Idc

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1401 H Street, NW, Suite 1200
Washington, DC 20005-2148
Phone 202/326-8300
Fax 202/326-5828
www.idc.org

IDC 1

INDEPENDENT DIRECTORS COUNCIL

January 13, 2016

Mr. Brent J, Fields
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re:

Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of
Comment Period for Investment Company Reporting Modernization Release (File
Nos. S7-16-15 and S7-08-15)

Dear Mr. Fields:
The Independent Directors Council' appreciates the opportunity to comment on the Securities
and Exchange Commission's liquidity risk management and swing pricing proposals. 2 Fund directors,
who represent the interests of fund shareholders and would have significant responsibilities under the
proposed rules, have a unique and important perspective to offer on this initiative.
As the SEC notes, daily redeemability is a defining feature of open-end funds.3 Liquidity risk
management, thus, is critical to the functioning of an open-end fund.4 Fund advisers have primary
responsibility to manage liquidity risk as part of the portfolio management and investment risk

1

IDC serves the U.S.-registered fund independent direccor community by advancing the education, communication, and
policy positions of fund independent direccors, and promoting public understanding of their role. IDC's activities are led by
a Governing Council of independent direccors oflnvestment Company Institute member funds. ICI is a leading, global
association of regulated funds, including mutual funds, exchange-traded funds, closed-end funds, and unit investment cruses
in the U.S., and similar funds offered to investors in jurisdictions worldwide. IC l's U.S. fund members manage coral assets
of $ 17.9 trillion and serve more than 90 million U.S. shareholders, and there are approximately 1,900 independent directors
ofIC I-member funds. The views expressed by IDC in this letter do not purport to reflect the views of all fund independent
directors,
2

Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment
Company Reporting Modernization Release, SEC Release No. IC-31835 (September 22, 2015) (the "Release"), available at
hup: //www.sec.gov/ rules/ proposed/ 20 I 5/'.B -9922.pdf.

3
4

See Release, supra n. 2, at 6.

T he liquidity risk management program proposal applies co all open-end funds, except money market funds, and the swing
pricing proposal applies to all open-end funds, except money market funds and exchange-traded funds (ETFs). T his letter's
references co "funds" is intended co cover the open-end funds to which the particular proposal applies.

acrui:c turning

issue of the
ger>en!llyrcly on fund

to adopt

a

to our comments on the proposal, we wish to address
boards in
proposals.
were
to see
as overseers and not as

proposals
' ln this regard, the SEC

for
under rhc rmmoscd tiq11id1ry risk managemenr prob'l"am. rhe board would
a fund's program
and any inaterlal
tn the prognun and receive a written report, .it least
on the
of the prograin and
its ctlCctivcncss. '1 'hc
takes a stmHar
'!he Release also rnakes clear rhat
docs not
surnmarics that "f:uniJiarizc directors
1ncan that a board must dive into the tninutiac of a progratr1, but rather can

v. ith the saJierv: features of the progra!YL .. "'>'ee
1

rL 2, at 175.

fund that would tvr!icacllv require rnd:epr,ndent . IC-17452 (April 23, 1990) [55l;R17933 (April 30.

securities is a

see111ri1v." ,)'ee Rcs;ilc of RcstT1cted Securities;

0

()f course, as \V'ith any declslon :a fund
n1akes on
connection \Vith a
risk n1:anagetnenr program M:ould

Su KeJ:ease.sttp1;, n. 2, at 7.

slrnrehnldm,a

derisirm 1uade in

bwnrn:ss1udgmeuc rule under state la\\'.

consideration
to 1mpm;e
developments support a tle~:1bie,

The SEC

nor

requm:mtnts cor1ce1mir1g liquidity

any significant
liquidity tarllun:s--m terms offaiJl1mes
dilmion of shareholders' inrerem as
of

to meet redemption····-··"··
sn;1reno•ld<:r transactions-to
tar:tors--rtot mentioned in
Keleas1:-sui;1po.rt a more flexible apriro;1cn.
cor1slcler:1tic•n is
half of the assets in 101111-ct:rm m1ttu:al

can hdp to am·vrare liquidity prc:ssuTes
in a way
sh;1relholde1:s, could not only

an important

most need of that
m
a fund ro
fund snare1101ders,
rhe capital imtrkcrsas
an >i:i•Ji«•r''

A. Funds have successfully managed liquidity risk for the past 75 years, and, thus, wide·
ranging reforms are not warranted.
Funds have a
obligation to pay redemption proceeds within seven
of a
12
and most do so in
than half that time
redemption
(absent unusual
three days or

adversely

Putting
the regulatory obligations, any failure to meet the redemption rcc1ucsts
carries sul)St:am:ial re>mtati·on:al
a strong incentive to minimize dilution
fund perfor1ma11cc.

the past
funds have generally sm:ce<:cled
rcclcrnpt10•n obl1:gar10ns rh 1·oll:'7h a
and events, including more rcc:ently
tman1:ial ma1K1:ccrisis of2007-2009
the reaction of bond mutual
investors in 2013 to a
lo11g-·te1:m imerest rates as a
done so by
a
inflows), selling
vat:lctvoftools available to them, including
in the rare case a
fund to
an

~ 1~'>i:e Letter fron1

Brhtn

Risk ;\fanagerncnt Prc•£rnms:

lviodcrnization l{e1case
;

2

Set Section

l'ricin~: Ke·llpenir1gol'C1m11mc1Jt Perlo{l

fiff lnvcstrnent (~;;unpany Reporting

n ••" .. ·~· 13, 2016)

Research

of the 1940 Act.

""""I' or cmcrg,:m:ycin::u1nstances but has done so on a
occasiut1s.

bond fund, 'vhose porrfhlio ;Js!iets wt: re cun1poscdprirnarily of dtbt instrurnents

redt:rnptions of a t;of1centrated high*yid;J

c:c:c: or

or not ratt:d at :all Stt'

Mr. Brem]. Fields
bmarv

13, 2016

B. Funds a.re successful investment products, and the SEC should be careful not to alter
their character or diminish their value to investors.
For many years,

fund industry

helped millions ofimresto1:s meet their most important
1<0c11c111cm, ed1ICat1on, or
also

nc1:dr1.l. To elate. funds
the 1940 Act
mana~(ers the flexibility to ;i111>uc

assets.

op1erated under a regulatory

a

proposal nreaKs new ground by regulating

management
should do so with extreme caution. l'a1mn11:0 n1arta,l;en1er1t cornpl1ex and ine;tme11t
mam11~erner1t and balancing
!r~'"'"'"; return fur a fund

remrns, a fund mmr incur investment
rci;1m1c to
fund's
and
in a fund,

they invest

Thus. the

The SEC should also

care not to

:1 compli:mcc

crnmrilvinl!: with

burden on funds that 1tctracts

rc11uirements and

cause
on their own

man31943
2015). As the c:o1nrnissinn ls quite a\V;lfC, it ts very rare fur ;l fund to seek to susperid redernptions.
the industrv' s
up the historic success \\'kh \Yhich funds ha\'C
;[m.m;l'ly !( :1 Research u:1:ret, supt?t n.

IL

o

o

o

Liquidity Program Aclmi:m>:tra:tor thar describes the

dis:crr:tio111 to

other

cvr:nt··bascd reports, such
as
assets is rcacel1ed.

•

Disclosure.

of illiquid

would support n"m1rm1> fonds to report to the
pcrcentajl!<~sof

but we strrcs:cca.blc sm:sscd conditions.

III.

The Proposed Six-Category Classiflcation Scheme and Three-Day Liquid Asset Minimum
Requirement are Highly Problematic

a
nv;m;un.cu burdens

liquid asset minimum rcq1u11·crr1ent.
on funds,

be difficult

req1n11:errtentswould 1mr•osc

boards m meaningfully oversee, and would not

SE(; ::tls:o v,rill bt• able to rnonkor hqt>idicy trends mromm rnmt,olio tnf{)rn1adun ir vviU rei,;eive on nrooos.x1 i:orrn
N-l'()R"r, as \Vcll at;
and cxatuinations: by SEC: staff.

A. The six-category dassification scheme is too granular and not useful.

position in a

positi:on in

to
its positions in a
011 six mt1cgones repres•cmmg the

asset)

asset

would be co1wertilbk to

at a

rhat

not

lD

the value of that asset immediately prior to

I. The proposed classification is not a proven or widely-used methodology.

by a fund

Although
better plan

a

i:na

scllten1e "may have prn:ctlcal bendlts,"22 it docs not dc1111c1ns·tratc
manaJ':em.em nra·ctices followed
m:m:igers--it any--dlas1iity portions

or some other period"21
this approach is sup•en,
liquidity

an entire poctfolio and do not find it useful to

panicuhu posiri:on is six

to liquidate a ponion

or seven,

current ract1c1cs are

crn,tac, any

dassilrk,ttirms would introduce a

ofscmriny and potential

Section IV.

2. The market impact determination makes the proposed classification scheme
extremely challenging.
the proposal,
rec1m1rea to
an asset position could be
to
immediately prior to its
This rype of determination would be extremely difficult to make

f"''c'"u" or

given
unpredictable nature of market
day ranges

rhe ;.ix

time

among orher
are: i l'nr&iness

16·30 calendar tlays; and n1nre than 30 caierular tlays.

the
some

it
8· l S calendar

be

25

a portfolio position could be co111v<:rt1:d to
to irs
sub1ecr to the same prc•blcrns owtlir1cd 1n;c1vc. mcludmg
de1:er111in1ations with 11
chaUcr11;cs of making

minimum
purstie investment strarr1g1<1sand make investment
to maintain

weightings in certain sectors, countries, ser1uriti1:s or other asset
certain

would be res trictcd

its ability to

time it

the m11:e··uavliquid asset minimum. M1xr·ovcr, in some cases,

liquid assets, such as

porttol!o manager views as undervalued, may 1wc>ema buying

offi:r a fond the flexibility to
redemptions, but without

for its<:lf ;vh<1th1:r it
problems

sufhci,

U1'·ClU,iC

narrative inl:or1mtti1m abour their uq•cuu1cusscd ocic>w, we
detailed liquidity information

additional,

rq;ist:ra:tion statements.
object co re{1uiri~•'4

to

on the proposed s1x··Cat:cg1)tydassilric:1tkm sc:he1ne.

object

l~hc SE<~ states that it considered rcq1mr]n~ funds to cnnarding the number of days with which
a po:sitlon in the same
could

asset

reports, thr:re:tore,

comparisons across funds by the

11MJU11.,_liquidity

to

nor will

or

in connection with proposed

we

not lend

N-PORT,

the

judgments

and

derem1in;aric111s, dis·rlo:mn:srr:11a1·dirt!lliquidiry derem1ina:rio:ns

would not provide meaningful infurmation to investors :md could

/m:srr#>tive nature

most other vk:ws-co11ld
could

second·guessed. Public disdosure, tht:re:tore,

like an ou1tlier-car1sir1g

funds to classify po:;iti1Jns similar to

rhe

the bendhs

on

to the extent the d1sclc1sure

more conservative apprtta. Mai>a)l,i;ng D•lrrcmr,

Ke1>ont11g :V1'>drmizarmn1 File No. S7·08· l 5 '"''!>""

a particular asset could cause

prc>posed form N·PORT the l>qJ1idi•cvinformation
infin:rnatiori pul>llely available.

use

In

ctJspo:se of that asset at the same

mamtam a particular liquidity

rhirct··oanv veJ)ci<)rs increases

borne to a gr<:atri:ol ct1anj~e ro
board also

approve

invcst1mc11t arlvis.:ror otticcr( s
prricc1;1u1:es, and for determining the swing factor that

would be responsible
administering the
would med each

the swing threshold is breached.33

The Release 1dr·nt1tu:s several potential benefits as
proposed

we

rhe

as costs and comr•lc:<1t1es
comments

ro

matters and bring additional issues to it> atten11io1i. 34 We note,
in particular, concerns about the op•er;Utt> to de1:en11ir1e w•nctn<:r or not swing pridng would be appropriate
cxp1cct the

to present its

determination not to adopt

though a

is nor required under

particular
adopt
and redemption act1v11:v

to
their funds.

Many fund

and circumstances

and
not to

""'""'' might
afimd

portfolio transaction

cfmHldgfi,:frfHC()1tfeflJS

flow estimates

to 1ierermine whether a

prol~m1~lf,tom1w111~areas:on~1blcmq1nry.

threshold has been cxc:ecrlcd

'.u1m:m error corrccrim1 po1ic11~s n:m111rc

errors

shareholders cx1Jcr1cncm.g
to state in any rc·Pr<>pc>Sal

error.
misstatcmems due solely to lmut;1tHJns
available to it should not rri2circr

ofllfab,ility.30

wllicttrliwcgre:at•~r

resources to de,•elo'P

ability to

wirh mrerrnec11a1:1es

mana15er, or its board to any

funds and sm11lllcr funds,

1m,ce,:tui1es.

.rnuu;u

prc1posa1, we

to our comment above in connection
rhat the ad\riser,

responsible for ad1mn11st1:nr1g

v.rill
board can oversee
describe the

rPsholrl is

ini; ptrici:ng proc1:ssi:s--i11dt1diing approving

responsibilities of the pe1cson(1;}

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