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SEC Finalizes Rules Expanding Risk, Liquidity Disclosures for Funds, ETFs

The Securities and Exchange Commission has voted to adopt changes to “modernize and enhance” reporting and disclosure of information by registered investment companies and to enhance liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).

The SEC says the new rules will enhance the quality of information available to investors and will allow it the agency to more effectively collect and use data reported by funds. Perhaps more significantly, it says these new rules will also promote effective liquidity risk management across the open-end fund industry and will enhance disclosure regarding fund liquidity and redemption practices.

With these rules, registered funds will be required to file a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that will require census-type information.

The rules also will require enhanced and standardized disclosures in financial statements and will add new disclosures in fund registration statements relating to a fund’s securities lending activities.

As for the new liquidity risk management rules, the SEC says they will require mutual funds and ETFs to establish liquidity risk management programs that address multiple elements, including classification of the liquidity of fund portfolio investments and a highly liquid investment minimum. The rules also strengthen the 15% limit on illiquid investments and will require enhanced disclosure regarding fund liquidity and redemption practices, according to the SEC.

Separately, the SEC also approved a swing pricing rule that will permit mutual funds to use swing pricing – the process of adjusting a fund’s net asset value to pass on to purchasing or redeeming shareholders costs associated with their trading activity.

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