the pricing time. Orders received after the fund’s established pricing time would receive the next day’s price.

Effects of the Proposed Hard Close Rule

The Proposing Release predicts that the Proposal would change the way in which funds and intermediaries process orders. For example, some intermediaries may opt to discontinue one-time batch processes for submitting orders and instead adopt more frequent submissions throughout the business day, or near-real-time submissions. The Proposing Release notes that having earlier and more frequent submissions would improve operational resilience across all market participants and will also help funds make portfolio and risk management decision based on more complete and accurate flow information than is currently available.

The Proposing Release does acknowledge that complying with these new requirements would be difficult and result in additional costs for intermediaries as well as substantial changes in their business and operating practices. 

Other Proposed Amendments to Rule 22c-1

The Proposal would also reorganize and re-word the existing provisions relating to the current rule concerning the frequency and time for determining the NAV.

Amendments to Form N-1A

The Proposal would also make changes to the disclosure requirements under Form N-1A. The Proposal would require funds to disclose on Form N-1A that if an investor places an order with a financial intermediary, the financial intermediary may require the investor to submit its order earlier than the fund’s pricing time to receive the next calculated NAV. Such a disclosure requirement would ensure that investors understand the potential variability in the time by which intermediaries may require an order to be placed to receive a particular day’s price.

[1] Release IC-34746, Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting (November 2, 2022) at  (“Proposing Release”).

[2] Also would not apply to feeder funds in a master-feeder structure.

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