On February 21, 2018, the SEC extended by six months the deadline by which open-end funds (“funds”) must comply with the classification (or “bucketing”)-related elements of Rule 22e-4 under the Investment Company Act of 1940 (the “Rule”)¹ and related reporting requirements.² Although the extended compliance date will not apply to other provisions of the Rule and certain reporting requirements, which will go into effect as originally scheduled, the extension is a welcome development for funds as they continue preparing to comply with the Rule.

The extended compliance date is June 1, 2019 (revised from December 1, 2018) for larger fund groups and December 1, 2019 (revised from June 1, 2019) for smaller fund groups,³ and it applies to the following elements of the Rule:

• classification of each portfolio investment into one of four liquidity categories, known as “buckets”;
• determination of a highly liquid investment minimum (“HLIM”) and related recordkeeping requirements;
• initial approval of the liquidity risk management program by the board of directors;
• the board’s review of an annual report prepared by the board-approved administrator of the program; and
• classification-related recordkeeping requirements.

The compliance dates for the other elements of the Rule – including the assessment and periodic review of liquidity risk; the implementation of a written liquidity risk management program; the 15% limit on illiquid investments; board approval of the designation of a program administrator; and, if applicable, the implementation of redemptions in-kind policies and procedures – remain as originally scheduled: December 1, 2018 for larger fund groups and June 1, 2019 for smaller fund groups.

The extended compliance dates also apply to the liquidity-related reporting requirements of Form N-PORT (the new portfolio holdings reporting form)⁴ and reporting of HLIM breaches on Form N-LIQUID.⁵

In addition, the staff of the SEC’s Division of Investment Management issued new FAQs relating to the Rule’s classification-related requirements, which can be found here. We plan to report on these FAQs in the near future.

______________________________________________________

¹ Rule 22e-4, which was adopted by the SEC in October 2016, requires each fund to adopt and implement a written liquidity risk management program reasonably designed to assess and manage the fund’s liquidity risk.

² See Release No. IC-33010

³ Larger fund groups include funds that together with other investment companies in the same “group of related investment companies” have net assets of $1 billion or more as of the end of the most recent fiscal year. Smaller fund groups include funds that together with other investment companies in the same “group of related investment companies” have net assets of less than $1 billion as of the end of the most recent fiscal year.

⁴ The extended compliance date applies to the following Form N-PORT items: (a) the fund’s portfolio investments in each of the liquidity classification buckets; (b) the fund’s HLIM; and (c) the aggregated percentage of the fund’s portfolio representing each of the liquidity classification buckets.

⁵ Form N-LIQUID is the new report on which a fund will notify the SEC when it breaches (a) its HLIM for more than seven days, or (b) the 15% limit on illiquid investments.