Recent Series of Regulatory Developments Regarding Implementation of the SEC’s Liquidity Rule and Related Requirements



The U.S. Securities and Exchange Commission (SEC) and the staff of the SEC’s Division of Investment Management (the Staff) recently have taken a series of regulatory actions designed to address issues associated with the effective implementation of Rule 22e-4 (Liquidity Rule) under the Investment Company Act of 1940 (the 1940 Act) and related disclosure and reporting requirements (collectively, Liquidity Rule Requirements). On March 14, 2018, the SEC proposed amendments to liquidity-related reporting requirements (Proposed Amendments), which would, among other things, rescind the current requirement that funds publicly disclose aggregate liquidity classification information about their portfolios. Prior to the Proposed Amendments, on February 21, 2018, the SEC adopted an interim final rule (Interim Rule) delaying by six months the compliance dates for certain elements of the Liquidity Rule Requirements.

On the same day the SEC adopted the Interim Rule, the Staff issued responses to a set of frequently asked questions (FAQs) related to the Liquidity Rule Requirements, which provide guidance on, among other matters, liquidity classifications and compliance monitoring. The Staff’s responses expand on their responses to an initial set of FAQs released on January 10, 2018, which provide guidance on, among other matters, the manner in which responsibilities under the Liquidity Rule may be delegated to third parties (including a fund’s sub-adviser) and the definition of an “in-kind” exchange-traded fund (In-Kind ETF) for purposes of the Liquidity Rule.

This alert summarizes and the critical elements of the recent series of regulatory actions taken by the SEC and the Staff with respect to the Liquidity Rule Requirements and is intended to incorporate into a single document and expand on the various individual summaries of these developments that previously were the subject of a prior alert or featured in other publications.  For purposes of this alert, registered open-end investment companies, including mutual funds (other than money market funds) and ETFs, are generally referred to herein as “funds”.  

Background on the Liquidity Rule

The Liquidity Rule generally requires each fund to adopt and implement a written liquidity risk management program (Liquidity Program) reasonably designed to assess and manage the fund’s liquidity risk. A fund’s Liquidity Program must incorporate certain specified elements, including, among others:

  • Assessment, management, and periodic review of the fund’s liquidity risk;
  • Classification of the liquidity of each of the fund’s portfolio investments into one of four defined liquidity classifications (sometimes referred to herein as “buckets” or “categories”) based upon certain specified considerations, as well as at least monthly reviews of the classifications;
  • Determining and periodically reviewing the fund’s highly liquid investment minimum (HLIM) and procedures to address a shortfall; and
  • Limiting the fund’s investment in illiquid investments that are assets to no more than 15% of the fund’s net assets.

Additionally, a fund’s board of directors/trustees must, among other things:

  • Initially approve the fund’s Liquidity Program;
  • Approve the designation of the person, or group of persons, responsible for administering the fund’s Liquidity Program (Program Administrator); and
  • Review, no less frequently than annually, a written report from the Program Administrator that addresses the operation of the Liquidity Program and assess its adequacy and effectiveness of implementation.

For a discussion of the various elements of the Liquidity Rule, please review our previous alert issued on November 16, 2016.

Since the adoption of the Liquidity Rule, the Staff has continued to engage in a dialogue with funds and other industry participants, such as third-party service providers and vendors, regarding progress toward implementation of the Liquidity Rule Requirements. As a complement to that engagement process, the SEC received numerous letters describing the concerns expressed by industry participants regarding, in large part, significant challenges to achieving timely compliance with the liquidity classification requirements, including the need for additional time to complete the build-out of systems and processes necessary to support compliance with the requirements. These efforts resulted in the series of regulatory actions that are the focus of this alert.

SEC Proposes Amendments to Liquidity-Related Reporting and Disclosure Requirements

The Proposed Amendments generally consist of three proposed changes to a fund’s liquidity-related reporting and disclosure requirements, which are summarized below. Comments on the Proposed Amendments are due on or before on or before May 18, 2018.

Elimination of Reporting Aggregate Liquidity Profile and Addition of Narrative Shareholder Report Disclosure.  First, in connection with the liquidity classification requirements of the Liquidity Rule, a fund would be required to publicly report on Form N-PORT the aggregate percentage of its portfolio investments that it has allocated to each of the four liquidity buckets. If adopted, the Proposed Amendments would replace this requirement with a new requirement under Form N-1A for funds to discuss briefly the operation and effectiveness of a fund’s Liquidity Program in the fund’s annual report to shareholders. The SEC stated that, in order to satisfy this requirement, a fund should provide investors with enough detail to appreciate the manner in which a fund manages its liquidity risk and could, but would not be required to, include discussion of the role of the classification process, the 15% illiquid investment limit, and the HLIM in the fund’s liquidity risk management process. 

In proposing to adopt this change, the SEC acknowledged “commenters’ concerns that public dissemination of the aggregate classification information, without an accompanying explanation to investors of the underlying subjectivity, methodological decisions, and assumptions that shape this information, and other relevant context, may be potentially misleading to investors”. The SEC stated that the annual report disclosure would provide a fund the opportunity to tailor its disclosure to the fund’s specific risks, explain the level of subjectivity involved in the liquidity assessment, and give a narrative description of these risks and how they are managed within the context of the fund’s own investment strategy, all of which would provide effective disclosure that better informs investors of how the fund’s liquidity risk and liquidity risk management practices affect their investment than the current Form N-PORT public liquidity risk profile.

Option to Report Multiple Liquidity Classifications.  Second, under the Liquidity Rule Requirements, a fund would be required to confidentially report to the SEC on Form N-PORT the liquidity classification assigned to each of the fund’s portfolio investments, and each holding would have to be assigned to a single liquidity bucket. The Proposed Amendments, if adopted, would give funds the option of splitting a fund’s holding into more than one liquidity bucket in any of the following specified circumstances:

  • If a Fund Has Multiple Sub-Advisers With Differing Liquidity Views.  In cases of sub-advisers managing different portions (or sleeves) of a fund’s portfolio, differences may arise between the sub-advisers as to their views of the liquidity classification of a single holding that may be held in multiple sleeves. To avoid the need for costly reconciliation, a fund may report each sub-adviser’s classification of the proportional holding it manages instead of putting the entire holding into a single category.
  • If Portions of the Position Have Differing Liquidity Features That Justify Treating the Portions Separately.  Even though a holding may nominally be a single security, different liquidity-affecting features may justify the fund treating the holding as two or more separate investments for liquidity classification purposes. For example, a feature (such as a put option on a percentage, but not all, of a fund’s holding) may significantly affect the liquidity characteristics of the portion of the holding subject to the feature, such that the fund believes that separate portions of the holding should be classified into different liquidity buckets. In such cases, the fund would apply the classification process separately to each portion of the holding that exhibits different liquidity characteristics.
  • If the Fund Chooses to Classify the Position Through Evaluation of How Long It Would Take to Liquidate the Entire Position (Rather Than Basing It on the Sizes It Would Reasonably Anticipate Trading). In cases where a fund chooses to classify its holdings proportionally across liquidity buckets based on an assumed sale of the entire position, the fund has the option of proportionally reporting the position on Form N-PORT. This approach effectively gives a fund the option to classify each portfolio position based on the amount of time it would take to convert the entire position to cash (i.e., analyze the entirety of a fund’s position and split it among different liquidity buckets), rather than bucketing the entire holding into a single category based on the sizes the fund reasonably anticipates trading, as required under the Liquidity Rule. For example, a fund holding $100 million in “Asset A” could determine that it would be able to convert to cash $30 million of it in 1-3 days, but could only convert the remaining $70 million to cash in 3-7 days. This fund could choose to split the liquidity classification of the holding on Form N-PORT and report an allocation of 30% of “Asset A” in the highly liquid category and 70% of “Asset A” in the moderately liquid category. 

Reporting Cash and Cash Equivalents.  Third, the Proposed Amendments, if approved, would require a fund to specifically report on Form N-PORT the amount of cash and cash equivalents held by the fund, which would be made publicly available each quarter.  Form N-PORT currently does not require the reporting of such information. Cash and cash equivalents held by a fund are highly liquid investments under the Liquidity Rule and, therefore, would have been included in the aggregate liquidity profile that the SEC has proposed to eliminate (as discussed above). According to the SEC, because the aggregate liquidity profile would have allowed the SEC to monitor whether a fund is compliant with its HLIM, the additional disclosure of cash and cash equivalents by funds will facilitate this monitoring and will also provide information that will be useful in analyzing a fund’s HLIM, as well as trends regarding the amount of cash held by a fund and net inflows and outflows. 

Compliance Dates.  The SEC proposed to align the compliance dates for the Proposed Amendments with the revised compliance date the SEC previously adopted for Form N-PORT, which is April 30, 2019 for “larger fund complexes” and March 1, 2020 for “smaller fund complexes”, as such terms are defined below. Accordingly, the compliance date would apply to Form N-PORT filings, and to initial registration statement filings on Form N-1A and post-effective amendment filings that are annual updates to effective registration statements on Form N-1A, after the relevant dates. 

SEC Delays Compliance Dates for Certain Liquidity Rule Requirements

Original Compliance Dates.  The compliance date for the Liquidity Rule Requirements, as originally adopted, is December 1, 2018 for fund complexes (i.e., all funds in the same “group of related investment companies”) with $1 billion or more in net assets (larger fund complexes) and June 1, 2019 for fund complexes with less than $1 billion in net assets (smaller fund complexes).

Extended Compliance Dates.  The Interim Rule extends the compliance dates for certain, but not all, of the Liquidity Rule Requirements by six months, with revised compliance dates of June 1, 2019 for larger fund complexes and December 1, 2019 for smaller fund complexes. Comments on the Interim Rule are due on or before April 27, 2018. 

Below is an overview of the original and revised compliance dates of the key Liquidity Rule Requirements. 

Liquidity Rule Requirement Original Compliance Date Revised Compliance Date
Classifying each portfolio investment of a fund into one of four defined liquidity categories based upon certain specified considerations, and at least monthly review of such classifications December 1, 2018 for larger fund complexes June 1, 2019 for smaller fund complexes June 1, 2019 for larger fund complexes December 1, 2019 for smaller fund complexes
Determining and periodically reviewing an HLIM for relevant funds, adopting procedures to address a shortfall, and complying with related board reporting requirements
Initial board approval of the Liquidity Program
Annual board reporting by the Program Administrator
Liquidity classification and HLIM reporting requirements on Forms N-PORT and N-LIQUID
Implementing a Liquidity Program (including assessing, managing and periodically reviewing a fund’s liquidity risk) December 1, 2018 for larger fund complexes June 1, 2019 for smaller fund complexes Unchanged
Limiting illiquid investments to 15% of a fund’s net assets and complying with certain related board and SEC reporting requirements associated with breaches of this 15% limit
Board designation of a Program Administrator
Establishing redemption in-kind procedures (for funds that engage in, or reserve the right to engage in, redemptions in kind)
All other reporting requirements on Forms N-PORT and N-LIQUID

Board Oversight. In delaying the compliance date for the board approval and related annual review requirements under the Liquidity Rule, the SEC stated that it would be “unnecessarily burdensome” to require a fund board to review the fund’s Liquidity Program prior to its complete development. The SEC further stated that funds may implement a Liquidity Program that achieves the Liquidity Rule’s intended goals “using any additional elements they view as reasonable” during the period of the compliance date extension, but need not obtain board approval of the Liquidity Program until the end of the extension period. Funds may wish to consider, however, whether there would be any advantages to seeking board approval of the Liquidity Program prior to the end of the extension period, which may differ from complex to complex depending on a variety of factors, including the readiness of necessary systems and processes and the maturity of the fund complex’s current approach to liquidity risk management. At the same time, fund boards may wish to consider using this additional six-month period to focus on continuing to gain a more granular understanding of how the funds they oversee are currently managing liquidity risk and how they will continue to do so after incorporating all elements of the Liquidity Program.

Guidance on the 15% Illiquid Investment Limit.  The SEC did not extend the compliance date for the 15% illiquid investment limit, or the related board and SEC reporting requirements. In declining to extend the compliance date for these requirements, the SEC stated that, although the Liquidity Rule’s definition of illiquid investments “differs in some respects” from the previous 15% guideline definition of illiquid assets, funds have experience following the previous guideline and should be able to apply that experience to comply with the 15% illiquid investment limit. However, the standard for compliance with the 15% illiquid investment limit during the compliance extension period is tied directly to the Liquidity Rule’s classification process, which requires funds to consider market depth and trading sizes larger than a single lot. The previous guideline, by contrast, is consistent with assessing an investment’s liquidity based on trading a single lot. In light of these differences, the SEC provided guidance for how funds can comply with the 15% illiquid investment limit without engaging in full portfolio classification during the compliance extension period.

The SEC described the use of a “preliminary evaluation” process as “one reasonable method” for a fund to comply with the 15% illiquid investment limit during the extension period, although the SEC noted that funds may use other reasonable approaches. Under this method, a fund would preliminarily identify certain asset classes or investments that the fund reasonably believes are likely to be illiquid. According to the SEC, a fund could base this reasonable belief on its previous trading experience, on its understanding of the general characteristics of the asset classes, or through other means. A fund could then choose to determine that certain investments identified in such asset classes that it purchases are illiquid based solely on this preliminary evaluation, and not engage in any further analysis. Alternatively, if a fund wishes to further evaluate the status of an investment, the fund may, as a secondary step, determine whether the investment is illiquid through the full classification process set forth in the Liquidity Rule.  

SEC Staff Issues Responses to Liquidity Rule FAQs

On January 10, 2018, the Staff released responses to a first set of FAQs relating primarily to sub-advised funds and ETFs, which are fund types with unique interpretive and implementation issues under the Liquidity Rule Requirements. On February 21, 2018, the same day the SEC adopted the Interim Rule, the Staff released responses to a second set of FAQs, which provide the Staff’s views on, among other matters, asset class liquidity classifications, reasonably anticipated trading sizes, the price impact standard, provisional classifications and compliance monitoring, and timing and frequency of liquidity classifications. Notably, the preamble to the FAQs states that the Staff “expects to update this document from time to time to include responses to additional questions.” There have been no further updates since the release of the second set of FAQs on February 21, 2018. A summary of the key points from the Staff’s responses to both sets of FAQs is provided below.

Sub-Advised Funds (1st Set of FAQs)

Delegation of Responsibilities (FAQ No. 1).  The Staff stated that the Program Administrator could delegate specific responsibilities under a fund’s Liquidity Program to a third party (including a sub-adviser) and, “subject to appropriate oversight”, has flexibility regarding such delegation, provided that each responsibility is delegated, and assumed and handled by, an appropriate entity. In addition, the Staff noted that an entity with delegated responsibilities may, in turn, appoint sub-delegates and task them with handling certain portions of its delegated responsibilities, provided that such entities “are appropriately supervised”. The Staff also stated that a fund may wish to implement policies and procedures regarding the scope of and conditions on permitted delegation of responsibilities by the Program Administrator, who “may, in turn, wish to implement policies and procedures to oversee those to whom it has delegated responsibilities.” The Staff emphasized that, regardless of any delegation of all or a portion of its responsibilities under the Liquidity Program, a fund “at all times retains ultimate responsibility for complying with the rule.”

Differing Responsibilities Under Multiple Liquidity Programs (FAQs No. 3-4).  Recognizing that investment advisers and sub-advisers may provide advisory services to multiple fund complexes and, therefore, may have responsibilities under different Liquidity Programs, the Staff stated that an adviser or sub-adviser is “under no obligation to reconcile”: (i) the elements of those Liquidity Programs; (ii) the Liquidity Programs’ underlying methodologies, assumptions, or practices; or (iii) the Liquidity Program outputs (e.g., liquidity classifications). The Staff further stated that, despite any differing responsibilities under multiple Liquidity Programs, a fund’s board-approved Liquidity Program will control how an adviser or sub-adviser implements its responsibilities for that particular fund. 

Different Liquidity Classifications Across Funds (FAQ No. 5).  Because different funds may classify the liquidity of similar investments differently based on their assumptions as to market and trading conditions and the facts and circumstances informing their analyses, the Staff acknowledged that funds – including funds in the same complex – could “appropriately arrive at different classifications for the same instrument”.

Different Liquidity Classifications Among Advisers and Sub-Advisers (FAQ No. 6).  In the event a Program Administrator adopts an approach where a fund’s investment adviser and sub-adviser(s) each have some input into the fund’s liquidity classification, the fund’s adviser and sub-adviser(s) may reach differing conclusions regarding an investment’s appropriate liquidity classification. In these instances, the Staff stated that the fund’s Liquidity Program could address how the fund would resolve those differences, which may include, for example: (1) stipulating that a specified party’s determination (e.g., Program Administrator, adviser, or sub-adviser(s)) would control; (2) establishing another method (e.g., factor analysis or hierarchy approach) to determine which classification would control; or (3) adopting the most conservative (i.e., least liquid) classification.

Different Liquidity Classifications Among Sub-Advisers for Multi-Manager Funds (FAQ No. 7).  In cases where sub-advisers manage different portions (or sleeves) of a fund’s portfolio in a “multi-manager” fund structure, the SEC acknowledged that sub-advisers of the same fund may classify the same investment held in multiple sleeves differently because they may be guided by differing assumptions and methodologies. If such classification differences were to arise, the Staff stated that the fund, Program Administrator, investment adviser and sub-advisers (to the extent they are delegated responsibilities) would not be under any obligation to resolve these differences for purposes of compliance with the fund’s HLIM (if applicable) or the 15% limit on illiquid investments. The Staff stated, however, that a fund’s Liquidity Program could have a process for resolving these differences.

ETFs (1st Set of FAQs)

An In-Kind ETF is exempt from the liquidity bucketing and HLIM requirements of the Liquidity Rule. To qualify as an In-Kind ETF, an ETF must: (1) meet redemptions through in-kind transfers of securities, positions and assets other than a de minimis amount of cash; and (2) publish its portfolio holdings daily. The FAQs provide useful guidance for determining whether, and under what circumstances, an ETF meets the definition of an In-Kind ETF.

Determining a De Minimis Cash Amount (FAQ Nos. 9 and 11).   The Staff confirmed that an ETF “may exclude cash in redemption proceeds that is proportionate to the ETF’s uninvested portfolio cash for purposes of defining and testing compliance with its de minimis cash amount”. The Staff stated that “it would be reasonable for an In-Kind ETF to determine that if the percentage of its overall redemption proceeds paid in cash does not exceed 5%, such use would be de minimis”. In addition, the Staff expressed its view that an In-Kind ETF may determine that cash use of more than 5% in redemptions is de minimis; in making such determination, the Staff stated that an ETF should evaluate its particular facts and circumstances, including whether a redemption(s) in cash in excess of 5% could give rise to liquidity risks substantially similar to those of mutual funds. The Staff further stated that, in general, if an ETF’s percentage of overall redemption proceeds paid in cash exceeds 10%, it would be unreasonable to consider it a de minimis amount of cash for purposes of qualifying as an In-Kind ETF. 

Testing De Minimis Cash Use (FAQ No. 13).  The Staff stated that an In-Kind ETF “may take a variety of reasonable approaches to determine whether its cash use is de minimis, so long as the approach the ETF selects is consistently applied”. For example, the Staff stated it would not object if an In-Kind ETF were to determine that a reasonable approach might include (1) testing each individual redemption transaction, to ensure that each has no more than a de minimis cash amount, or (2) testing its redemption transactions in their totality over some reasonable period of time to ensure that, on average, its aggregate redemption transactions have no more than a de minimis cash amount. According to the Staff, a reasonable period of time for a fund with frequent redemption basket activity might be a day or a week and a reasonable period for a fund with less frequent redemption basket activity may be up to a month, but using a period of time over a month would not be reasonable. Regardless of the method used, the Staff stated that an ETF’s Liquidity Program should describe the ETF’s approach for testing compliance and the time period used, and that the approach should be applied consistently.

Effect of a Redemption Transaction Entirely in Cash on an ETF’s Status as an In-Kind ETF (FAQ No. 12).  The Staff clarified that an ETF engaging in a single redemption transaction consisting entirely of cash is not necessarily precluded from qualifying as an In-Kind ETF, “so long as such a redemption transaction as a proportion of the ETF’s aggregate redemption transactions does not exceed the de minimis amount of cash defined in the ETF’s policies and procedures, and the [authorized participant (AP)] who receives the cash redemption is not an AP who has elected to receive cash redemptions as a standard practice”. In explaining its view, the Staff stated that “where an ETF has agreed to accommodate an AP’s election to receive cash as a standard practice, that ETF may be exposed to the risks that the rule is generally designed to address, and thus would not be able to qualify as an In-Kind ETF” (emphasis in original). The Staff further stated that “if the delivery of all cash to a single AP is at the ETF’s discretion (and not the election of the AP to receive cash as a standard practice), then the choice to provide cash or in-kind redemptions would be under the ETF’s control, and thus the ETF would not be exposed to the risk that it would need to sell investments to make a cash redemption in adverse liquidity situations.”

Timing of Compliance When an ETF Loses Its Status as an In-Kind ETF (FAQ No. 10).  In the event that an ETF is no longer able to qualify as an In-Kind ETF, thereby losing its exemption from the liquidity classification and HLIM requirements, the Staff recognized that there are practical considerations that would prevent such an ETF from coming into immediate compliance with these requirements. Accordingly, the Staff stated that it would “not recommend enforcement if such an ETF comes into compliance with these requirements as soon as reasonably practicable after the ETF no longer qualifies for the In-Kind ETF exception”.

Asset Class Liquidity Classification (2nd Set of FAQs) (FAQ Nos. 16-18)

The Staff’s responses provide guidance on liquidity classifications according to asset classes and in particular the requirement to separately classify and review “any investment within an asset class if the fund or its adviser has information about any market, trading, or investment specific considerations that are reasonably expected to significantly affect the liquidity characteristics of that investment as compared to the fund’s other portfolio holdings within that asset class” (Exception Processes). The Staff emphasized that a fund classifying investments according to asset classes “may identify liquidity characteristics it reasonably expects would make a significant departure from the range of liquidity characteristics present within its asset class” (emphasis in original). The Staff expressed its belief that investments falling within this range should not trigger the Exception Processes. The Staff also indicated its belief that every deviation in an investment’s liquidity characteristics from those of the range of others in its asset class should not trigger the Exception Processes, but rather only the ones that have “a significant effect on those liquidity characteristics” (emphasis in original). 

In addition, the Staff stated that a fund classifying investments according to asset classes should include in its policies and procedures “a reasonable framework for identifying exceptions” through the Exception Processes (which may rely on automated processes) and that funds with such a framework “need not subsequently justify every classification on a CUSIP-by-CUSIP basis”. However, the Staff stated that it expects these funds to conduct periodic testing to determine whether the Exception Processes are operating properly.

If a fund identifies a potential exception through the Exception Processes, the Staff stated that the fund does not necessarily have to reclassify the investments. According to the Staff, upon further review, a fund may conclude that classification of the investment with other investments within the same asset class is still appropriate because the particular investment’s liquidity remains within the liquidity bucket assigned to the asset class as a whole.

Reasonably Anticipated Trading Size (2nd Set of FAQs) (FAQ Nos. 19-21)

The Staff provided guidance on the requirement to consider the “sizes that the fund would reasonably anticipate trading” and market depth when classifying investments. The Staff confirmed that a fund is permitted to engage in an aggregate analysis for those investments that a fund classifies by asset class. Thus, if a fund has identified “Asset Class X” as appropriately grouped together, then for purposes of this analysis, the Staff stated that the fund could arrive at reasonably anticipated trading sizes for all of its “Asset Class X” investments, and use those reasonably anticipated trading sizes in classifying all of its “Asset Class X” investments.

The Staff clarified that, in determining sizes that a fund reasonably anticipates trading, the fund is not required to predict which specific portfolio positions it will sell in advance or consider actual trades executed for reasons other than meeting redemptions. The Staff stated that, as a result, a fund may make a reasonable assumption about the sizes that it will reasonably anticipate trading and use that assumed size throughout its classification process, even in cases where a fund anticipates fully liquidating a position for investment reasons in the near term. 

The Staff also clarified that “a fund should not attempt to predict its future portfolio management decisions related to meeting redemptions, but rather should estimate a portion of an investment that it reasonably believes it could choose to sell to meet redemptions”. The Staff stated that, accordingly, it may be appropriate for a fund to make certain simplifying assumptions in conducting this analysis and arriving at reasonably anticipated trading size assumptions (e.g., a fund could conclude that selling all portfolio investments pro rata in response to a redemption would be a reasonable baseline assumption). Importantly, however, the Staff stated that “a zero or near zero reasonably anticipated trading size would not be a reasonable assumption”.

Price Impact Standard (2nd Set of FAQs) (FAQ No. 22)

The FAQs provide guidance on the requirement when classifying an investment that a fund consider how quickly it may convert an investment to cash (or sell or dispose of it, as applicable) without “significantly changing the market value of the investment”. The Staff recognized that price impact assumptions are subjective due to the variety of inputs that may reasonably be used by any fund or portfolio manager and, therefore, a fund has flexibility to establish the meaning(s) of what constitutes a “significant change in market value” in its policies and procedures. The Staff stated that a fund does not need to employ as a price impact assumption a fixed amount or percentage (although it could do so), and a fund may have differing standards for different investments and/or asset classes.

Provisional Classifications and Compliance Monitoring (2nd Set of FAQs) (FAQ Nos. 24-26)

The Staff provided guidance on monitoring for compliance with the HLIM and the 15% illiquid investment limit. The Staff expressed its belief that “regular monitoring is essential to compliance” with these requirements and a fund should calculate the value of existing investments for this purpose in conjunction with its daily computation of net asset value. However, the Staff noted that such monitoring does not require funds to make liquidity classifications of existing investments on a daily basis and that a fund may use the classifications “that it last verified” (generally the last reported classification on Form N-PORT).

The Staff stated that a fund may voluntarily make use of “provisional classifications”, defined in the FAQs as “any liquidity classification other than a final classification determination reported to the [SEC] on Form N-PORT or verified reclassifications made pursuant to an intra-month compliance monitoring”. The Staff noted that, where provisional classifications and compliance monitoring suggest potential compliance issues related to the HLIM or 15% illiquid investment limit, funds should review these matters in accordance with the funds’ “reasonably designed policies and procedures”. The Staff also noted that, if such a compliance issue is verified “based on compliance monitoring or by finalizing a provisional classification”, the fund would be subject to the applicable reporting requirements.

Timing and Frequency of Classification of Investments (2nd Set of FAQs) (FAQ Nos. 27-29)

The Staff provided guidance on when a fund must initially classify a newly acquired investment or consider re-classification of an investment. Noting that the Liquidity Rule requires at least monthly review of the classification status of investments held in a fund’s portfolio, the Staff stated it would not object if a fund classifies a newly acquired investment, or considers for re-classification an investment in which the fund has increased or decreased its position, during its next regularly scheduled monthly classifications (other than as noted in FAQ Nos. 28 and 31).

The Staff also provided guidance on the requirement to conduct more frequent liquidity classification (i.e., intra-month classifications) if changes in relevant market, trading and investment-specific considerations are reasonably expected to materially affect one or more classifications of a fund’s investments. The Staff clarified that it “does not believe that this intra-month review requirement creates a de facto review requirement for classification” and that they “would not object if a fund complies with this intra-month review obligation by identifying in its policies and procedures events that it reasonably expects would materially affect an investment’s classification”, such as events limited to those that are objectively determinable (e.g., a trading halt or delisting of a security, an issuer or counterparty default or bankruptcy, or significant macro-economic developments). In the event an intra-month classification review is triggered, the Staff noted that a fund must review and determine whether to classify only those particular investments that the fund reasonably expects to be materially affected by the change in question, not all of the fund’s investments.

Possibility of Further Regulatory Developments

Based on recent statements made by the SEC and certain of its Commissioners, further regulatory developments regarding the implementation of the Liquidity Rule Requirements may be forthcoming. Among other things, in the release adopting the Interim Rule, the SEC stated: “[d]ue to the tiered nature and complexity of the rule’s implementation process, we expect to receive additional requests for guidance in the future, and will respond to them accordingly.” In addition, in a recent public statement, Commissioner Hester M. Peirce acknowledged that the Interim Rule release “indicated that more interpretations likely are coming”, and she noted that she has “heard from funds that the FAQs, while helpful, prompted a new set of questions.”


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  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

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This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.