Shareholders’ ability to redeem shares on demand is a defining feature of open-end funds.

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FACT SHEET
Open-End Fund
Liquidity Risk
Management and
Swing Pricing

U.S. SECURITIES AND EXCHANGE COMMISSION  PAGE 1 OF 2

Background
Shareholders’ ability to redeem shares on demand is a defining feature of open-end funds.
Without effective liquidity risk management, a fund may not be able to make timely payment
on  shareholder  redemptions,  and  sales  of  portfolio  investments  to  pay  redemptions  may
result  in  the  dilution  of  shareholders’  interests.  Even  when  a  fund  manages  its  liquidity
effectively, transaction costs associated with meeting redemption requests or investing the
proceeds  of  subscriptions  can  create  dilution  for  fund  shareholders.  These  concerns are
heightened  in  times  of  stress  or  for  funds  invested  in  less  liquid  investments.  The  market
disruptions  of  March  2020  reinforced  the  fact  that  liquidity  can  deteriorate  rapidly  and
significantly.

Proposed Amendments
This  proposal  would  amend  rule  22e-4,  rule  22c-1,  and  certain  reporting  and  disclosure
forms under the Investment Company Act of 1940.
Improve Liquidity Risk Management and Publicly Report Liquidity Information
To better prepare for the potential effects of stress on a fund’s portfolio, most open-end funds
would  be  required  under  the  rule  amendments  to  incorporate  stress  into  their  liquidity

The Securities and Exchange Commission proposed amendments to better prepare open-end
management  investment  companies  (“open-end  funds”)  for  stressed  conditions  and  mitigate
dilution of shareholders’ interests. The rule and form amendments incorporate lessons learned
from the market events of March 2020 and would improve on the existing framework by:
●    Enhancing how open-end funds other than money market funds (“MMFs”) and certain
exchange traded funds (“ETFs”) classify the liquidity of their investments and requiring
a minimum amount of highly liquid assets of at least 10 percent of net assets;
●    Requiring  any  open-end fund,  other  than  a  MMF  or  ETF,  to  use  swing  pricing  and
implementing  a  “hard  close”  to  operationalize  this  pricing  and  to  improve  order
processing more generally; and
●    Providing  for  more  frequent,  timelier,  and  more  detailed  public  reporting  of  fund
information, including information about funds’ liquidity and use of swing pricing.

FACT SHEET | Open-End Fund Liquidity Risk Management and Swing Pricing

U.S. SECURITIES AND EXCHANGE COMMISSION  Page 2 of 2
classifications by assuming the sale of a stressed trade size, similar to an ongoing stress
test. The proposal also would establish other minimum standards for liquidity classifications,
designed to prevent funds from overestimating the liquidity of their investments and provide
clearer guideposts. Further, the proposal would amend the liquidity categories, including by
removing the less liquid investment category, which includes investments that take longer
than seven days to settle, and treating those investments as illiquid to help reduce the risk
of  a  fund  not  being  able  to  pay  redemptions  in  the  period  the  Investment  Company  Act
requires.  Finally,  funds  would  be  required  to  maintain  a  minimum  amount  of  highly  liquid
assets  of  at  least  10 percent  of  net  assets  to  prepare  for  and  help  manage  stressed
conditions. As liquidity classifications would be more objective and comparable, the proposal
would  provide  investors  with  aggregate  information  about  a  fund’s  liquidity  profile  and
information related to its use of service providers for liquidity classification.
Require Use of Swing Pricing and Hard Close
An open-end fund other than an MMF or ETF would be required to adjust its net asset value
(“NAV”) so that the transaction price effectively passes on costs stemming from inflows or
outflows to the investors engaged in that activity, rather than diluting other shareholders. The
proposal would require funds to adopt policies and procedures to adjust a fund’s NAV per
share by a swing factor when the fund experiences net redemptions or when net purchases
exceed a threshold. The swing factor would reflect bid-ask spread and certain other costs of
selling or purchasing a vertical slice of the fund’s portfolio. It would also include an estimate
of market impact costs when net redemptions or net purchases exceed a threshold.
Further,  the  proposal  would  require  a  “hard  close”  for  these  funds.  An  investor’s  order  to
purchase or redeem a fund’s shares would be eligible for a given day’s price only if the fund,
its transfer agent, or a registered clearing agency receives the order before the time as of
which the fund calculates its NAV, typically 4 p.m. ET. The proposed hard close would help
operationalize  swing  pricing  by  ensuring  that  funds  receive  timely  flow  information,  help
prevent  late  trading  of  fund  shares,  and  improve  order  processing.  The  proposal  would
require additional disclosure related to swing pricing and the hard close.
Report Fund Information More Frequently
The proposal would provide the Commission and investors with timelier portfolio information,
which is particularly useful in times of changing market conditions. Currently, funds prepare
monthly reports and file them at the end of every quarter. Only the report for the third month
of the quarter is made public. The proposal would instead require funds to file each month’s
report within 30 days after month-end, with the report becoming public 60 days after month-
end. This change would apply to all registrants that report on Form N-PORT, including open-
end  funds  other  than  MMFs,  registered  closed-end  funds,  and  ETFs  organized  as  unit
investment trusts.

Additional Information:
Visit sec.gov to find more information about the proposed rulemaking and the full text of the proposing release.
The public comment period will remain open for 60 days after the released is published in the Federal Register.

FACT SHEET 
Open-End Fund 
Liquidity Risk 
Management and 
Swing Pricing  

 

U.S. SECURITIES AND EXCHANGE COMMISSION  PAGE 1 OF 2 

 

 
Background 
Shareholders’ ability to redeem shares on demand is a defining feature of open-end funds. 
Without effective liquidity risk management, a fund may not be able to make timely payment 
on shareholder redemptions, and sales of portfolio investments to pay redemptions may 
result in the dilution of shareholders’ interests. Even when a fund manages its liquidity 
effectively, transaction costs associated with meeting redemption requests or investing the 
proceeds of subscriptions can create dilution for fund shareholders. These concerns are 
heightened in times of stress or for funds invested in less liquid investments. The market 
disruptions of March 2020 reinforced the fact that liquidity can deteriorate rapidly and 
significantly. 

 

Proposed Amendments 
This proposal would amend rule 22e-4, rule 22c-1, and certain reporting and disclosure 
forms under the Investment Company Act of 1940.  

Improve Liquidity Risk Management and Publicly Report Liquidity Information 

To better prepare for the potential effects of stress on a fund’s portfolio, most open-end funds 
would be required under the rule amendments to incorporate stress into their liquidity 

 
The Securities and Exchange Commission proposed amendments to better prepare open-end 
management investment companies (“open-end funds”) for stressed conditions and mitigate 
dilution of shareholders’ interests. The rule and form amendments incorporate lessons learned 
from the market events of March 2020 and would improve on the existing framework by:  

● Enhancing how open-end funds other than money market funds (“MMFs”) and certain 
exchange traded funds (“ETFs”) classify the liquidity of their investments and requiring 
a minimum amount of highly liquid assets of at least 10 percent of net assets;  

● Requiring any open-end fund, other than a MMF or ETF, to use swing pricing and 
implementing a “hard close” to operationalize this pricing and to improve order 
processing more generally; and 

● Providing for more frequent, timelier, and more detailed public reporting of fund 
information, including information about funds’ liquidity and use of swing pricing. 

 



FACT SHEET | Open-End Fund Liquidity Risk Management and Swing Pricing 
 

U.S. SECURITIES AND EXCHANGE COMMISSION  Page 2 of 2 

classifications by assuming the sale of a stressed trade size, similar to an ongoing stress 
test. The proposal also would establish other minimum standards for liquidity classifications, 
designed to prevent funds from overestimating the liquidity of their investments and provide 
clearer guideposts. Further, the proposal would amend the liquidity categories, including by 
removing the less liquid investment category, which includes investments that take longer 
than seven days to settle, and treating those investments as illiquid to help reduce the risk 
of a fund not being able to pay redemptions in the period the Investment Company Act 
requires. Finally, funds would be required to maintain a minimum amount of highly liquid 
assets of at least 10 percent of net assets to prepare for and help manage stressed 
conditions. As liquidity classifications would be more objective and comparable, the proposal 
would provide investors with aggregate information about a fund’s liquidity profile and 
information related to its use of service providers for liquidity classification.  

Require Use of Swing Pricing and Hard Close 

An open-end fund other than an MMF or ETF would be required to adjust its net asset value 
(“NAV”) so that the transaction price effectively passes on costs stemming from inflows or 
outflows to the investors engaged in that activity, rather than diluting other shareholders. The 
proposal would require funds to adopt policies and procedures to adjust a fund’s NAV per 
share by a swing factor when the fund experiences net redemptions or when net purchases 
exceed a threshold. The swing factor would reflect bid-ask spread and certain other costs of 
selling or purchasing a vertical slice of the fund’s portfolio. It would also include an estimate 
of market impact costs when net redemptions or net purchases exceed a threshold. 

Further, the proposal would require a “hard close” for these funds. An investor’s order to 
purchase or redeem a fund’s shares would be eligible for a given day’s price only if the fund, 
its transfer agent, or a registered clearing agency receives the order before the time as of 
which the fund calculates its NAV, typically 4 p.m. ET. The proposed hard close would help 
operationalize swing pricing by ensuring that funds receive timely flow information, help 
prevent late trading of fund shares, and improve order processing. The proposal would 
require additional disclosure related to swing pricing and the hard close. 

Report Fund Information More Frequently 

The proposal would provide the Commission and investors with timelier portfolio information, 
which is particularly useful in times of changing market conditions. Currently, funds prepare 
monthly reports and file them at the end of every quarter. Only the report for the third month 
of the quarter is made public. The proposal would instead require funds to file each month’s 
report within 30 days after month-end, with the report becoming public 60 days after month-
end. This change would apply to all registrants that report on Form N-PORT, including open-
end funds other than MMFs, registered closed-end funds, and ETFs organized as unit 
investment trusts. 

 

Additional Information: 
Visit sec.gov to find more information about the proposed rulemaking and the full text of the proposing release. 
The public comment period will remain open for 60 days after the released is published in the Federal Register. 


	Background
	Proposed Amendments
	Additional Information: