Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting, 77172-77296 [2022-24376]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 241 (Friday, December 16, 2022)]
[Proposed Rules]
[Pages 77172-77296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-24376]



[[Page 77171]]

Vol. 87

Friday,

No. 241

December 16, 2022

Part II





 Securities and Exchange Commission





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17 CFR Parts 270 and 274





Open-End Fund Liquidity Risk Management Programs and Swing Pricing; 
Form N-PORT Reporting; Proposed Rule

Federal Register / Vol. 87, No. 241 / Friday, December 16, 2022 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270 and 274

[Release Nos. 33-11130; IC-34746; File No. S7-26-22]
RIN 3235-AM98


Open-End Fund Liquidity Risk Management Programs and Swing 
Pricing; Form N-PORT Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing amendments to its current rules for open-end management 
investment companies (``open-end funds'') regarding liquidity risk 
management programs and swing pricing. The proposed amendments are 
designed to improve liquidity risk management programs to better 
prepare funds for stressed conditions and improve transparency in 
liquidity classifications. The amendments are also designed to mitigate 
dilution of shareholders' interests in a fund by requiring any open-end 
fund, other than a money market fund or exchange-traded fund, to use 
swing pricing to adjust a fund's net asset value (``NAV'') per share to 
pass on costs stemming from shareholder purchase or redemption activity 
to the shareholders engaged in that activity. In addition, to help 
operationalize the proposed swing pricing requirement, and to improve 
order processing more generally, the Commission is proposing a ``hard 
close'' requirement for these funds. Under this requirement, an order 
to purchase or redeem a fund's shares would be executed at the current 
day's price only if the fund, its designated transfer agent, or a 
registered securities clearing agency receives the order before the 
pricing time as of which the fund calculates its NAV. The Commission 
also is proposing amendments to reporting and disclosure requirements 
on Forms N-PORT, N-1A, and N-CEN that apply to certain registered 
investment companies, including registered open-end funds (other than 
money market funds), registered closed-end funds, and unit investment 
trusts. The proposed amendments would require more frequent reporting 
of monthly portfolio holdings and related information to the Commission 
and the public, amend certain reported identifiers, and make other 
amendments to require additional information about funds' liquidity 
risk management and use of swing pricing.

DATES: Comments should be received on or before February 14, 2023.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-26-22 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-26-22. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method of submission. The Commission will post all 
comments on the Commission's website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's Public Reference Room. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on our website. To ensure direct electronic 
receipt of such notifications, sign up through the ``Stay Connected'' 
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Mykaila DeLesDernier, Y. Rachel Kuo, 
James Maclean, Nathan R. Schuur, Senior Counsels; Angela Mokodean, 
Branch Chief; Brian M. Johnson, Assistant Director, at (202) 551-6792 
or [email protected], Investment Company Regulation Office, Division of 
Investment Management, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing to amend the 
following rules and forms:
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    \1\ 15 U.S.C. 80a-1 et seq. Unless otherwise noted, all 
references to statutory sections are to the Investment Company Act, 
and all references to rules under the Investment Company Act are to 
title 17, part 270 of the Code of Federal Regulations [17 CFR part 
270].
    \2\ 15 U.S.C. 77a et seq.

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             Commission reference                CFR citation (17 CFR)
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Investment Company Act of 1940 (``Act'' or
 ``Investment Company Act''): \1\
    Rule 22c-1...............................  Sec.   270.22c-1.
    Rule 22e-4...............................  Sec.   270.22e-4.
    Rule 30b1-9..............................  Sec.   270.30b1-9.
    Rule 31a-2...............................  Sec.   270.31a-2.
    Form N-PORT..............................  Sec.   274.150.
    Form N-CEN...............................  Sec.   274.101.
Securities Act of 1933 (``Securities Act'')
 \2\ and Investment Company Act:
    Form N-1A................................  Sec.  Sec.   239.15A and
                                                274.11A.
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Table of Contents

I. Introduction
    A. Open-End Funds and Existing Regulatory Framework
    1. Liquidity Risk Management
    2. Swing Pricing
    B. March 2020 Market Events
    C. Rulemaking Overview
II. Discussion
    A. Amendments Concerning Funds' Liquidity Risk Management 
Programs

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    1. Amendments to the Classification Framework
    2. Highly Liquid Investment Minimums
    3. Limit on Illiquid Investments
    B. Swing Pricing
    1. Proposed Swing Pricing Requirement
    2. Amendments to Swing Threshold Framework
    3. Determining Flows
    4. Swing Factors
    C. Hard Close
    1. Purpose and Background
    2. Pricing Requirements
    3. Effects on Order Processing, Intermediaries and Investors, 
and Certain Transaction Types
    4. Other Proposed Amendments to Rule 22c-1
    5. Amendments to Form N-1A
    D. Alternatives to Swing Pricing and a Hard Close Requirement
    1. Alternatives to Swing Pricing
    2. Alternatives to a Hard Close
    3. Additional Illustrative Examples
    E. Reporting Requirements
    1. Amendments to Form N-PORT
    2. Amendments to Form N-CEN
    F. Technical and Conforming Amendments
    G. Exemptive Order Rescission and Withdrawal of Commission Staff 
Statements
    H. Transition Periods
III. Economic Analysis
    A. Introduction
    B. Baseline
    1. Regulatory Baseline
    2. Overview of Certain Industry Order Management Practices
    3. Liquidity Externalities in the Mutual Fund Sector
    4. Affected Entities
    C. Benefits and Costs of the Proposed Amendments
    1. Liquidity Risk Management Program
    2. Swing Pricing
    3. Hard Close Requirement
    4. Commission Reporting and Public Disclosure
    D. Effects on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Alternatives
    1. Liquidity Risk Management
    2. Swing Pricing
    3. Hard Close Requirement
    4. Commission Reporting and Public Disclosure
    F. Request for Comment
IV. Paperwork Reduction Act
    A. Introduction
    B. Rule 22e-4
    C. Rule 22c-1
    D. Form N-PORT
    E. Form N-1A
    F. Form N-CEN
    G. Request for Comment
V. Initial Regulatory Flexibility Analysis
    A. Reasons for and Objectives of the Proposed Actions
    B. Legal Basis
    C. Small Entities Subject to the Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    1. Liquidity Risk Management Programs
    2. Swing Pricing
    3. Hard Close
    4. Reporting Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. General Request for Comment
VI. Consideration of Impact on the Economy
    Statutory Authority

I. Introduction

    When the Investment Company Act was enacted, a primary concern was 
the potential for dilution of shareholders' interests in open-end 
investment companies.\3\ In addition, the ability of shareholders to 
redeem their shares in an investment company on demand is a defining 
feature of open-end investment funds.\4\ Section 22 of the Act reflects 
these concerns and priorities. For example, section 22(c) gives the 
Commission broad powers to regulate the pricing of redeemable 
securities for the purpose of eliminating or reducing so far as 
reasonably practicable any dilution of the value of outstanding fund 
shares.\5\ Section 22(e) of the Act establishes a shareholder right of 
prompt redemption in open-end funds by requiring such funds to make 
payments on shareholder redemption requests within seven days of 
receiving the request.\6\
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    \3\ See Investment Trusts and Investment Companies: Hearings on 
S. 3580 before a Subcomm. of the Senate Comm. on Banking and 
Currency, 76th Cong., 3d Sess. (1940), at 37, 137-145 (stating that 
among the abuses that served as a backdrop for the Act were 
practices that resulted in substantial dilution of investors' 
interests, including backward pricing by fund insiders to increase 
investment in the fund and thus enhance management fees, but causing 
dilution of existing investors in the fund) (statements of 
Commissioner Healy and Mr. Bane).
    \4\ See Investment Trusts and Investment Companies: Letter from 
the Acting Chairman of the SEC, A Report on Abuses and Deficiencies 
in the Organization and Operation of Investment Trusts and 
Investment Companies (1939), at n.206 (``[T]he salient 
characteristic of the open-end investment company. . .was that the 
investor was given a right of redemption so that he could liquidate 
his investment at or about asset value at any time that he was 
dissatisfied with the management or for any other reason.''). An 
open-end investment company is required to redeem its securities on 
demand from shareholders at a price approximating their 
proportionate share of the fund's net asset value (``NAV'') next 
calculated by the fund after receipt of such redemption request. See 
section 22 of the Act; rule 22c-1.
    \5\ Section 22(c) of the Act authorizes the Commission to make 
rules and regulations applicable to registered investment companies 
and to principal underwriters of, and dealers in, the redeemable 
securities of any registered investment company related to the 
method of computing purchase and redemption prices of redeemable 
securities for the purpose of eliminating or reducing so far as 
reasonably practicable any dilution of the value of other 
outstanding securities of the fund or any other result of the 
purchase or redemption that is unfair to investors in the fund's 
other outstanding securities. See also section 22(a) of the Act 
(authorizing a securities association registered under section 15A 
of the Securities Exchange Act of 1934 (``Exchange Act'') similarly 
to prescribe the prices at which a member may purchase or redeem an 
investment company's redeemable securities for the purposes of 
addressing dilution).
    \6\ Section 22(e) of the Act provides, in part, that no 
registered investment company shall suspend the right of redemption 
or postpone the date of payment upon redemption of any redeemable 
security in accordance with its terms for more than seven days after 
tender of the security absent specified unusual circumstances.
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    The open-end fund industry has grown significantly over the last 
six years as more Americans rely on funds to gain exposure to financial 
markets while having the ability to quickly redeem their 
investments.\7\ At the end of 2021, assets in open-end funds (excluding 
money market funds) were approximately $26 trillion, having grown from 
about $15 trillion at the end of 2015.\8\ An estimated 102.6 million 
Americans owned mutual funds at the end of 2021, up from an estimated 
91 million individual investors at the end of 2015.\9\ Open-end funds 
continue to be an important part of the financial markets, and as those 
markets have grown more complex, some funds are pursuing more complex 
investment strategies, including fixed income and

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alternative investment strategies focused on less liquid asset classes. 
For example, as of December 2021, bond funds had assets of more than $6 
trillion, funds with alternative investment strategies had about $15 
billion in assets, and bank loan funds had around $12 billion in 
assets.\10\ Figure 1 below shows the amount of assets held by different 
types of open-end funds.
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    \7\ For purposes of this release, the term ``fund'' or ``open-
end fund'' generally refers to an open-end management investment 
company registered on Form N-1A or a series thereof, excluding money 
market funds, unless otherwise specified. Mutual funds and most 
exchange-traded funds (``ETFs'') are open-end management companies 
registered on Form N-1A. An open-end management investment company 
is an investment company, other than a unit investment trust or 
face-amount certificate company, that offers for sale or has 
outstanding any redeemable security of which it is the issuer. See 
sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-
4 and 80a-5(a)(1)]. While a money market fund is an open-end 
management investment company, money market funds generally are not 
subject to the amendments we are proposing and thus are not included 
when we refer to ``funds'' or ``open-end funds'' in this release 
except where specified. Although unit investment trusts, like open-
end funds, issue redeemable securities, they are not included when 
we refer to open-end funds in this release, unless otherwise 
specified.
    \8\ The $26 trillion figure is based on Form N-CEN filing data 
as of Dec. 2021. Of the $26 trillion in assets, ETFs had $5.1 
trillion in assets. See Investment Company Liquidity Risk Management 
Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016) 
[81 FR 82142 (Nov. 18, 2016)] (``Liquidity Rule Adopting Release''), 
at text accompanying n.1046 (estimating open-end fund assets of 
approximately $15 trillion at the end of 2015).
    \9\ See Investment Company Institute, 2022 Investment Company 
Fact Book (2022) (``2022 ICI Fact Book''), at 44, available at 
https://www.icifactbook.org/; Investment Company Institute, 2016 
Investment Company Fact Book (2016), at 110, available at https://www.ici.org/fact-book. Retail investors hold the vast majority of 
mutual fund net assets. See 2022 ICI Fact Book, at 48 (estimating 
that retail investors held 88% of mutual fund assets at year end 
2021). An estimated 13.9 million U.S. households held ETFs in 2021, 
in addition to many institutional investors. See id. at 83.
    \10\ Based on Morningstar data. Unless otherwise indicated, data 
discussed throughout this section is based on Morningstar data. Bond 
funds include funds that invest in taxable bonds (approximately $5.5 
trillion in assets) and funds that invest in municipal bonds 
(approximately $1 trillion in assets).
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[GRAPHIC] [TIFF OMITTED] TP16DE22.001

    Without effective liquidity risk management, a fund may not be able 
to make timely payment on shareholder redemptions, and sales of 
portfolio investments to satisfy redemptions may result in the dilution 
of outstanding fund shares. Moreover, even when a fund is managing its 
liquidity effectively, the transaction costs associated with meeting 
redemption requests or investing the proceeds of subscriptions can 
create dilution for fund shareholders. These concerns are particularly 
heightened in times of stress or in funds invested in less liquid 
investments. To that end, the ability of funds to meet investor 
redemptions, while mitigating the impact of this redemption activity on 
remaining shareholders, is an important aspect of the regulatory regime 
for open-end funds.
    Commission rules currently provide open-end funds with several 
tools to mitigate dilution from shareholder purchase or redemption 
activity and facilitate a fund's ability to meet shareholder 
redemptions in a timely manner. These tools include a fund's liquidity 
risk management program, the option to use swing pricing for certain 
funds, the ability to impose purchase or redemption fees, and/or the 
ability to redeem in kind.\11\ In March 2020, in connection with the 
economic shock from the onset of the COVID-19 pandemic, U.S. open-end 
funds faced a significant volume of investor redemptions.\12\ As 
investors sought to redeem fund investments to free up cash during a 
time of market uncertainty, open-end funds faced significant 
redemptions and liquidity concerns.\13\
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    \11\ See Liquidity Rule Adopting Release, supra note 8; 
Investment Company Swing Pricing, Investment Company Act Release No. 
32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)] (``Swing Pricing 
Adopting Release'').
    \12\ See infra section I.B for a discussion of the fund flows 
for different types of open-end funds during the Mar. 2020 period.
    \13\ See infra section I.B discussing the events of Mar. 2020.
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    In light of these events, we have reviewed the effectiveness of 
funds' current tools for managing liquidity and limiting dilution, 
including through staff outreach and review of information funds are 
required to report to the Commission.\14\ We have identified weaknesses 
in funds' liquidity risk management programs that can cause delays in 
identifying liquidity issues in stressed periods and cause funds to 
over-estimate the liquidity of their investments, as well as limited 
use of tools such as redemption fees or swing pricing that are designed 
to limit dilution resulting from a fund's trading of portfolio 
investments in response to shareholder redemptions or purchases. As a 
result, we are proposing amendments to enhance funds' liquidity risk 
management to help better prepare them for stressed market conditions 
and to require the use of swing pricing for certain funds in certain 
circumstances to limit dilution. We believe the proposed amendments 
would enhance open-end fund resilience in periods of market stress by 
promoting funds' ability to meet redemptions in a timely manner while 
limiting dilution of remaining shareholders' interests in the fund.
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    \14\ The review consisted of outreach with funds, advisers, and 
liquidity vendors that funds use to help classify the liquidity of 
their investments. In addition, staff reviewed data provided on Form 
N-PORT, Form N-CEN, and Form-RN.
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A. Open-End Funds and Existing Regulatory Framework

    Open-end funds are a popular investment choice for investors 
seeking to gain professionally managed, diversified exposure to the 
capital

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markets while preserving liquidity.\15\ There are two kinds of open-end 
funds: mutual funds and ETFs. Open-end funds offer investors daily 
liquidity, but may invest in assets that cannot be liquidated quickly 
without significantly affecting market prices. Since the 1940s, the 
Commission has stated that open-end funds should maintain highly liquid 
portfolios and recognized that this may limit their ability to 
participate in certain transactions in the capital markets.\16\
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    \15\ See Liquidity Rule Adopting Release, supra note 8. See also 
supra note 9 and accompanying text (discussing an estimated number 
of Americans who invest in mutual funds).
    \16\ See Investment Trusts and Investment Companies: Report of 
the Securities and Exchange Commission (1942), at 76 (``Open-end 
investment companies, because of their security holders' right to 
compel redemption of their shares by the company at any time, are 
compelled to invest their funds predominantly in readily marketable 
securities. Individual open-end investment companies, therefore, as 
presently constituted, could participate in the financing of small 
enterprises and new ventures only to a very limited extent.'').
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    While the Act requires open-end funds to pay redemptions within 
seven days, as a practical matter most investors expect to receive 
redemption proceeds in fewer than seven days. For example, many mutual 
funds represent in their prospectuses that they will pay redemption 
proceeds on the next business day after the redemption. In addition, 
open-end funds redeemed through broker-dealers must meet redemption 
requests within two business days because of rule 15c6-1 under the 
Exchange Act, which establishes a two-day (T+2) settlement period for 
trades effected by broker-dealers.\17\
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    \17\ The Commission has proposed to amend rule 15c6-1 to 
establish a T+1 settlement period for broker-dealer trades. See 
Shortening the Securities Transaction Settlement Cycle, Exchange Act 
Release No. 34-94196 (Feb. 9, 2022) [87 FR 10436 (Feb. 24, 2022)].
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    In terms of pricing, an order to purchase or redeem fund shares 
must receive a price based on the current NAV next computed after 
receipt of the order.\18\ Open-end funds typically calculate their NAVs 
once a day. Purchase and redemption requests submitted throughout the 
day receive the NAV calculated at the end of that day, which is 
typically calculated as of 4 p.m. ET.\19\ These provisions are designed 
to promote equitable treatment of fund shareholders when buying and 
selling fund shares.
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    \18\ Rule 22c-1 under the Act. The process of calculating or 
``striking'' the NAV of the fund's shares on any given trading day 
is based on several factors, including the market value of portfolio 
securities, fund liabilities, and the number of outstanding fund 
shares, among others. Rule 2a-4 requires, when determining the NAV, 
that funds reflect changes in holdings of portfolio securities and 
changes in the number of outstanding shares resulting from 
distributions, redemptions, and repurchases no later than the first 
business day following the trade date. As indicated in the adopting 
release for rule 2a-4, this calculation method provides funds with 
additional time and flexibility to incorporate last-minute portfolio 
transactions into their NAV calculations on the business day 
following the trade date, rather than on the trade date. See 
Adoption of Rule 2a-4 Defining the Term ``Current Net Asset Value'' 
in Reference to Redeemable Securities Issued by a Registered 
Investment Company, Investment Company Act Release No. 4105 (Dec. 
22, 1964) [29 FR 19100 (Dec. 30, 1964)].
    \19\ Commission rules do not require that a fund calculate its 
NAV at, or as of, a specific time of day. Current NAV must be 
computed at least once daily, subject to limited exceptions, Monday 
through Friday, at the pricing time set by the board of directors. 
See rule 22c-1(b)(1).
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    A characteristic of open-end funds is that fund shareholders share 
the gains and losses of the fund, as well as the costs. As a result, 
there are circumstances in which the transaction activity of certain 
investors leads to costs that are distributed across all shareholders, 
unfairly reducing the value (or ``diluting'') the interests of 
shareholders who did not engage in the underlying transactions. For 
example, while redemption orders receive the next computed NAV, the 
fund may incur costs on subsequent days to meet those redemptions, 
because the fund may engage in trading activity and make other changes 
in its portfolio holdings over multiple business days following the 
redemption order. As a result, the costs of providing liquidity to 
redeeming investors can be borne by the remaining investors in the fund 
and dilute the interests of non-redeeming shareholders. Similarly, when 
shareholders purchase shares in the fund, costs may arise when the fund 
buys portfolio investments to invest the proceeds of the purchase, and 
the fund and its shareholders may bear those costs in days following 
the purchase request, diluting the interests of the non-purchasing 
shareholders.
    Transaction costs associated with redemptions or purchases can 
vary. The less liquid the fund's portfolio holdings, the greater the 
liquidity costs associated with redemption and purchase activity can 
become and the greater the possibility of dilution effects on fund 
shareholders. For example, during times of heightened market volatility 
and wider bid-ask spreads for the fund's underlying holdings, selling 
fund investments to meet investor redemptions results in greater costs 
to the fund. Moreover, funds also incur transaction costs outside of 
stressed periods. Although these costs would generally be smaller than 
in times of heighted market volatility, they also are borne by fund 
investors and, particularly over time, also can result in dilution.
    In times of liquidity stress, there may be incentives for 
shareholders to redeem fund shares quickly to avoid further losses, to 
redeem fund shares for cash in times of uncertainty, or to obtain a 
``first-mover'' advantage by avoiding anticipated trading costs and 
dilution associated with other investors' redemptions. This perceived 
advantage may lead to increasing outflows, further exacerbating the 
effect on remaining shareholders and incentivizing increased 
shareholder redemptions. Whether investors redeem because they need 
cash or want to capitalize on a first-mover advantage, the remaining 
investors in the fund may, particularly in times of stress, experience 
dilution of their interests in the fund.
1. Liquidity Risk Management
    In 2016, the Commission adopted rule 22e-4 under the Act (the 
``liquidity rule'') to require open-end funds to adopt and implement 
liquidity risk management programs. Rule 22e-4 was designed to address 
concerns that open-end funds investing in less liquid securities may 
have difficulty meeting redemption requests without significant 
dilution of remaining investors' interests in the fund.\20\ Rule 22e-4 
requires: (1) assessment, management, and periodic review of a fund's 
liquidity risk; (2) classification of the liquidity of each of a fund's 
portfolio investments into one of four prescribed categories--ranging 
from highly liquid investments to illiquid investments--including at-
least-monthly reviews of these classifications; (3) determination and 
periodic review of a highly liquid investment minimum for certain 
funds; (4) limitation on illiquid investments; and (5) board oversight.
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    \20\ See Liquidity Rule Adopting Release, supra note 8, at 
section II.B.
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    Funds are also subject to related reporting requirements. For 
example, funds must report the liquidity classifications of their 
holdings confidentially to the Commission on Form N-PORT. A fund also 
must immediately report to the Commission on Form N-RN and to the 
fund's board if its portfolio becomes more than 15% illiquid, as well 
as if the fund breaches a highly liquid investment minimum

[[Page 77177]]

established as part of its liquidity risk management program for seven 
consecutive days.\21\ While the compliance dates for specific 
provisions of rule 22e-4 varied, most funds were required to be in 
compliance with all requirements of the rule in 2019.\22\
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    \21\ Form N-RN was previously titled Form N-LIQUID. See Use of 
Derivatives by Registered Investment Companies and Business 
Development Companies, Investment Company Act Release No. 34084 
(Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)] (``Derivatives Adopting 
Release'').
    \22\ Small entities were required to be in compliance with the 
reporting requirements under Form N-PORT by Mar. 1, 2020. See 
Investment Company Liquidity Disclosure, Investment Company Act 
Release No. 33142 (June 28, 2018) [83 FR 31859 (July 10, 2018)] 
(``2018 Liquidity Disclosure Adopting Release'').
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    In 2018, the Commission adopted amendments designed to improve the 
reporting and disclosures of liquidity information by open-end 
funds.\23\ These amendments modified certain aspects of the liquidity 
framework by requiring funds to disclose information about the 
operation and effectiveness of their liquidity risk management program 
in their shareholder reports instead of requiring funds to disclose 
aggregate liquidity classifications publicly in Form N-PORT.\24\ Since 
that time, some individual investors have stated that they care about 
being able to redeem but do not need narrative information about how a 
fund manages its liquidity, while some other commenters have suggested 
that aggregate liquidity classifications would be more helpful than 
narrative shareholder report disclosure.\25\ We recently removed the 
narrative disclosure requirement because, in practice, it did not 
meaningfully augment other information already available to 
shareholders.\26\
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    \23\ Id.
    \24\ The Commission also adopted amendments to Form N-PORT to 
allow funds classifying the liquidity of their investments pursuant 
to their liquidity risk management programs to report multiple 
liquidity classification categories for a single position under 
specified circumstances. See 2018 Liquidity Disclosure Adopting 
Release, supra note 22.
    \25\ See infra notes 303 to 305 and accompanying text 
(discussing these comments in more detail).
    \26\ See Tailored Shareholder Reports for Mutual Funds and 
Exchange-Traded Funds; Fee Information in Investment Company 
Advertisements, Investment Company Act Release No. 34731 (Oct. 26, 
2022) (``Tailored Shareholder Reports Adopting Release'') at nn.462-
472 and accompanying text.
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    When the Commission adopted the 2018 amendments, it stated that 
Commission staff would continue to monitor and solicit feedback on the 
implementation of the liquidity framework and inform the Commission 
what steps, if any, the staff recommends in light of this 
monitoring.\27\ The Commission stated its expectation that this 
evaluation would take into account at least one full year's worth of 
liquidity classification data from large and small entities to allow 
funds and the Commission to gain experience with the classification 
process and to allow analysis of its benefits and costs based on actual 
practice. As discussed below, we have had the opportunity since the 
adoption of these amendments to evaluate the liquidity framework while 
taking into account the data available to us regarding funds' liquidity 
risk management programs.\28\ We discuss our evaluation of the current 
liquidity framework throughout this release.
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    \27\ See 2018 Liquidity Disclosure Adopting Release, supra note 
22, at paragraph accompanying n.125.
    \28\ See infra sections I.B and II.A.
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2. Swing Pricing
    In 2016, the Commission adopted a rule permitting registered open-
end funds (except money market funds or ETFs), under certain 
circumstances, to use swing pricing, which is the process of adjusting 
the price above or below a fund's NAV per share to effectively pass on 
the costs stemming from shareholder purchase or redemption activity to 
the shareholders associated with that activity.\29\ When a shareholder 
purchases or redeems fund shares, the price of those shares does not 
typically account for the transactions costs, including trading costs 
and changes in market prices, that may arise when the fund buys 
portfolio investments to invest proceeds from purchasing shareholders 
or sells portfolio investments to meet shareholder redemptions.\30\ 
Swing pricing is an investor protection tool currently available to 
funds to mitigate potential dilution and manage fund liquidity as a 
result of investor redemption and purchase activity.
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    \29\ Swing Pricing Adopting Release, supra note 11; rule 22c-
1(a)(3).
    \30\ See Swing Pricing Adopting Release, supra note 11, at 
section II.A.1.
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    The 2016 swing pricing rule requires that, for funds choosing to 
use swing pricing, the fund's NAV is adjusted by a specified amount 
(the ``swing factor'') once the level of net purchases into or net 
redemptions from the fund has exceeded a specified percentage of the 
fund's NAV (the ``swing threshold''). A fund's swing factor is 
permitted to take into account only the near-term costs expected to be 
incurred by the fund as a result of net purchases or net redemptions on 
that day and may not exceed an upper limit of 2% of the NAV per share. 
The rule also requires a fund that uses swing pricing to adopt swing 
pricing policies and procedures that specify the process for 
determining the fund's swing factor and swing threshold. The fund's 
board must approve the fund's swing pricing policies and procedures, 
the fund's swing factor upper limit, and the swing threshold. The board 
also must review a written report on the adequacy and effectiveness of 
the fund's swing pricing policies and procedures at least annually.
    In the time since the adoption of the rule, no U.S. funds have 
implemented swing pricing. While swing pricing has been a commonly 
employed anti-dilution tool in Europe, including among U.S.-based fund 
managers that also operate funds in Europe, U.S. funds face unique 
operational obstacles in its implementation. When considering the 
adoption of the 2016 swing pricing rule, the Commission received 
comment letters articulating the operational issues that funds may 
encounter if they implemented swing pricing.\31\ In response to the 
concerns raised by commenters, the Commission adopted an extended 
effective date to allow for the creation of industry-wide operational 
solutions to facilitate the implementation of swing pricing more 
effectively. In that release, the Commission stated that it had 
directed Commission staff to review, two years after the rule's 
effective date, market practices associated with funds' use of swing 
pricing to mitigate dilution and to provide the Commission with the 
results of its review.\32\ Since that time, we have evaluated market 
practices associated with funds' lack of use of swing pricing, and this 
release reflects that evaluation. Despite over five years passing since 
adoption, the industry has not developed an operational solution to 
facilitate implementation of swing pricing, nor have individual market 
participants.\33\
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    \31\ See Comment Letter of BlackRock on Open-End Fund Liquidity 
Risk Management Programs; Swing Pricing; Re-Opening of Comment 
Period for Investment Company Reporting Modernization Release, 
Investment Company Act File No. 31835 (Sep. 22, 2015) [80 FR 62274 
(Oct. 15, 2015)] (``2015 Proposing Release''), File No. S7-16-15; 
Comment Letter of Dodge & Cox on 2015 Proposing Release, File No. 
S7-16-15; Comment Letter of Pacific Investment Management Company 
LLC on 2015 Proposing Release, File No. S7-16-15; Comment Letter of 
Securities Industry and Financial Markets Association on 2015 
Proposing Release, File No. S7-16-15. The comment file for the 2015 
Proposing Release, where these comment letters can be accessed, is 
available at https://www.sec.gov/comments/s7-16-15/s71615.shtml.
    \32\ See Swing Pricing Adopting Release, supra note 11, at 
section II.A.1.
    \33\ After the Commission adopted the current swing pricing 
rule, the industry formed working groups to explore potential 
operational solutions to facilitate funds' ability to implement 
swing pricing. See Evaluating Swing Pricing: Operational 
Considerations, Addendum (June 2017), available at https://www.ici.org/system/files/attachments/ppr_17_swing_pricing_summary.pdf (``2017 ICI Swing Pricing White 
Paper'').

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[[Page 77178]]

    We understand that the industry has been unable to develop an 
operational solution to implement swing pricing largely because funds 
currently are unable to obtain sufficient fund flow information before 
they finalizes their NAVs, a necessary precursor to determining whether 
a fund needs to use swing pricing on any particular day. Generating 
fund flow information involves a broad network of market participants 
with multiple layers of systems, including, among others, funds, 
transfer agents, broker-dealers, retirement plan recordkeepers, banks, 
and the National Securities Clearing Corporation (``NSCC''). In 
general, many mutual funds use prices as of 4 p.m. ET (or the ``pricing 
time'') to value the funds' underlying holdings for purposes of 
computing their NAVs for the current day. This time is established by 
the fund's board of directors. Typically, investors may place orders to 
purchase or redeem mutual fund shares with the fund's transfer agent or 
with intermediaries as late as 3:59 p.m. ET for execution at that day's 
NAV. When the transfer agent or an intermediary receives an order 
before the pricing time, that order typically receives that day's 
price. An investor who submits an order after the pricing time must 
receive the next day's price.
    While some investors may place orders by opening an account 
directly with the fund's transfer agent, we understand that the 
majority of mutual fund orders are placed with intermediaries, such as 
broker-dealers, banks, and retirement plan recordkeepers.\34\ Some 
intermediaries do not transmit flow details to the fund's transfer 
agent or the clearing agency until after the fund has finalized its NAV 
calculation and disseminated the NAV to pricing vendors, media, and 
intermediaries (``NAV dissemination''). NAV dissemination tends to 
occur between 6 p.m. ET and 8 p.m. ET. Indeed, the fund's transfer 
agent or the clearing agency often do not receive a significant portion 
of orders until after midnight--i.e., the next day.\35\ This 
contributes to a mismatch between the extent of flow information funds 
require to implement swing pricing and the flow information funds 
currently have before the pricing time. For example, based on staff 
outreach, we understand that some funds receive only around half of 
their daily volume by 6 p.m. ET.\36\ We are also aware of a separate 
review of funds' receipt of flow data for a quarter in 2016, which 
found that only 70% of actual and estimated trade flow could be 
delivered by 6 p.m. ET.\37\ Without sufficient actual or estimated flow 
information before the fund finalizes its NAV, funds cannot implement 
swing pricing because the determination of whether to swing the fund's 
NAV depends on the size of net flows.
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    \34\ In 2021, an estimated 18% of U.S. households owning mutual 
funds purchased them directly from the mutual fund company. See 2022 
ICI Fact Book, supra note 9, at Figure 7.8.
    \35\ NSCC currently is the only registered clearing agency for 
fund shares. A significant portion of mutual fund orders are 
processed through NSCC's Fund/SERV platform. See Depositary Trust 
and Clearing Corporation 2021 Annual Report, available at https://www.dtcc.com/annuals/2021/performance/dashboard (stating that the 
value of transactions Fund/SERV processed in 2021 was $8.5 trillion 
and the volume for this period was 261 million transactions). A part 
of the platform, referred to as Defined Contribution Clearance & 
Settlement, focuses on purchase, redemption, and exchange 
transactions in defined contribution and other retirement plans. 
This service handled a volume of nearly 154 million transactions in 
2021. See id.
    \36\ We understand based on staff outreach that the time by 
which a fund receives flow information varies to some extent based 
on the fund's investor base. For example, funds with large 
investments by retirement plans generally receive a larger portion 
of their flow information after 6 p.m. ET than other funds.
    \37\ See 2017 ICI Swing Pricing White Paper, supra note 33 
(stating that, for instance, intermediaries trading via traditional 
Fund/SERV, such as traditional brokerage and managed account 
activity, transmit orders to the fund by 7 p.m. ET but, with system 
and procedural enhancements, processing and submission of orders as 
actual trades might be able to occur prior to 6 p.m. ET). This paper 
also suggested that 90% to 100% of trade flow (actual or estimated) 
is required to apply swing pricing between 4 p.m. and 6 p.m. ET.
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B. March 2020 Market Events

    In March 2020, at the onset of the COVID-19 pandemic in the United 
States, most segments of the open-end fund market witnessed large-scale 
investor outflows. Investors' concerns about the potential impact of 
the COVID-19 pandemic led investors to reallocate their assets into 
cash and short-dated, near-cash investments.\38\ The resulting outflows 
from many open-end funds placed pressure on these funds to generate 
liquidity quickly in order to meet investor redemptions. Equity and 
debt security prices fell as yields rose. Uncertainty throughout the 
U.S. economy and asset-price volatility rose, and credit spreads and 
bid-ask spreads widened.\39\ The large outflows open-end funds faced 
during March 2020, combined with the widening bid-ask spreads funds 
encountered when purchasing or selling portfolio investments at that 
time, likely contributed to dilution of the value of funds' shares for 
remaining investors.\40\
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    \38\ See SEC Staff Report on U.S. Credit Markets 
Interconnectedness and the Effects of the COVID-19 Economic Shock 
(Oct. 2020) (``SEC Staff Interconnectedness Report''), at 17 to 18, 
available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf. Staff reports and other staff documents (including 
those cited herein) represent the views of Commission staff and are 
not a rule, regulation, or statement of the Commission. The 
Commission has neither approved nor disapproved the content of these 
documents and, like all staff statements, they have no legal force 
or effect, do not alter or amend applicable law, and create no new 
or additional obligations for any person.
    \39\ See id., at 3 and 6 to 8 (discussing that the market 
structure of certain segments of the credit market contributed to 
market stress in Mar. 2020, including reduced dealer inventories and 
reluctance to accommodate customer demand in some cases). On Apr. 1, 
2020, the Board of Governors of the Federal Reserve System 
(``Federal Reserve'') made a temporary change to its supplementary 
leverage ratio rule to allow banking organizations to expand their 
balance sheets as appropriate to continue to serve as financial 
intermediaries, stating that the rule's regulatory restrictions may 
constrain the firms' ability to continue to serve as financial 
intermediaries and to provide credit to households and businesses in 
the face of rapid deteriorations in Treasury market liquidity 
conditions and significant inflows of customer deposits and 
increased reserve levels. See Federal Reserve Board Announces 
Temporary Changes to its Supplementary Leverage Ratio Rule to Ease 
Strains in the Treasury Market Resulting from the Coronavirus and 
Increase Banking Organizations' Ability to Provide Credit to 
Households and Businesses (Apr. 1, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200401a.htm.
    \40\ We do not have specific data about the dilution fund 
shareholders experienced in Mar. 2020 because funds do not report 
information about their trading activity and the prices at which 
they purchase and sell each instrument. However, European funds 
experienced similar market conditions as U.S. funds and, to mitigate 
dilution during this period, many European funds increased their use 
of swing pricing and the size of their swing factors. See infra 
paragraph accompanying note 60. European funds are subject to 
regulatory regimes that differ in some respects from the U.S. regime 
for open-end funds. We are not aware, however, of differences 
between the regimes that would have significantly reduced dilution 
for U.S. funds relative to European funds during this period, such 
that European funds needed to use swing pricing to mitigate dilution 
that U.S. funds were not experiencing due to regulatory or other 
differences.
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    Open-end funds are a large and important component of U.S. markets. 
At the end of 2019, assets in open-end funds totaled $21 trillion.\41\ 
Fixed-income funds accounted for $5.3 trillion, or 25% of total open-
end fund assets.\42\ Bank loan assets were nearly $100 billion, or less 
than 2% of total fixed-income fund assets. At the end of March 2020, 
following the height of the COVID-19 related market stress, assets in 
open-end funds (including ETFs) fell
---------------------------------------------------------------------------

    \41\ Of this amount, ETFs had assets of $4.4 trillion and other 
open-end funds had assets of $16.4 trillion. Money market funds and 
funds of funds are excluded from calculations relating to the size 
and redemptions of open-end funds.
    \42\ Fixed-income funds, excluding ETFs, had assets of $4.5 
trillion, and fixed-income ETFs had assets of $800 billion.

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[[Page 77179]]

17% ($3.6 trillion) from $20.8 trillion in December 2019 to a total of 
$17.2 trillion. Assets of open-end funds excluding ETFs fell 18% ($2.9 
trillion) from $16.4 trillion to $13.5 trillion, and ETF assets fell 
17% (approximately $760 billion) from $4.4 trillion to $3.7 trillion. 
Of this amount, fixed-income mutual fund assets fell 5.5%, although 
fixed-income ETFs' assets increased slightly.\43\ In addition, bank 
loan fund assets fell by 30% in March 2020, or from $100 billion to $70 
billion, compared to the level of assets reported in December 2019.
---------------------------------------------------------------------------

    \43\ Fixed-income funds, excluding ETFs, had assets of 
approximately $4.1 trillion, while fixed-income ETFs' assets 
increased slightly from Dec. 2019 levels to $830 billion.
[GRAPHIC] [TIFF OMITTED] TP16DE22.002


[[Page 77180]]


    The market disruptions of the March 2020 period included 
significant redemption activity in open-end funds.\44\ Throughout 2019, 
net flows into open-end funds averaged approximately $32.4 billion, or 
0.2% per month.\45\ During this same period, fixed-income funds 
experienced a steady inflow of approximately $41.7 billion, or 0.9% per 
month on average.\46\ In March 2020, however, open-end funds had 
outflows totaling $329.4 billion, or 1.7% of prior period assets.\47\ 
The majority of these outflows were from fixed-income funds, which had 
$286.6 billion in outflows.\48\ Taxable bond funds had outflows of 
$241.7 billion (or 5.2% of prior period assets), of which, bank loan 
funds had outflows of $12.4 billion (or 13.4% of prior period assets in 
these funds).\49\ Municipal bond funds had $44.9 billion in outflows 
(or 4.9% of prior period assets).\50\
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    \44\ Open-end funds also experienced heightened outflows in 
other stressed periods, such as the last quarter of 2008, but 
outflows in March 2020 surpassed those witnessed in these other 
periods. For example, during the last quarter of 2008, investors 
withdrew $65 billion from bond funds. Total outflows for bond funds 
during this period never exceeded 1.5% of total net assets. See ICI, 
2009 Investment Company Fact Book, Figure 2.10 and accompanying 
text, available at https://www.ici.org/system/files/attachments/2009_factbook.pdf (calculating net flows as a three-month moving 
average of net flows as a percentage of previous month-end assets, 
and excluding high yield bond funds).
    \45\ Open-end funds (excluding ETFs) had average net flows of 
approximately $4.8 billion (or 0.04% per month). ETFs had average 
net flows of approximately $27.7 billion (or 0.7% per month).
    \46\ Fixed-income funds (excluding ETFs) had inflows of $28.8 
billion (or 0.7% per month on average). Fixed-income ETFs had 
inflows of $12.5 billion (or 1.7% per month on average).
    \47\ Open-end funds (excluding ETFs) had outflows totaling 
$336.8 billion, or 1.7% of prior period assets. ETFs had inflows 
totaling $7.3 billion, or 2% of prior period assets. The majority of 
ETF inflows were for equity ETFs, which had $14.7 billion in 
inflows. Allocation, alternative, commodity, and miscellaneous/other 
ETFs had inflows of $13.2 billion. The inflows into some types of 
ETFs were partially offset by outflows of $20.6 billion from fixed-
income ETFs.
    \48\ Open-end funds (excluding ETFs) had outflows of 
approximately $266 billion, and ETFs had outflows of approximately 
$20.6 billion.
    \49\ For open-end funds (excluding ETFs) this included outflows 
of $223.3 billion (5.9%) for taxable bond funds (of which, bank loan 
funds had outflows of $11.4 billion (13.6%)). For ETFs this included 
outflows of $18.4 billion (2.2%) for taxable bond ETFs (of which, 
bank loan ETFs had outflows of approximately $1 billion (11.2%))
    \50\ For open-end funds (excluding ETFs) this included outflows 
of $42.6 billion (5%) for municipal bond funds. For ETFs this 
included outflows of $2.2 billion (4.3%) for municipal bond ETFs.

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[[Page 77181]]

[GRAPHIC] [TIFF OMITTED] TP16DE22.003

    During the period of market turmoil, bid-ask spreads spiked by as 
much as 100 basis points for high-yield bonds and 150-200 basis points 
for investment-grade bonds.\51\ In general, the bond market and bank 
loan market experienced significant price declines in March 2020. The 
price for 10 year U.S. Treasuries increased by roughly 4.6%. The price 
of corporate bonds declined by 7%.\52\ The price of leveraged loans 
decreased by roughly 13%.\53\ The heightened volatility and demand for 
liquidity drove stress throughout the market, particularly in the bond 
fund and bank loan fund markets. Price declines were not limited to 
these markets, however. For example, the price for U.S. small cap 
equities decreased by roughly 24%.\54\
---------------------------------------------------------------------------

    \51\ See SEC Staff Interconnectedness Report, supra note 38, at 
37.
    \52\ The decline in the price of corporate bonds is measured by 
the BBG U.S. Corporate Bond Index.
    \53\ The decline in the price of leveraged loans was measured by 
the S&P Leveraged Loan Price Index.
    \54\ The decline in the price of U.S. small cap equities was 
measured by the Russell 2000 Total Return Index.

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[[Page 77182]]

    Beginning in mid-March 2020, the Federal Reserve, with the approval 
of the Department of the Treasury, used its emergency powers to 
intervene by providing timely and sizable interventions in an effort to 
stabilize the markets. The official sector interventions included, 
among others, the Secondary Market Corporate Credit Facility, 
introduced on March 23, 2020. This facility supported market liquidity 
by purchasing in the secondary market corporate bonds issued by 
investment grade U.S. companies, as well as U.S.-listed ETFs whose 
investment objective is to provide broad exposure to the market for 
U.S. corporate bonds.\55\
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    \55\ See, e.g., Press Release, Federal Reserve Announces 
Extensive New Measures to Support the Economy (Mar. 23, 2020), 
available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm; https://www.federalreserve.gov/monetarypolicy/smccf.htm (describing the Secondary Market Corporate 
Credit Facility in particular).
---------------------------------------------------------------------------

    After the Federal Reserve announced that it would be using its 
emergency powers for official sector interventions, market stress 
relating to the COVID-19 pandemic began to subside. Assets in open-end 
funds, including fixed income funds, began to increase. By December 
2020, open-end fund assets had increased to $24 trillion, with fixed-
income funds (excluding ETFs) reaching $6 trillion in assets, and 
fixed-income ETFs surpassing $1 trillion in assets.\56\ Bank loan fund 
assets remained essentially unchanged, however, from March 2020 levels 
and remained at $68 billion.
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    \56\ From Apr. to Dec. 2020, fixed-income funds averaged $75 
billion in inflows, or 1.4% per month. Ultrashort and short-term 
bond funds experienced average monthly inflows of $16 billion and 2% 
of assets over this period.
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Other Observations From March 2020
    Beyond data evidencing the liquidity stress funds faced in March 
2020, we also observed the stress through staff outreach to the 
industry. During this period, fund managers discussed their liquidity 
concerns with Commission staff and the potential need for emergency 
relief. Fund managers explored various emergency relief actions. For 
example, some fund managers requested emergency relief that would 
provide additional flexibility for interfund lending and other short-
term funding to help meet redemptions, which the Commission 
provided.\57\ Some managers suggested emergency relief to permit funds 
to impose redemption fees that exceed 2% to mitigate dilution, 
including fees that ETFs can charge authorized participants to cover 
liquidity and transaction costs.\58\ Some fund managers that have 
successfully used swing pricing in Europe urged the Commission to 
explore emergency actions to facilitate funds' ability to 
operationalize the Commission's current swing pricing rule. Some fund 
managers also suggested there was a need for Federal Reserve 
interventions. These discussions indicated that fund managers sought 
additional means to quickly address liquidity and dilution concerns 
during this period of financial stress.
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    \57\ See Order Under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) 
and 38(b) of the Investment Company Act of 1940 and Rule 17d-1 
Thereunder Granting Exemptions from Specified Provisions of the 
Investment Company Act and Certain Rules Thereunder, Investment 
Company Act Release No. 33821 (Mar. 23, 2020), available at https://www.sec.gov/rules/other/2020/ic-33821.pdf. Although the Commission 
provided this relief for a period of time, we understand funds 
generally did not use it.
    \58\ ETFs typically externalize the costs associated with 
purchases and redemptions of shares by redeeming in kind and by 
charging a fixed and/or variable fee to authorized participants to 
offset both transfer and other transaction costs that an ETF (or its 
service provider) may incur, as well as brokerage, tax-related, 
foreign exchange, execution, market impact, and other costs and 
expenses related to the execution of trades resulting from such 
transaction. The amount of these fixed and variable fees typically 
depends on whether the authorized participant effects transactions 
in kind or with cash and is related to the costs and expenses 
associated with transactions effected in kind versus in cash. For 
example, when an authorized participants redeems ETF shares by 
selling a creation unit to the ETF, the fees that the ETF imposes 
defray the costs of liquidity the redeeming authorized participant 
receives. This, in turn, mitigates the risk of diluting non-
redeeming authorized participants when an ETF redeems its shares.
---------------------------------------------------------------------------

    During these conversations, several fund managers with operations 
in both the U.S. and Europe discussed their experience with swing 
pricing in Europe and indicated that swing pricing would have been a 
useful tool for U.S. funds to have had in March 2020. Swing pricing was 
widely used in several European jurisdictions during the March 2020 
stressed period to reduce dilution from rising transaction costs.\59\ 
In these jurisdictions, some funds used partial swing pricing (where a 
NAV adjustment occurs only if net flows exceed a swing threshold), some 
funds used full swing pricing (where a NAV adjustment occurs any time a 
fund has net inflows or net outflows), and some funds did not use swing 
pricing. Many European funds increased their use of swing pricing and 
increased the size of their swing factors during the stressed period. 
For example, a voluntary survey conducted by the Bank of England and 
Financial Conduct Authority of a subset of fund managers in the United 
Kingdom (``UK'') indicated that the use of swing pricing more than 
doubled from the last quarter of 2019 to the first quarter of 2020.\60\ 
Due to increasing transaction costs, several European funds lowered 
their swing thresholds in March 2020, with some moving to full swing 
pricing for net redemptions.\61\ Funds also increased the size of their 
swing factors to account for the increase in liquidity and transaction 
costs. For example, a survey of Luxembourg UCITS found that while the 
average swing factor for the survey sample hovered around zero before 
the turmoil, it increased by more than 100 basis points on average 
during the market stress.\62\ The survey of UK-authorized

[[Page 77183]]

funds similarly found that the size of swing factors increased during 
this period and that some funds that had capped the size of their swing 
factors needed to temporarily remove these caps.\63\ In terms of the 
effects of using swing pricing during March 2020, one study found that 
swing pricing allowed surveyed funds to recoup roughly 0.06% of total 
net assets on average from redeeming investors during three weeks of 
elevated redemptions in March 2020.\64\
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    \59\ Funds in countries such as Luxembourg, Ireland, the United 
Kingdom, and the Netherlands had implemented swing pricing and it 
was well-established market practice. In Mar. 2020, funds in some 
countries, such as France, Spain, and Germany, had more recently 
begun to employ swing pricing as an anti-dilution method. See 
Lessons from COVID-19: Liquidity Risk Management and Open-Ended 
Funds, BlackRock ViewPoint (Jan. 2021), available at https://www.blackrock.com/corporate/literature/whitepaper/viewpoint-addendum-lessons-from-covid-liquidity-risk-management-is-central-to-open-ended-funds-january-2021.pdf.
    \60\ See Liquidity management in UK open-ended funds: Report 
based on a joint Bank of England and Financial Conduct Authority 
survey (Mar. 2021), available at https://www.bankofengland.co.uk/report/2021/liquidity-management-in-uk-open-ended-funds (``Bank of 
England Survey''). The increase in the use of partial and full swing 
pricing included the increase in the number of funds using swing 
pricing as well as the increase in the frequency of its use for 
funds that already used swing pricing. The survey also found that 
some funds did not use swing pricing or other tools during the 
period because, for example, net outflows of certain funds were 
below levels at which they would consider applying swing pricing or 
other tools.
    \61\ See id. (stating that, out of a total of 202 surveyed funds 
that were authorized to use swing pricing, 45 funds decided to 
reduce their swing threshold during this period, including 18 funds 
that switched temporarily to full swing pricing during the market 
stress); ICI, Experiences of European Markets, UCITS, and European 
ETFs During the COVID-19 Crisis (Dec. 2020), available at https://www.ici.org/doc-server/pdf%3A20_rpt_covid4.pdf (``Respondents 
reported that some UCITS lowered their partial swing thresholds 
during March to take into consideration the impact flows could have 
on investors from increased transaction costs in underlying markets. 
. . Some UCITS using partial swing pricing lowered their threshold 
for redemptions to zero in March (which is equivalent to full swing 
pricing) in response to market volatility that had caused bid-ask 
spreads to widen on underlying securities.''); Claessens, Stijn, and 
Lewrick, Ulf, ``Open-ended bond funds: systemic risks and policy 
implications'' (Dec. 2021) available at https://www.bis.org/publ/qtrpdf/r_qt2112c.pdf (stating that, in a survey of 57 Luxembourg 
actively managed bond UCITS based on a supervisory data collection, 
these funds lowered swing thresholds on average from net outflows of 
1% of total net assets before Mar. 2020 to less than 0.5% of total 
net assets) (``Claessens and Lewrick''). See also CSSF Working 
Paper: An Assessment of Investment Funds' Liquidity Management Tools 
(June 2022), available at https://www.cssf.lu/en/2022/06/publication-of-cssf-working-paper-an-assessment-of-investment-funds-liquidity-management-tools/(``CSSF Paper'').
    \62\ See Claessens and Lewrick, supra note 61; CSSF Paper, supra 
note 61 (stating that ``[t]he average swing factor of the 42 bond 
funds participating in the CSSF survey increased by more than 100 
basis points on average during Mar. 2020 (the median and maximum 
swing factor were 60 and 350 basis points, respectively)'').
    \63\ See Bank of England Survey, supra note 60 (stating that of 
the 17 surveyed funds that had a cap on their swing factors, which 
ranged from 0.25% to 3%, 13 funds temporarily removed the caps in 
response to heightened outflows and a few managers overrode the 
caps). We also understand that in response to funds' requests to use 
swing factors above their disclosed caps, some jurisdictions 
provided guidance on when this is permitted. See Commission de 
Surveillance du Secteur Financier, Swing Pricing Mechanism--FAQ, 
available at https://www.cssf.lu/en/Document/cssf-faq-swing-pricing-mechanism/ (providing guidance for increasing the swing factor above 
the maximum level identified in a fund's prospectus under certain 
circumstances, and noting that typical maximum swing factors 
observed in fund prospectuses are between 1% and 3%).
    \64\ See Claessens and Lewrick, supra note 61.
---------------------------------------------------------------------------

    We also observed funds' liquidity risk management in March 2020 
through funds' filings with the Commission and other staff outreach. 
Specifically, during and following the market events of March 2020, 
Commission staff assessed liquidity-related data reported on Forms N-
PORT and N-RN, as well as the development of liquidity risk management 
programs through staff outreach to funds, advisers, and liquidity 
classification vendors.\65\ Based on review of Form N-PORT filings for 
February and March 2020, approximately two-thirds of funds did not 
appear to reclassify any investment held in both months despite the 
market events described above.\66\ We saw that reclassifications 
increased from 25% of funds that held the same investment in both 
January and February 2020 to 33% of funds in March 2020, and stayed 
elevated for April 2020. We understand that many fund and liquidity 
vendor classification models use data lookback periods of 30 days or 
more that made them slowly adjust to changing market conditions, 
leaving these firms unable to consider their classifications and 
reclassify when market conditions changed quickly. In addition, we 
understand that classification models generally tend to assess 
liquidity based on relatively small sale sizes that do not necessarily 
reflect the amount a fund may need to sell to meet heightened levels of 
redemptions in stress periods, and most models do not automatically 
adjust to a higher trade size when market conditions change. Moreover, 
our data indicate that in March 2020 cash levels in the aggregate 
increased and relatively few funds made use of borrowing to meet 
redemptions, suggesting that funds generally were selling portfolio 
assets to meet redemptions and potentially for other purposes, such as 
to raise cash in anticipation of future redemptions. During March 2020, 
more than a dozen funds (primarily fixed-income funds) filed reports on 
Form N-RN. Most of these Form N-RN filings related to breaches of the 
15% limit on illiquid investments.
---------------------------------------------------------------------------

    \65\ The Mar. 2020 data collected on Form N-PORT often was not 
available to the Commission until June or July 2020 because a fund 
files data covering each month of its fiscal quarter on Form N-PORT 
no later than 60 days after the end of each fiscal quarter.
    \66\ See infra note 128 (discussing that fewer equity funds 
reported reclassifications of investments held in both Feb. and Mar. 
2020 than fixed-income funds).
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    Overall, the market events in March 2020 show how liquidity can 
deteriorate rapidly and significantly. In the face of such rapid market 
changes, liquidity risk management program features of some funds 
adjusted slowly, making them less effective during the stress period 
for managing liquidity risk. Additionally, tools, such as swing 
pricing, that may have helped open-end funds limit dilution as both 
transaction costs and redemptions rose were unavailable because of 
operational challenges, although these tools were used in other 
jurisdictions during this period.

C. Rulemaking Overview

    In March 2020, some open-end funds were not prepared for the sudden 
market stress that arose after many years of relative calm and, as the 
market stress and outflows grew, several funds began to explore 
emergency relief requests or suggest a need for government intervention 
in an effort to withstand or alleviate liquidity stress, address 
dilution, and improve overall market conditions. The period of market 
stress in March 2020 was relatively brief ending upon Federal Reserve 
interventions, and no funds sought to suspend redemptions during this 
period. We believe there are meaningful lessons from this period that 
our rules should reflect, while also recognizing the possibility that 
future stressed periods--whether specific to certain funds or the 
markets as a whole--may be more protracted or more severe than March 
2020, particularly absent Federal Reserve action. Fundamentally, we 
believe funds should be better prepared for future stressed conditions, 
which can occur suddenly and unexpectedly, and should have well-
functioning tools for managing through stress without significantly 
diluting the interests of their shareholders. We are proposing 
amendments to rules 22e-4 and 22c-1 that are designed to achieve these 
key objectives and to reflect our experience with the rules since they 
were adopted, as well as supporting amendments to Form N-PORT and other 
reporting and disclosure forms.
    Specifically, recognizing that it can be difficult to predict when 
market stress will occur, the proposed amendments to rule 22e-4 would 
require funds to incorporate stress into their liquidity 
classifications by assuming the sale of a stressed trade size, which 
would be 10% of each portfolio investment, rather than the rule's 
current approach of assuming the sale of a ``reasonably anticipated 
trade size'' in current market conditions. Requiring a fund's 
classification model to assume the sale of larger-than-typical position 
sizes may better emulate the potential effects of stress on the fund's 
portfolio, similar to an ongoing stress test, and help better prepare a 
fund for future stress or other periods where the fund faces higher 
than typical redemptions. The proposal also would establish other 
minimum standards for classifying the liquidity of an investment, which 
are designed to improve the quality of classifications by preventing 
funds from over-estimating the liquidity of their investments and to 
provide clearer guideposts for liquidity classifications, reflecting 
the more effective practices we have observed.
    In addition, we propose to remove the less liquid investment 
category and to treat these investments as illiquid. The less liquid 
category consists of investments that can be sold in seven calendar 
days but that take longer to settle. For example, many bank loans take 
longer than seven days to settle. The proposed amendment is designed to 
reduce the mismatch between the receipt of cash upon the sale of assets 
with longer settlement periods and the payment of shareholder 
redemptions. This would better position funds to meet redemptions, 
including in times of stress. Currently, treating these investments as 
``less liquid''--as opposed to ``illiquid''--allows funds to invest in 
these assets beyond the 15% limit on illiquid investments, 
notwithstanding that ``less liquid'' investments settle beyond the 
statutory seven-day period to pay redemptions. We are also proposing to 
amend the definition of illiquid investment to

[[Page 77184]]

include investments whose fair value is measured using an unobservable 
input that is significant to the overall measurement. We understand 
many funds classify these investments as illiquid today.
    We also propose to require daily liquidity classifications. We 
believe this change would promote better monitoring of a fund's 
liquidity and an ability to more rapidly understand and respond to 
changes that affect the liquidity of the fund's portfolio, including 
the fund's compliance with its highly liquid investment minimum and the 
rule's limit on illiquid investments.
    As another means to prepare funds for stressed conditions, we are 
proposing to amend the highly liquid investment minimum provisions in 
the rule to require all funds to determine and maintain a minimum 
amount of highly liquid assets of at least 10% of net assets. This 
aspect of the proposal is designed to ensure that funds have sufficient 
liquid investments for managing heightened levels of redemptions. 
Finally, we are proposing amendments to how the highly liquid 
investment minimum calculation and the calculation of the 15% limit on 
illiquid investments take into account the value of assets that are 
posted as margin or collateral for certain derivatives transactions to 
reflect that the fund cannot access the value of posted assets to meet 
redemptions until the fund is able to exit the derivatives 
transactions.
    In addition, to reduce shareholder dilution during stress and other 
periods, we are proposing to amend rule 22c-1 to require all open-end 
funds, other than ETFs and money market funds, to implement swing 
pricing. Today, no fund has implemented swing pricing, and funds rarely 
use redemption fees to address dilution other than in the case of 
short-term trading of fund shares, meaning shareholders may experience 
dilution both in normal and stressed conditions, particularly when 
purchases or redemptions are large or when funds invest in markets with 
high transaction costs relative to other markets.\67\ We believe swing 
pricing is an important and effective tool for dynamically addressing 
such dilution by recognizing that costs associated with shareholder 
purchases and redemptions rise as net flows increase and liquidity and 
transaction costs grow.
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    \67\ Based on an analysis of fund prospectuses, approximately 
551 open-end funds (or around 4.6% of funds) state that they apply 
redemption fees under certain circumstances for at least one share 
class of the fund. Approximately 3.3% of fund classes have a 
redemption fee, or 0.6% of net fund assets.
---------------------------------------------------------------------------

    In addition to proposing mandatory swing pricing, we are proposing 
to amend the swing pricing framework in rule 22c-1 to apply lessons 
learned from March 2020, including information about the European 
experience with swing pricing during that period. Specifically, we 
propose to amend both when and how a fund would adjust its NAV, which 
would vary depending on whether a fund has net purchases or net 
redemptions. Rather than require funds to determine their own swing 
thresholds, we propose to specify the amount of net inflows or net 
outflows that would trigger a pricing adjustment in the rule, informed 
by an analysis of historical flow amounts.
    In addition, we propose a specific method of calculating the swing 
factor price adjustment, which would require a fund to make good faith 
estimates of the transaction costs of selling or purchasing a pro rata 
amount of its portfolio investments (or a ``vertical slice'') to 
satisfy that day's redemptions or to invest the proceeds from that 
day's purchases. Under the proposal, a fund would be required to apply 
a swing factor on any day it has net redemptions. When net redemptions 
exceed 1% of net assets, the swing factor would also account for market 
impacts of selling a vertical slice of the portfolio to capture the 
dilutive effect of trading in response to large outflows better. We 
believe trading in response to small levels of net inflows is less 
likely to have a dilutive effect than trading in response to net 
outflows and, as a result, we propose to require a fund to apply a 
swing factor for net purchases only if net purchases exceed 2% of net 
assets. In addition, we propose to remove the 2% swing factor upper 
limit from the current rule because we are proposing a more specific 
framework for determining swing factors, some European funds used swing 
factors above 2% in order to mitigate dilution in March 2020, and we 
received requests for emergency relief in the United States during this 
period to allow funds to charge redemptions fees exceeding 2% to 
mitigate dilution. The proposed swing pricing amendments are designed 
to reduce the dilution of an investor's interest in a fund that is 
caused by the redemption or purchase activity of other investors in the 
fund and to fairly allocate the costs associated with redemption and 
purchase activity. These amendments also may reduce potential first-
mover advantages that might incentivize early redemptions to avoid 
anticipated trading costs and dilution associated with other investors' 
redemptions.
    To operationalize the proposed swing pricing requirement and 
provide other benefits, we are also proposing to amend rule 22c-1 to 
require that the fund, its transfer agent, or a registered clearing 
agency receive purchase and redemption orders by an established cut-off 
time to receive a given day's price (a ``hard close''). Specifically, 
for an order to be eligible to receive a day's price, these designated 
parties would have to receive the order before the pricing time, which 
is typically 4 p.m. ET. The proposed hard close would facilitate the 
receipt of timely flow information to inform swing pricing decisions. 
In addition, we believe it would help prevent late trading and reduce 
operational risk.
    To promote transparency related to fund liquidity and use of swing 
pricing, we are proposing amendments to Form N-PORT to require funds to 
report their aggregate liquidity classifications publicly, as well as 
the frequency and amount of swing pricing adjustments. With respect to 
liquidity disclosure, this amendment is designed to provide investors 
with meaningful information about fund liquidity, taking into account 
that our proposed amendments to the liquidity classification framework 
should result in more objective and comparable liquidity 
classifications across funds.\68\ As for the proposed swing pricing 
reporting requirements, we believe the proposed frequency and size 
information would allow investors to better understand the operation 
and effects of swing pricing.
---------------------------------------------------------------------------

    \68\ In certain cases, investors consume reported information 
indirectly through other data users. These other data users can 
include, for example, regulators such as the Commission, fund 
analysts, and third-party data providers. Throughout this release, 
references to consumption of information by investors include 
indirect consumption by investors enabled by other data users.
---------------------------------------------------------------------------

    We also propose broader changes to Form N-PORT to require all 
registered investment companies that report on the form, which include 
open-end funds (other than money-market funds), registered closed-end 
funds, and ETFs registered as unit investment trusts, to file monthly 
reports with the Commission within 30 days of month-end. These monthly 
reports would subsequently be publicly available 60 days after month-
end. These proposed amendments would require filers to provide the 
Commission with more timely information and would provide investors 
with access to monthly rather than quarterly information. We observed 
in March 2020 that timely and full disclosure can be particularly 
important

[[Page 77185]]

during and immediately after stress events. Finally, we propose 
amendments to Forms N-PORT, N-CEN, and N-1A to, among other things, 
conform to our other proposed amendments and to improve entity 
identifiers.
    Taken together, these proposed amendments are designed to provide 
investors with increased protection regarding how liquidity in their 
funds is managed, thereby reducing the risk that funds will be unable 
to meet redemptions and mitigating dilution of the interests of fund 
shareholders. These reforms also are intended to give investors 
information to make more informed investment decisions, and to give the 
Commission more timely information to conduct comprehensive oversight 
of an ever-evolving fund industry.

II. Discussion

A. Amendments Concerning Funds' Liquidity Risk Management Programs

1. Amendments to the Classification Framework
    Rule 22e-4 currently requires a fund to classify each portfolio 
investment based on the number of days within which it reasonably 
expects the investment would be convertible to cash, sold or disposed 
of, without significantly changing its market value.\69\ Under this 
framework, funds must, using information obtained after reasonable 
inquiry and taking into account relevant market, trading, and 
investment-specific considerations, classify each portfolio investment 
into one of four liquidity classifications: highly liquid, moderately 
liquid, less liquid, and illiquid.\70\ A fund may generally classify 
and review its investments by asset class unless the fund or adviser 
has information about any market, trading, and investment-specific 
considerations that it reasonably expects to significantly affect the 
liquidity characteristics of an investment compared to the fund's other 
portfolio holdings within that asset class.\71\ In classifying its 
investments, a fund must analyze the number of days that it reasonably 
expects it would take to sell, or convert to cash, portions of a 
position in a particular investment or asset class that the fund would 
reasonably anticipate trading (the ``reasonably anticipated trade 
size'') without significantly changing its market value (``value 
impact'').\72\ A fund must review its liquidity classifications at 
least monthly in connection with reporting the liquidity classification 
for each investment on Form N-PORT, and more frequently if changes in 
relevant market, trading, and investment-specific considerations are 
reasonably expected to materially affect one or more of its 
investments' classifications.\73\
---------------------------------------------------------------------------

    \69\ In-kind ETFs are included when we refer to ``funds'' or 
``open-end funds'' throughout this release when discussing rule 22e-
4, except in the sections discussing classifying the liquidity of a 
fund's investments and the highly liquid investment minimum 
requirement, from which in-kind ETFs are excepted. See proposed rule 
22e-4(a) (defining ``in-kind ETF'' as an ETF that meets redemptions 
through in-kind transfers of securities, positions, and assets other 
than a de minimis amount of U.S. dollars and that publishes its 
portfolio holdings daily); see also rule 22e-4(b)(1)(ii) and 22e-
4(b)(1)(iii). In-kind ETFs do not present the same kind of liquidity 
risks as other funds because the redeeming shareholder typically 
bears the direct costs associated with its liquidity needs. See 
Liquidity Rule Adopting Release, supra note 8, at paragraphs 
accompanying n.842.
    \70\ See rule 22e-4(b)(1)(ii).
    \71\ See rule 22e-4(b)(1)(ii)(A).
    \72\ See rule 22e-4(b)(1)(ii)(B) (requiring a fund to determine 
whether trading varying portions of a position in sizes that the 
fund would reasonably anticipate trading is reasonably expected to 
significantly affect its liquidity). The definition of each 
liquidity category sets out the number of days in which a fund 
reasonably expects to sell, or convert to cash, an investment 
without significantly changing its market value. See rule 22e-
4(a)(6), rule 22e-4(a)(8), rule 22e-4(a)(10), and rule 22e-4(a)(12).
    \73\ See rule 22e-4(b)(1)(ii).
---------------------------------------------------------------------------

    The liquidity classifications are integral to rule 22e-4. Among 
other things, these classifications help a fund monitor its liquidity, 
including compliance with the fund's highly liquid investment minimum 
and the 15% limit on illiquid investments.\74\ The fund's 
classifications also provide liquidity information to the Commission 
and, under our proposal, to the public.
---------------------------------------------------------------------------

    \74\ See rule 22e-4(b)(1)(iii) and rule 22e-4(b)(1)(iv).
---------------------------------------------------------------------------

    The current rule allows funds considerable discretion in how funds 
determine the classification of investments.\75\ Funds may choose which 
investments to classify individually or by asset class, with the 
composition of asset classes determined by the fund. Funds also may use 
different reasonably anticipated trade sizes and have different 
standards for evaluating value impact. Through staff outreach, we 
observed that funds had varied approaches in their classifications 
processes. The proposed amendments to the liquidity classifications are 
intended to better prepare funds for future stressed conditions. For 
example, the reasonably expected trade sizes and value impact standards 
some funds and liquidity classification vendors used tended to over-
estimate a fund's liquidity in March 2020 because they considered 
relatively smaller trade sizes or used value impact methodologies with 
longer lookback periods.
---------------------------------------------------------------------------

    \75\ See Liquidity Rule Adopting Release, supra note 8, at n.163 
and accompanying text (stating that the primary goals of the 
liquidity rule program requirements were to reduce the risk that 
funds would be unable to meet redemption and other legal 
obligations, minimize dilution, and elevate the overall quality of 
liquidity risk management across the fund industry while at the same 
time providing funds with reasonable flexibility to adopt policies 
and procedures that would be most appropriate to assess and manage 
their liquidity risk).
---------------------------------------------------------------------------

    Based on our observations from March 2020 and our review of funds' 
liquidity risk management practices and classifications, we are 
proposing amendments to the classification framework. The proposed 
amendments would provide additional standards for making liquidity 
determinations, amend certain aspects of the liquidity categories, and 
require more frequent liquidity classifications. Specifically, we 
propose to provide objective minimum standards that funds would use to 
classify investments, including by: (1) requiring funds to assume the 
sale of a set stressed trade size, rather than the rule's current 
approach of assuming the sale of a reasonably anticipated trade size in 
current market conditions; and (2) defining the value impact standard 
with more specificity on when a sale or disposition would significantly 
change the market value of an investment. We also propose to remove 
classification by asset class. These proposed amendments are designed 
to improve the quality of classifications by preventing funds from 
over-estimating the liquidity of their investments, including in times 
of stress, and to provide classification standards that are consistent 
with more effective practices the staff has observed. In addition, a 
more objective and comparable framework for how funds classify the 
liquidity of their investments would enhance the Commission's ability 
to analyze trends across funds' classifications and establish the 
groundwork for classification information that investors could use to 
analyze and compare funds.
    We also propose to remove the less liquid investment category, 
which would reduce the number of liquidity categories from four to 
three, and expand the scope of the illiquid investment category. We 
believe these changes would reduce the risk of a fund not being able to 
meet shareholder redemptions. Finally, we propose to require daily 
classifications, which we believe would promote better monitoring by 
liquidity risk program administrators of a fund's liquidity and an 
ability to more rapidly understand

[[Page 77186]]

and respond to changes that affect the liquidity of the fund's 
portfolio.\76\
---------------------------------------------------------------------------

    \76\ See rule 22e-4(a)(13) (defining ``person(s) designated to 
administer the program'', in part, as the investment adviser, 
officer, or officers responsible for administrating the program).
---------------------------------------------------------------------------

    Table 1 sets forth the primary proposed changes to the rule's 
liquidity classification framework, which are described in more detail 
below.

       Table 1--Proposed Changes to the Liquidity Classifications
------------------------------------------------------------------------
  Liquidity classifications
      and related terms        Current rule 22e-4    Proposed rule 22e-4
------------------------------------------------------------------------
                               Definitions
------------------------------------------------------------------------
Highly Liquid Investment....  Any cash held by a    Any U.S. dollars
                               fund and any          held by a fund and
                               investment that the   any investment that
                               fund reasonably       the fund reasonably
                               expects to be         expects to be
                               convertible into      convertible to U.S.
                               cash in current       dollars in current
                               market conditions     market conditions
                               in three business     in three business
                               days or less          days or less
                               without the           without
                               conversion to cash    significantly
                               significantly         changing the market
                               changing the market   value of the
                               value of the          investment.
                               investment.
Moderately Liquid Investment  Any investment that   Any investment that
                               the fund reasonably   is neither a highly
                               expects to be         liquid investment
                               convertible into      nor an illiquid
                               cash in current       investment.
                               market conditions
                               in more than three
                               calendar days but
                               in seven calendar
                               days or less,
                               without the
                               conversion to cash
                               significantly
                               changing the market
                               value of the
                               investment.
Less Liquid Investment......  Any investment that   Removed.
                               the fund reasonably
                               expects to be able
                               to sell or dispose
                               of in current
                               market conditions
                               in seven calendar
                               days or less
                               without the sale or
                               disposition
                               significantly
                               changing the market
                               value of the
                               investment, but
                               where the sale or
                               disposition is
                               reasonably expected
                               to settle in more
                               than seven calendar
                               days.
Illiquid Investment.........  Any investment that   Any investment that
                               the fund reasonably   the fund reasonably
                               expects cannot be     expects not to be
                               sold or disposed of   convertible to U.S.
                               in current market     dollars in current
                               conditions in seven   market conditions
                               calendar days or      in seven calendar
                               less without the      days or less
                               sale or disposition   without
                               significantly         significantly
                               changing the market   changing the market
                               value of the          value of the
                               investment.           investment and any
                                                     investment whose
                                                     fair value is
                                                     measured using an
                                                     unobservable input
                                                     that is significant
                                                     to the overall
                                                     measurement.
Convertible to Cash/U.S       The ability to be     The ability to be
 Dollars.                      sold, with the sale   sold or disposed
                               settled.              of, with the sale
                                                     or disposition
                                                     settled in U.S.
                                                     dollars.
------------------------------------------------------------------------
                            Related Concepts
------------------------------------------------------------------------
Assumed Trade Size..........  Sizes that the fund   10% of the fund's
                               would reasonably      net assets by
                               anticipate trading.   reducing each
                                                     investment by 10%.
Value Impact Standard.......  Significantly         Significantly
                               changing the market   changing the market
                               value of the          value of an
                               investment.           investment means:
                                                    (1) For shares
                                                     listed on a
                                                     national securities
                                                     exchange or a
                                                     foreign exchange,
                                                     any sale or
                                                     disposition of more
                                                     than 20% of average
                                                     daily trading
                                                     volume of those
                                                     shares, as measured
                                                     over the preceding
                                                     20 business days.
                                                    (2) For any other
                                                     investment, any
                                                     sale or disposition
                                                     that the fund
                                                     reasonably expects
                                                     would result in a
                                                     decrease in sale
                                                     price of more than
                                                     1%.
------------------------------------------------------------------------

a. Stressed Trade Size and Significant Changes in Market Value
i. Replacing Reasonably Anticipated Trade Size With Stressed Trade Size
    Currently, when a fund makes liquidity classifications under rule 
22e-4, it must determine whether trading varying portions of a position 
in a particular portfolio investment or asset class, in sizes that the 
fund would reasonably anticipate trading, is reasonably expected to 
significantly affect its liquidity.\77\ This determination of a 
reasonably anticipated trade size helps a fund analyze market depth. 
For example, if a fund anticipates trading a large investment position 
relative to the market's total trading volume, the size of the trade 
might affect liquidity and price.\78\
---------------------------------------------------------------------------

    \77\ See rule 22e-4(b)(1)(ii)(B).
    \78\ See Liquidity Rule Adopting Release, supra note 8, at 
paragraphs accompanying n.440 and n.450.
---------------------------------------------------------------------------

    Using a small reasonably anticipated trade size to analyze market 
depth leads to a more liquid classification, as a smaller position can 
be sold more quickly without significantly affecting the investment's 
liquidity than a larger position. In contrast, using a larger 
reasonably anticipated trade size would often lead to less liquid 
classifications. Under the current rule, a fund may determine its own 
reasonably anticipated trade size, and we have observed wide variation 
in practice.\79\ From staff outreach, we observed that funds may 
consider a variety of different factors, such as their flow history, 
flow trends of other similar funds, and shareholder makeup and 
concentration,

[[Page 77187]]

and a fund may weigh the importance of those factors differently to 
determine what it would reasonably anticipate trading. We believe that 
using a reasonably anticipated trade size based on these, or a subset 
of these factors, may not help funds prepare for future stressed 
conditions. Even if a fund increased its reasonably anticipated trade 
size during periods of stress, the resulting adjustments in the fund's 
liquidity risk management may be too late to help the fund prepare for 
the stressed environment and, thus, may have limited utility.
---------------------------------------------------------------------------

    \79\ See SEC staff Investment Company Liquidity Risk Management 
Programs Frequently Asked Questions (Apr. 10, 2019) (``Liquidity 
FAQs''), available at https://www.sec.gov/investment/investment-company-liquidity-risk-management-programs-faq for discussion of 
factors funds may consider in determining reasonably anticipated 
trading size. The Commission has observed that many funds have set 
reasonably anticipated trade size values at 3%. Others have set 
values of below 3% and up to 100%, signifying wide variation.
---------------------------------------------------------------------------

    In response to the variability in funds' reasonably anticipated 
trade sizes and the potential ineffectiveness of small trade sizes in 
helping a fund prepare for stress, we propose to require funds to 
assume the sale of a set stressed trade size. Specifically, for a fund 
to determine the liquidity classification of each investment, we 
propose that it must measure the number of days in which the investment 
is reasonably expected to be convertible to U.S. dollars without 
significantly changing the market value of the investment, while 
assuming the sale of 10% of the fund's net assets by reducing each 
investment by 10%.\80\ The proposed stressed trade size may result in 
funds classifying fewer investments as highly liquid, and may increase 
the number of investments that are subject to the 15% limit on illiquid 
investments. These changes, in turn, may lead some funds to rebalance 
their portfolio holdings to comply with the proposed changes, which 
could negatively affect the performance of these funds. However, a lack 
of preparation for higher than normal redemptions also can negatively 
affect fund performance when such redemptions occur.\81\ We believe 
that requiring a fund's classification model to assume the sale of 
larger-than-typical position sizes would better emulate the potential 
effects of stress on the fund's portfolio, similar to an ongoing stress 
test, and help better prepare a fund for future stress or other periods 
where the fund faces higher than typical redemptions.
---------------------------------------------------------------------------

    \80\ The liquidity classifications define the number of days as 
business days for highly liquid investments or calendar days for 
illiquid investments. See Table 1. See also rule 22e-4(a)(2) 
(defining ``business day'' to exclude customary business holidays).
    \81\ See Liquidity Rule Adopting Release, supra note 8, at 
paragraphs accompanying nn.109 and 110 (stating that staff had 
observed that some funds with more thorough liquidity risk 
management practices appeared to be able to better meet periods of 
higher than typical redemptions without significantly altering their 
risk profile or materially affecting their performance, while some 
funds with substantially less rigorous liquidity risk management 
practices experienced particularly poor performance compared with 
their benchmark when faced with higher than normal redemptions).
---------------------------------------------------------------------------

    Based on an analysis of weekly flows of equity and fixed-income 
funds over a period of more than ten years, outflows greater than 6.6% 
occurred 1% of the time in a pooled sample across weeks and funds.\82\ 
Based on this analysis, we estimate that a random fund in a random week 
has approximately a 0.5% chance of experiencing redemptions in excess 
of the 10% stressed trade size, and there were 3.4% of weeks where more 
than 1% of funds experienced net redemptions exceeding the proposed 
stressed trade size. We believe that weekly outflows at the 99th 
percentile is a useful approximation of the level of outflows funds may 
experience in future stressed conditions.\83\ However, because it is 
difficult to predict future stress events, including the effect and 
length of such events--particularly without official sector 
interventions--we believe it is appropriate to require funds to use a 
stressed trade size amount of 10%, which is moderately higher than the 
6.6% weekly outflow figure discussed above. We also considered, during 
this same historical period, equity and fixed-income funds had weekly 
inflows of greater than 8% for 1% of the time in a pooled sample across 
weeks and funds. In addition, large, concentrated inflows have the 
possibility of translating to similarly large outflows. For example, if 
the large inflows are the result of investment by an institutional 
investor or a fund's inclusion in a model portfolio, the fund may 
experience similarly large outflows if the investor mandate changes or 
if the fund is removed from the model portfolio.
---------------------------------------------------------------------------

    \82\ Based on an analysis of historical Morningstar weekly fund 
flow data for equity and fixed income funds from 2009 through 2021. 
See infra sections III.B.4.a and III.C.1.a.i (providing additional 
equity and fixed income flow data and discussing this analysis in 
more detail). While some Morningstar data is available for 2008, we 
have not included that data in our historical flow analyses in this 
release because of gaps in the 2008 data (e.g., the 2008 dataset 
covers a more limited set of funds). Other available flow 
information for 2008, such as from the ICI Fact Book, is not 
granular enough for purposes of our analyses.
    \83\ We believe weekly outflows is a better proxy for the 
stressed trade size than daily outflows because stressed conditions 
may take some time to fully present in flows and often result in 
outflows that continue over several days or more.
---------------------------------------------------------------------------

    Under the proposed approach, a fund would apply its stressed trade 
size to each investment to determine its liquidity classifications. We 
have observed that funds generally determine and apply a reasonably 
anticipated trade size to each investment or asset class currently 
(commonly referred to as pro rata or vertical slice methods). We have 
also observed, however, that some funds have applied the reasonably 
anticipated trade size in such a manner that the trading would be 
satisfied largely by selling the fund's most liquid investments, 
resulting in smaller assumed trade sizes for purposes of classifying 
the fund's less liquid investments.\84\ As recognized above, small 
assumed sale sizes can result in more liquid classifications generally, 
as sales of small amounts are less likely to affect the market value of 
the investment significantly and typically can be converted to U.S. 
dollars more quickly. We are particularly concerned that use of small 
assumed sale sizes for non-highly liquid investments can overstate the 
liquidity of these investments and reduce the effectiveness of a fund's 
liquidity risk management program when a fund needs to sell a larger-
than-assumed portion to meet redemptions under stressed conditions or 
for any other portfolio management reason. Requiring funds to apply the 
10% stressed trade size to each investment would better prepare funds 
to manage their liquidity in stressed conditions, when a fund may be 
required to sell positions that are larger than the assumed sale sizes 
some funds are using currently. The amendments to replace the 
determination of a reasonably anticipated trade size with a stressed 
trade size are designed to enhance a fund's preparation for stressed 
conditions, including the potential for sizeable outflows.
---------------------------------------------------------------------------

    \84\ See Liquidity Rule Adopting Release, supra note 8, at 
paragraph accompanying n.1084. We do not suggest that a fund should 
only, or primarily, use its most liquid investments to meet 
shareholder redemptions. See id., at n.661 and accompanying 
paragraph.
---------------------------------------------------------------------------

    We request comment on the proposed requirement for funds to apply a 
stressed trade size to each investment in their liquidity 
classification determinations:
    1. Should we require funds to use a stressed trade size, as 
proposed? Would the change from reasonably anticipated trade size to 
stressed trade size materially change the proportion of investments 
classified in a given liquidity category? If yes, how? Would the 
proposed stressed trade size affect certain types of funds more than 
others? Would the proposed stressed trade size be likely to overstate 
or understate liquidity?
    2. Is the proposed stressed trade size of 10% appropriate? If not, 
what minimum trade size would be appropriate and why? For example, 
should we increase or decrease the stressed trade size to, for example, 
15% or 5% or some other threshold? Is there

[[Page 77188]]

other data that should factor into setting the stressed trade size?
    3. Should the stressed trade size vary for different types of funds 
and, if so, how? For instance, should the stressed trade size be a 
function of the fund's flow history, such as the 99th percentile 
highest week of the fund's absolute or net flows over a given period 
(e.g., 3 years, 5 years, 10 years, or the life of the fund)? Should the 
stressed trade size be the higher of a specified value applied to each 
investment or the 99th percentile highest week of absolute flows?
    4. Should the method of applying the stressed trade size to each 
investment vary for different types of funds and, if so, how? Are there 
types of investments that should be excluded or use a different 
stressed trade size? Are there other, more appropriate methods of 
applying a stressed trade size across different type of investments and 
portfolios?
    5. Instead of establishing a set stressed trade size, should we set 
a minimum stressed trade size and provide factors for determining if a 
fund should have a higher stressed trade size? If so, what factors 
should funds consider in setting their stressed trade size?
ii. Determining a Significant Change to Market Value
    Currently, when a fund makes liquidity classifications under rule 
22e-4, it must analyze whether a sale or disposition would 
significantly change the market value of the investment. In the 
adopting release for rule 22e-4, the Commission explained that this 
value impact analysis captures the risk of a fund only being able to 
meet redemption requests in a manner that significantly dilutes the 
non-redeeming shareholders.\85\ The Commission established the value 
impact standard to capture the risk of dilution in cases of inadequate 
liquidity, while not requiring funds to account for every possible 
value movement.\86\ We propose to establish a minimum value impact 
standard that defines more specifically what constitutes a significant 
change in market value.\87\ We believe the proposed change would 
improve the quality of funds' liquidity classifications by preventing 
funds from over-estimating the liquidity of their investments and would 
improve comparability of funds' liquidity classifications. In addition, 
the proposed approach is consistent with more effective practices we 
have observed from some funds and liquidity classification vendors, as 
discussed below.
---------------------------------------------------------------------------

    \85\ See Liquidity Rule Adopting Release, supra note 8, at 
paragraph accompanying n.334.
    \86\ See id., at paragraph accompanying n.339.
    \87\ See proposed rule 22e-4(a) (definition of ``Significantly 
changing the market value of an investment'').
---------------------------------------------------------------------------

    Under the current rule, a fund may determine value impact in a 
variety of ways, depending on the type of asset, or vendor, model, or 
system used. There also is variation in the depth and sophistication of 
funds' analyses. We believe the variation in how a fund may determine 
value impact leads to differences in the quality of funds' 
classifications, limits comparability of funds' classifications across 
the same or similar investments, and may cause funds to over-estimate 
the liquidity of their investments.
    The proposed definition of a significant change in market value 
would require a fund to consider the size of the sale relative to the 
depth of the market for the instrument.\88\ This would vary depending 
on the type of investment. For shares listed on a national securities 
exchange or a foreign exchange, we believe selling or disposing of more 
than 20% of the security's average daily trading volume would indicate 
a level of market participation that is significant.\89\ We understand 
that if a fund sold more than 20% of the average daily trading volume 
of a listed equity security, such a large sale is likely to result in a 
significant change in the security's market value, which would dilute 
remaining investors in the fund. We have observed that a standard based 
on average daily trading volume is consistent with practices many funds 
and vendors apply for assessing value impact for listed equity 
investments today.\90\ To determine average daily trading volume, we 
propose to require funds to measure the average daily trading volume 
over the preceding 20 business days. We believe using a period of 20 
business days provides an appropriate measure of daily trading volume, 
which would reflect current market conditions as well as consider a 
period of recent market history. The 20 business day period is intended 
to strike a balance between longer periods that are less reflective of 
current conditions and shorter periods that can be skewed easily by an 
abnormally high or low volume day. For purposes of measuring average 
daily trading volume, the preceding 20 business days include those days 
where U.S. markets are open but where one or more international markets 
are closed, such as ``Golden Week,'' a week in Japan including multiple 
Japanese public holidays. A fund would count these and any other 
trading days where shares were not traded as zero volume days for the 
relevant investment.
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    \88\ The proposed rule would continue to provide that an 
investment's classification is based on a fund's reasonable 
expectations in current market conditions. See Liquidity Rule 
Adopting Release, supra note 8, at section III.C.1.d (discussing 
comments and suggestions on the consideration of market conditions). 
Thus, a fund would be able to rely on its reasonable expectations at 
the time it makes the value impact assessment. Although we are 
proposing to require funds to assume an element of stressed 
conditions in their liquidity classifications through the stressed 
trade size, a broader requirement to predict how an investment may 
trade in stressed market conditions would introduce additional 
variables into the classification process that could increase the 
risk of misclassifications and decrease the data quality of funds' 
liquidity-related reporting and disclosure.
    \89\ Under this proposal, the sale or disposition must be below 
20% of the security's average daily trading volume. A fund may 
choose to impose a stricter limitation of any percentage under 20%, 
for example, 15% of average daily trading volume.
    \90\ Through staff outreach, we observed many funds using some 
percent of average daily trading volume (e.g., 15%, 20%, or 25%) 
that the fund's investment can represent if it wants to be able to 
sell into daily volume without affecting market prices. In practice, 
this meant funds would estimate the number of days it would take to 
sell or dispose of the reasonably anticipated trade size without 
approaching the set percentage of average daily trading volume to 
avoid impacting the value significantly. We observed funds 
calculating the average daily trading volume taking into account 
different sources, and for different time periods, ranging from 10 
days to 6 months.
---------------------------------------------------------------------------

    For any investments other than shares listed on a national 
securities exchange or a foreign exchange, such as fixed-income 
securities and derivatives, we propose to define a significant change 
in market value as any sale or disposition that a fund reasonably 
expects would result in a decrease in sale price of more than 1%. Funds 
currently use a variety of methods to determine significant changes in 
market value in fixed-income securities, taking into account different 
groups of comparable securities, asset class characteristics and 
volatility, number and depth of market makers, bid-offer spread size, 
volume of the security or similar securities, and elasticity of prices 
in the security or similar securities. For purposes of the proposed 
rule, a decrease of more than 1% would indicate a level of value impact 
that is significant because the fund is selling or disposing of a 
relatively large position or because the market for the investment has 
constricted, and bid-ask spreads have widened. We also understand that 
several commonly employed liquidity models currently use this price 
decrease measure. We acknowledge that not all liquidity models specify 
a price decrease explicitly as the determination for a significant 
change in market value and some funds would have to make changes to 
convert to this more

[[Page 77189]]

objective threshold. The proposed value impact standard would improve 
funds' abilities to perform quality checks and back testing and would 
allow the Commission to better analyze classification data across 
funds.
    In considering whether a sale is reasonably expected to result in a 
price decrease of more than 1%, the fund would be required to consider 
the size of the sale relative to the depth of the market for the 
instrument. As part of that analysis, we believe a fund generally 
should consider, among other things, the width of bid-offer spreads. 
This is because the width of bid-offer spreads is an important 
consideration in analyzing the costs of selling a security and thus 
whether a sale would result in a price decrease exceeding 1%. For 
example, a sale would be more likely to result in a price decline of 
more than 1% if the trade size is large in relation to the market for 
that instrument or if bid-ask spreads are wide, or if both are the 
case. Wide, or widening, bid-ask spreads may indicate a lower level of 
demand for the instrument, which makes it more likely that a sale of 
the instrument would result in a price decline of more than 1%.
    We request comment on our proposed definition of significant change 
in market value:
    6. Would funds have to make significant changes to their liquidity 
classification methodologies to reflect the proposed amendments to the 
value impact standard? If so, what effect would those changes have on a 
fund's liquidity risk management program?
    7. Should we define value impact through average daily trading 
volume or price decline, as proposed? Should we use a different 
definition of value impact instead, and if so, should it depend on the 
type of investment? Should different types of funds have different 
value impact standards? If yes, what standards, and for what types of 
funds?
    8. For shares listed on a national securities exchange or a foreign 
exchange, should we define a significant change in market value as 
selling or disposing of more than 20% of the average daily trading 
volume, as proposed? Are there other types of investments for which an 
average daily trading volume test would be appropriate? For example, is 
there data available for fixed-income securities that funds could use 
objectively to analyze market participation under a value impact 
standard?
    9. Should the percent of average daily trading volume be higher or 
lower (e.g., 15% or 25%)? Should the measurement period for the average 
daily trading volume be longer or shorter than the proposed 20 business 
days (e.g., 10, 30, or 40 business days)? Should days where shares were 
not traded be counted as zero volume days as proposed or in some other 
manner? Are there circumstances in which the average daily trading 
volume test should vary by instrument, type of instrument, or trading 
venue?
    10. For investments that are not listed on a national securities 
exchange or foreign exchange, should we define a significant change in 
market value as any sale or disposition that the fund reasonably 
expects would result in a price decline of more than 1%, as proposed? 
Should the identified percentage be higher or lower (e.g., 0.5% or 2%)? 
Should this standard for determining a significant change in market 
value apply to all investments? Would funds need additional guidance or 
parameters to measure this standard consistently, including what inputs 
or comparable investments may be used in determining the price decline?
    11. Should the 1% price decline definition of value impact be 
applied against the fund's last valuation of an investment, which would 
include both the effect of the fund's sale and market moves?
iii. Removing Asset Class Classification
    Under current rule 22e-4, a fund may generally classify and review 
its portfolio investments (including the fund's derivatives 
transactions) according to their asset class. However, a fund must 
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.\91\ The current provision was intended to strike a balance 
between reducing operational burdens associated with classification and 
providing reasonably precise liquidity classifications that 
appropriately reflect investments' liquidity characteristics.\92\ The 
burden to determine individual investment classifications may have 
decreased since the adoption of the rule for many funds as these funds 
became more familiar with and developed their liquidity risk management 
programs and, in some cases, developed automated processes for 
classifying investments or employed sophisticated liquidity 
classification vendors that provide economies of scale. In addition, in 
practice there may be weaknesses in asset class level classifications 
that may result in a lack of reasonably precise classifications. 
Therefore, we propose to remove the asset class method of 
classification from the rule.
---------------------------------------------------------------------------

    \91\ See rule 22e-4(b)(1)(ii)(A).
    \92\ See Liquidity Rule Adopting Release, supra note 8, at 
section III.C.3.a. The current approach was also intended to 
leverage fund managers' current practices and to recognize that many 
investments within an asset class may be considered interchangeable 
from a liquidity perspective.
---------------------------------------------------------------------------

    Through outreach, we understand that asset class level 
classifications are not widely used by many funds. But, where these 
asset class level classifications are used, this method runs the risk 
of over-estimating the liquidity of a fund's investments and not 
adjusting quickly in times of stress. After a fund has begun to use 
asset class level classifications, and particularly if classifications 
are reviewed only on a monthly basis, it might be difficult for a fund 
to identify instances where a given investment's liquidity 
characteristics do not align with the characteristics of other 
investments in the asset class because individual investment liquidity 
data is not being collected and analyzed. Through outreach, we observed 
that funds generally established a process and timing for liquidity 
assessments and did not change those processes or timing as market 
conditions changed, and particularly were unlikely to do so under 
stressed conditions. For example, during a stress event like March 
2020, a fund using asset class level classifications may not be 
equipped to re-classify a subset of investments in an asset class 
adeptly in response to changing conditions that affect those 
investments directly. Also, because funds classify a significant 
portion of their holdings as highly liquid, we believe this potential 
gap in identifying investments that a fund should classify differently 
from other investments in the asset class is more likely to over-
estimate, rather than under-estimate, the liquidity of a fund's 
investments. These tendencies run counter to the premise of the current 
rule's classification system, which presumed that a fund would use 
efficiencies such as asset class level classifications and monthly 
review of classifications only when market conditions or other factors 
did not indicate that a shift to a more granular or frequent 
classification is appropriate.\93\ Therefore, we are

[[Page 77190]]

proposing to remove asset class level classifications to provide more 
precise liquidity classifications that appropriately reflect 
investments' liquidity characteristics.
---------------------------------------------------------------------------

    \93\ See rule 22e-4(b)(1)(ii) (identifying the circumstances in 
which a fund must review its portfolio investments' classifications 
more frequently than monthly); rule 22e-4(b)(1)(ii)(A) (identifying 
the circumstances in which a fund must separately classify and 
review an investment within an asset class instead of classifying 
according to the investment's asset class).
---------------------------------------------------------------------------

    Moreover, asset class level classifications are not compatible with 
the other changes we are proposing to the classification framework, 
including the proposed definitions of the value impact standard. It 
would also be difficult for a fund to meaningfully apply at the asset 
class level a standard based on average daily trading volume or a price 
decline in a given investment because the average trading volume, or 
market depth generally, can vary from investment to investment even 
within the same asset class. Classifying each investment separately 
therefore allows a more precise assessment of that investment's 
liquidity. In addition, because the proposed rule would include 
specific minimum standards for classifying investments, it may reduce 
burdens of classifying investments while improving the quality of 
classifications relative to the current rule, consistent with the 
Commission's objectives in originally allowing asset class level 
classifications. Finally, staff has observed through outreach that 
liquidity risk management programs have developed so that specific and 
individual portfolio investment liquidity classifications are widely 
used and the removal of asset class level classifications is consistent 
with that approach.
    We request comment on the proposed removal of the provision 
permitting funds to classify the liquidity of their investments by 
asset class.
    12. Should we preserve the ability of funds to use asset classes 
for liquidity determinations, as currently permitted? To what extent do 
funds currently rely on the provision allowing liquidity 
classifications by asset class? Would it be more or less burdensome for 
funds to classify investments individually under the proposal's 
specific minimum standards (such as the stressed trade size and the 
defining the value impact standard) than to separately classify any 
investment within an asset class whenever the fund or its adviser has 
market, trading, or investment-specific information indicating that the 
investment should be classified separately rather than as part of the 
relevant asset class?
    13. Would the operational burden of individually classifying be 
balanced by the improved quality of data for each individual investment 
as compared to classifying by asset class? To what extent would 
investment-by-investment classifications differ compared to asset class 
level classification? Are there other benefits to removing asset class 
level classification, such as timely, useful, improved, or increased 
data?
    14. Is reliance on this provision more common for certain types of 
funds or certain asset classes? Should asset class level 
classifications be limited to specific types of funds or asset classes?
    15. If we permitted asset class level classifications, how should 
the stressed trade size and value impact standard in the proposal apply 
to asset class level classifications?
b. Amendments to Liquidity Classification Categories
    We are proposing changes to the liquidity classification categories 
to improve funds' abilities to make timely payment on shareholder 
redemptions, without the sale of portfolio investments resulting in the 
dilution of outstanding fund shares. Section 22(e) of the Act 
establishes a right of prompt redemption in open-end funds by requiring 
such funds to make payments on shareholder redemption requests within 
seven days of receiving the request. In March 2020, in connection with 
the economic shock from the onset of the COVID-19 pandemic, open-end 
funds faced a significant amount of investor redemptions, and we 
believe additional changes to rule 22e-4 would assist funds in managing 
investor redemptions in future stressed conditions.
    Rule 22e-4 currently allows funds to classify as less liquid 
investments those that the fund reasonably expects to be able to sell 
or dispose of in seven calendar days or less without significantly 
changing the market value of the investment, but that are reasonably 
expected to settle in more than seven calendar days.\94\ Under the 
current rule, an investment is classified as illiquid if it cannot be 
sold or disposed of in seven calendar days or less without 
significantly changing the market value of the investment.\95\ We 
propose to eliminate the less liquid classification category and amend 
the definition of illiquid investment to include those investments that 
a fund reasonably expects not to be convertible to U.S. dollars in 
current market conditions in seven calendar days or less without 
significantly changing the market value of the investment, as well as 
those investments whose fair value is measured using an unobservable 
input that is significant to the overall measurement.\96\ Under the 
proposal to eliminate the less liquid classification category, the rule 
would therefore have only three liquidity classifications: highly 
liquid investments, moderately liquid investments, and illiquid 
investments. We also propose to amend the term ``convertible to cash'' 
to ``convertible to U.S. dollars,'' codifying prior Commission 
statements.\97\ Finally, we propose to specify how to count the 
identified number of days an investment is convertible to U.S. dollars 
for purposes of the liquidity categories.
---------------------------------------------------------------------------

    \94\ See rule 22e-4(a)(10) (defining ``less liquid 
investment'').
    \95\ See rule 22e-4(a)(8) (defining ``illiquid investment'').
    \96\ See proposed rule 22e-4(a).
    \97\ See Liquidity Rule Adopting Release, supra note 8, at n.848 
(``Cash means cash held in U.S. dollars, and would not include, for 
example, cash equivalents or foreign currency.'').
---------------------------------------------------------------------------

i. Removing the Less Liquid Investment Category and Classifying These 
Investments as Illiquid
    We propose to eliminate the less liquid classification category and 
amend the definition of illiquid investment to include investments, in 
part, that a fund reasonably expects not to be convertible to U.S. 
dollars in seven calendar days or less without significantly changing 
the market value of the investment. Investments that funds currently 
classify as less liquid would become illiquid investments under the 
proposed amendments, absent changes to shorten the settlement time of 
many of those investments. Section 22(e) of the Act requires open-end 
funds to make payment on shareholder redemption requests within seven 
days of receiving the request. The proposed amendment to define an 
investment as illiquid if it does not settle to U.S. dollars in seven 
calendar days is designed to reduce the mismatch between the receipt of 
cash upon the sale of assets with longer settlement periods and the 
payment of shareholder redemptions. This would help prepare funds for 
future stressed conditions by reducing the risk of a fund not being 
able to meet shareholder redemptions. Unlike the current rule, the 
proposed rule would directly limit to 15% the amount of fund assets 
that are not reasonably expected to be convertible to U.S. dollars in 
seven days.
    While funds may classify different types of investments as less 
liquid investments today, the most common type of investment in this 
category is bank loans.\98\ Fund investments make

[[Page 77191]]

up approximately 15% of the bank loan market.\99\ Filings on Form N-
PORT show that over 90% of bank loan investments reported by open-end 
funds are classified as less liquid.\100\ In 2015, commenters 
addressing concerns about liquidity in the bank loan market stated that 
significant efforts were then underway to materially improve settlement 
times in the bank loan market, which are typically longer than other 
asset classes.\101\ Bank loans are not standardized and have 
individualized legal documentation. This provides flexibility of terms 
for bank loans, but also increases the time for a fund to settle a bank 
loan trade and receive proceeds from the sale, thus increasing the risk 
of the fund not being able to meet shareholder redemptions.\102\
---------------------------------------------------------------------------

    \98\ Based on Form N-PORT data, bank loans made up 77% and 60% 
of investments reported as less liquid in Feb. and Mar. 2020, 
respectively. In addition to bank loans, a smaller number of fixed-
income securities, mortgage-backed securities, and equities are 
categorized as less liquid investments.
    \99\ See Leveraged Loan Primer (last visited Oct. 4, 2022), 
available at https://pitchbook.com/leveraged-commentary-data/leveraged-loan-primer#market-size (stating that the Morningstar LSTA 
U.S. Leveraged Loan Index, which is used as a proxy for market size 
in the U.S., totaled approximately $1.375 trillion as of Feb. 2022). 
As of Dec. 2021, there are 746 open-end funds that classified 
approximately $204 billion in bank loan interests as reported on 
Form N-PORT. Using this data, we estimate that funds held 
approximately 15% of the bank loan market.
    \100\ Based on Form N-PORT data, in 2021, more than 90% of the 
gross value of loans reported by open-end funds were classified as 
less liquid. This was also the case in Feb. and Mar. 2020.
    \101\ See, e.g., Comment Letter of the Loan Syndications and 
Trading Association on 2015 Proposing Release, supra note 31, File 
No. S7-16-15, available at https://www.sec.gov/comments/s7-16-15/s71615-57.pdf (``LSTA Comment Letter'') (stating the goal of 
transforming syndicated loan settlement to a similar settlement 
period as most other asset classes).
    \102\ See id.
---------------------------------------------------------------------------

    Around the time that the Commission adopted the liquidity rule, the 
median settlement time for a loan sale was about 12 days.\103\ In the 
Liquidity Rule Adopting Release, the Commission stated that a fund may 
need to consider re-classifying an investment as illiquid in the event 
of an extended settlement period.\104\ By July 2021, the average time 
to settle a bank loan par trade in the secondary market increased to a 
then seven-year high of T+23, and the median was at T+15.\105\ While 
median settlement time for bank loans in which funds invest has 
generally increased, Form N-PORT data has not shown funds reclassifying 
these investments to take into account extended settlement times.
---------------------------------------------------------------------------

    \103\ See LSTA Comment Letter.
    \104\ See Liquidity Rule Adopting Release, supra note 8, at 
n.380 and accompanying text.
    \105\ See LSTA, Secondary Trading & Settlement: Monthly July 
Executive Summary (Aug. 19, 2021), available at https://www.lsta.org/news-resources/secondary-trading-settlement-monthly-july-executive-summary/?utm_source=rss&utm_medium=rss&utm_campaign=secondary-trading-settlement-monthly-july-executive-summary. In addition, fewer trades 
settled within T+7, (just 20% of trades settled within the LSTA 
guideline during July, a nine-percentage point reduction from the 
previous year's monthly average) and settlements wider than T+20 
increased 10-percentage points as of July 2021, to a 39% market 
share, nearly double that of the T+7 distribution.
---------------------------------------------------------------------------

    We are proposing changes to remove the less liquid investment 
classification to reduce the risk that funds that invest significantly 
in less liquid investments may not be able to meet shareholder 
redemptions. While bank loan funds were able to meet redemption 
requests during March 2020, a period of significant outflows, we are 
concerned that they may not be able to meet shareholder redemptions in 
future stressed conditions, especially as investments in this asset 
class increase. During the month of March 2020, bank loan funds 
experienced outflows of approximately 13% of assets, more than any 
other type of fund. In addition, since March 2020, total registered 
investment company investments in bank loans have increased 50% to 
approximately $200 billion.\106\ We understand that in past times of 
large outflows, the median buy-side settlement time for bank loans 
generally decreased and funds had a degree of success in effecting 
shorter settlement periods for these investments to help meet 
redemptions.\107\ We are concerned, however, that in future stress 
events these attempts to shorten settlement times may fail since loans 
are not standardized, have individualized legal documentation, and rely 
on manual processes for settlement. We also understand that funds with 
significant extended settlement investments have used borrowing through 
lines of credit to meet redemptions, but lines of credit may not be 
available to all funds and borrowing imposes costs that can dilute the 
value of the fund for remaining investors. Based on Form N-CEN filings, 
several bank loan funds have accessed their lines of credit in their 
most recent reporting period.\108\ We understand that the costs of 
borrowing have risen and credit has become more difficult to obtain 
over time.
---------------------------------------------------------------------------

    \106\ This is based on Form N-PORT information as of Jan. 31, 
2022.
    \107\ See LSTA Comment Letter (stating that settlement times 
have decreased in periods of large outflows, for example, in Aug. 
2011, when bank loan funds experienced $8 billion of outflows 
(approximately 13% of assets). Similarly, in Mar. 2020, when bank 
loan funds experienced $12 billion of outflows (approximately 13% of 
assets), we understand that settlement times also generally 
decreased.
    \108\ See infra note 459 and accompanying text (providing 
information about bank loan funds' use of lines of credit as of Dec. 
2021).
---------------------------------------------------------------------------

    We believe that investments that funds currently classify as less 
liquid should be classified as illiquid investments and be subject to 
the 15% limit on illiquid investments, so that funds may be better 
prepared to satisfy redemptions in future stressed conditions without 
delay and without significant dilution. Using Form N-PORT data, we 
estimate that approximately 200 funds during March 2020 would have had 
illiquid investments over the 15% limit if this proposed change had 
been in effect, with bank loan funds being the largest type of affected 
fund.\109\ As a result of the proposed amendments, more bank loan funds 
may contract for expedited settlement, which would involve costs. 
Alternatively, advisers with strategies that have 15% or more of assets 
in investments classified as less liquid and illiquid may change those 
strategies, close funds, or consider using a closed-end fund or other 
investment vehicle structure that is not subject to rule 22e-4. 
Further, potential additional demand for these investments could 
provide incentives to shorten the settlement cycle for bank loans more 
generally, which may reduce trading costs.\110\ We believe that these 
amendments would reduce the risk of a fund not being able to satisfy 
redemptions without diluting the interests of remaining shareholders 
while waiting for the proceeds from the sale of an investment with 
extended settlement.
---------------------------------------------------------------------------

    \109\ The number of funds is estimated by dividing the aggregate 
gross value in the relevant categories by the aggregate gross value 
reported.
    \110\ See infra section III.C.1.b.
---------------------------------------------------------------------------

ii. Additional Amendments to the Definition of Illiquid Investment
    We also propose to amend the definition of illiquid investment to 
include investments whose fair value is measured using an unobservable 
input that is significant to the overall measurement. U.S. GAAP 
establishes a fair value hierarchy that categorizes into three levels 
the inputs to valuation techniques used to measure fair value.\111\ The 
fair value measurements of investments are categorized in accordance 
with this three-level

[[Page 77192]]

hierarchy. The highest-level measurements are those developed using 
quoted, observable inputs in active markets for identical assets and 
liabilities (Level 1), such as prices for identical investments on a 
securities exchange; the lowest are those developed using unobservable 
inputs (Level 3).\112\ We acknowledge that observability is a valuation 
concept and may not always correspond to liquidity. The proposed 
amendment would require those funds not already classifying investments 
valued using unobservable inputs that are significant to the overall 
measurement as illiquid to change their classification practices and 
may change the liquidity profile for those funds under the rule to be 
less liquid. To the extent there is a liquid market for affected 
investments, this proposed amendment would cause funds to over-estimate 
the illiquidity of their portfolios. As of December 2021, 2,006 open-
end funds held investments that were valued using unobservable inputs 
that are significant to the overall measurement (Level 3 investments), 
comprising $76.3 billion, or 0.27% of all open-end fund assets.\113\ 
Among these, $16.9 billion were classified as highly liquid investments 
and $2.1 billion as moderately liquid investments.\114\ Accordingly, we 
estimate that approximately 0.07% of all open-end fund assets would be 
affected by this amendment.
---------------------------------------------------------------------------

    \111\ See FASB ASC 820-10-35-37, which sets out a fair value 
hierarchy for accounting purposes, as compared to rule 2a-5, which 
provides a framework for fund valuation practices and determining 
fair value (including applying an appropriate methodology consistent 
with the principles of FASB Accounting Standard Codification Topic 
820: Fair Value Measurement (``ASC Topic 820'')) for purposes of the 
Act. See Good Faith Determinations of Fair Value, Investment Company 
Act Release No. 34128 (Dec. 3, 2020) [86 FR 748 (Jan. 6, 2021) 
(``Valuation Adopting Release'')].
    \112\ See ASC Topic 820. U.S. GAAP requires funds to maximize 
the use of relevant observable inputs and minimize the use of 
unobservable inputs in valuing any asset or liability. In some 
cases, the inputs used to measure fair value might be categorized 
within different levels of the fair value hierarchy. In those cases, 
the fair value measurement is categorized in its entirety in the 
same level of the fair value hierarchy as the lowest level input 
that is significant to the overall measurement. See ASC 820-10-35-
16AA and 820-10-35-37A. Examples of particular assets and 
liabilities that may be measured using Level 3 inputs include long-
dated currency swaps, three-year options on exchange-traded shares, 
interest rate swaps, asset retirement obligations at initial 
recognition, and reporting units. See FASB ASC 820-10-55-22.
    \113\ See infra note 424 and accompanying paragraph. We observed 
that the investments classified as highly liquid that were Level 3 
investments primarily were mortgage-backed securities.
    \114\ We recognize that, in light of the proposed removal of the 
less liquid category, only those investments valued using 
unobservable inputs that are significant to the overall measurement 
that are classified as highly liquid or moderately liquid would be 
affected by this proposed amendment.
---------------------------------------------------------------------------

    Where an investment is valued using unobservable inputs that are 
significant to the overall measurement, this may indicate that an 
active, liquid, and visible market for the investment does not exist. 
Where there is no active, liquid, and visible market for an investment, 
there may be a corresponding risk that the fund cannot sell the 
investment in time to meet redemptions without dilution. The proposal 
defines investments whose fair value is measured using unobservable 
inputs that are significant to the overall measurement as illiquid for 
purposes of this rule, which is intended to reduce this risk. By 
classifying these investments as illiquid, the proposal would establish 
a minimum standard for classifying the liquidity of an investment, 
which is designed to provide more consistent guideposts for liquidity 
classifications.
iii. Other Amendments Related to Liquidity Classification Categories
Amendments to the Definition of Moderately Liquid Investment
    We propose to simplify the definition of moderately liquid 
investment to mean any investment that is neither a highly liquid 
investment nor an illiquid investment.\115\ The moderately liquid 
investment category would continue to provide information about the 
portion of a fund's portfolio that is not on the most liquid end of the 
spectrum, but that still is sufficiently liquid to meet redemption 
requests within the statutory seven day period.
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    \115\ We also are proposing to remove a provision that addresses 
how to classify an investment that could be viewed as either a 
highly liquid investment or a moderately liquid investment because 
the ambiguity in classification that provision addresses is no 
longer present under the proposed amendments to those 
classifications. See note to paragraph (b)(1)(ii) introductory text 
in current rule 22e-4.
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Amendments to the Definition of Convertible to Cash and References to 
Cash
    We propose to amend the term ``convertible to cash'' to 
``convertible to U.S. dollars'' and to make conforming amendments to 
the definition of this term to refer to the ability for a fund to sell 
or dispose of an investment, and for it to settle in U.S. dollars.\116\ 
These amendments codify prior Commission statements. In the adopting 
release for rule 22e-4, the Commission stated that cash means ``cash 
held in U.S. dollars, and would not include, for example, cash 
equivalents or foreign currency.'' \117\ The Commission also provided 
an example in that release in which the period of time it took to 
repatriate or convert a foreign currency to dollars factored into the 
analysis of how quickly a foreign security could convert to cash.\118\ 
Some funds are classifying foreign investments as highly liquid taking 
into account solely the time it would take to convert the proceeds of a 
sale to the foreign currency. Similarly, some funds classify foreign 
currency as highly liquid without further analysis about the time that 
would be needed to convert that currency to U.S. dollars. We believe it 
is important to view the liquidity of fund investments in terms of 
convertibility to U.S. dollars within a specified period so that a fund 
is able to satisfy redemption requests in U.S. dollars.\119\ This 
amendment is intended to promote the ability of funds to meet 
redemptions without diluting the interests of the remaining 
shareholders and increase consistency in how funds classify the 
liquidity of investments, including in foreign investments and foreign 
currencies. In addition to the definition of convertible to cash, we 
also propose to amend other references in rule 22e-4 to refer to U.S. 
dollars instead of cash for consistency and clarity.\120\
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    \116\ See proposed rule 22e-4(a) (defining ``convertible to U.S. 
dollars'' as the ability to be sold or disposed of, with the sale or 
disposition settled in U.S. dollars) (emphasis added). We also 
propose to amend the definition of convertible to U.S. dollars to 
refer to disposition of an investment, and not only sales. This is a 
conforming amendment, as current rule 22e-4 classifications 
otherwise refer to the ability to sell or dispose of an investment.
    \117\ See Liquidity Rule Adopting Release, supra note 8, at 
n.848.
    \118\ See id., at paragraph accompanying n.379 (providing an 
example where certain foreign securities may be able to be sold in 
seven calendar days or less, but may be subject to capital controls 
that would limit the extent to which the foreign currency could be 
repatriated or converted to dollars within this time frame and 
explaining that these securities would be considered to be less 
liquid investments because they would be reasonably expected to 
settle in more than seven calendar days).
    \119\ See id., at n.105 and accompanying text (noting concerns 
about the potential mismatch between the timing of receipt of cash 
for sales of fund assets and the payment of cash for shareholder 
redemptions).
    \120\ See proposed rule 22e-4(a) (defining ``highly liquid 
investment'' and ``in-kind exchange traded fund''); and proposed 
rule 22e-4(b)(1)(i)(C) (listing liquidity risk factors).
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Method for Counting the Number of Days
    We propose to specify when a fund must start to measure the 
identified number of days in which it reasonably expects a stressed 
trade size of an investment would be convertible to U.S. dollars 
without significantly changing its market value. Currently, the rule 
does not directly specify when to begin counting the number of days an 
investment would be convertible to U.S. dollars, and funds have 
inconsistent practices as to when they begin this measurement. This 
inconsistency may lead certain funds to overestimate their liquidity 
classifications, and reduce

[[Page 77193]]

their ability to meet redemptions. This also detracts from 
comparability when analyzing trends across funds. For example, some 
funds may consider an investment highly liquid if it could be converted 
to U.S. dollars three business days after the date of the 
classification analysis, while others include the date of 
classification when counting the number of days. Those funds that begin 
counting after the date of the classification would have the advantage 
of counting an additional day as compared to those funds that include 
the date of classification, and their liquidity classifications may 
appear to be more liquid than a similar fund that begins counting on 
the date of classification. Therefore, we propose to specify that funds 
must count the day of classification when determining the period in 
which an investment is reasonably expected to be convertible to U.S. 
dollars.\121\ For example, in order for a fund to classify an 
investment as highly liquid on Monday, it would need to reasonably 
expect that the investment could be sold and settled to U.S. dollars by 
Wednesday at the latest.
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    \121\ See proposed rule 22e-4(b)(1)(ii)(A).
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    We request comment on the proposed amendments to the liquidity 
classification categories:
    16. As proposed, should we eliminate the less liquid investment 
category and amend the illiquid investment definition to include an 
investment that a fund reasonably expects can be sold within seven 
calendar days without significantly changing the market value but is 
not convertible to U.S. dollars within that period (i.e., investments 
that are currently classified as less liquid under the rule)? What 
effect would these proposed amendments have and how would those funds 
that significantly invest in such less liquid investments likely 
change?
    17. Would the proposed amendment cause funds that currently hold 
less liquid investments to contract for expedited settlement for such 
investments? What are the advantages or limitations of contracting for 
expedited settlement? Would the proposed amendments provide an 
incentive to reduce settlement times in bank loan and other relevant 
markets more generally? If so, how long might it take to reduce 
settlement times in response to the rule and what would be the burdens 
associated with this change? Are there certain categories of bank loans 
or other investments for which market participants may be unable to 
reduce the settlement time to seven calendar days or less? Which 
investments and why? What other effects may occur, for example, would 
some funds change their strategies, liquidate, or choose to be 
structured as a different investment vehicle, such as a closed-end 
fund? If some funds would convert to closed-end funds, what type of 
closed-end fund would they likely choose (e.g., interval fund, or a 
closed-end fund listed on an exchange)? Should we amend other rules, or 
provide relief from any specific rules or provisions of the Federal 
securities laws, to expedite changes to strategies or conversions to 
closed-end funds or other investment vehicles?
    18. Some funds classify certain bank loans as highly liquid or 
moderately liquid today. What characteristics of these bank loans lead 
to a reasonable expectation that they will be convertible to cash in 
seven days or less without significantly changing the market value? Are 
funds considering contracts for expedited settlement? Would funds need 
additional guidance on how to assess the period in which a bank loan or 
other investment is reasonably expected to be convertible to U.S. 
dollars? For example, should we revise the proposed rule to require 
that funds consider, or provide guidance suggesting that funds may wish 
to consider: settlement time history for the individual or similar 
investments, average settlement times for the market, and guarantees 
for settlement or expedited settlement, as well as the contractual 
settlement period?
    19. Have the costs of borrowing risen and has credit become more 
difficult to obtain over time for bank loan funds, particularly during 
stressed periods?
    20. As proposed, should we remove the less liquid category and 
require funds to use a three category classification framework? Would 
the proposed changes simplify classifications and reduce burdens over 
time, after funds updated systems to reflect the change? Would the 
proposed changes appropriately reflect the liquidity of a fund, or 
would the current framework be more appropriate? Should funds be 
permitted to invest above 15% in less liquid investments if there are 
other methods or mechanisms to reduce the mismatch between the receipt 
of cash upon the sale of assets with longer settlement periods and the 
payment of shareholder redemptions or to address potential dilution 
associated with this mismatch? If so, what other methods or mechanisms 
should these funds be required or permitted to use (for example, swing 
pricing, gates to suspend redemptions, redemption fees, redemptions in 
kind, additional limits on less liquid investments, notice periods, or 
lengthening the settlement period for paying redemptions)? \122\ If we 
permit (to the extent not already permitted) or require use of one or 
more of these tools, how should they be used (individually, in some 
combination with each other, or with other protections, such as 
disclosure, board approval, and Commission reporting)? Should we amend 
other rules, or provide relief from any specific rules or provisions of 
the Federal securities laws, to expedite or permit use of these methods 
and mechanisms? \123\
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    \122\ With a notice period, an investor's redemption request 
would not be processed until the end of a notice period (e.g., after 
2 to 5 days). The investor would receive the next calculated price 
after the notice period ends, with payment occurring at the end of a 
settlement period. With a lengthened settlement period, a redeeming 
investor would receive the price next calculated after submitting 
the redemption order but would not receive payment until the end of 
a lengthened settlement period (e.g., 5 to 7 days after trade date).
    \123\ See, e.g., section 22(e) of the Act (providing the 
conditions under which a registered investment company may suspend 
the right, or postpone the date, of redemption for more than seven 
days).
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    21. Should we provide that an investment is illiquid if it is not 
reasonably expected to be convertible to U.S. dollars in a shorter or 
longer period than seven calendar days? How would a shorter or longer 
period align with the requirement in section 22(e) of the Act for a 
fund to satisfy redemptions within seven days? If we provided a longer 
period of time to convert to U.S. dollars before an investment is 
classified as illiquid, how would funds prepare for the potential 
mismatch during stressed situations between the amount of available 
cash and the size of shareholder redemptions? Should we provide 
additional exemptions to allow funds to delay redemptions to 
shareholders under certain limited circumstances and conditions, such 
as independent director approval?
    22. Are there circumstances in which an investment is fair valued 
using an unobservable input that is significant to the overall 
measurement, but the investment should not be treated as illiquid for 
purposes of the rule? Please explain and provide supporting data. 
Should we permit a fund to classify certain types of investments that 
are fair valued using unobservable inputs that are significant to the 
overall measurement as highly liquid or moderately liquid and, if so, 
which types? Should we instead treat investments that are fair valued 
using unobservable inputs that are significant to the overall 
measurement as presumptively illiquid, but permit funds to rebut this 
presumption? If so, what process should we require for rebutting the 
presumption? For example, should

[[Page 77194]]

we require funds to maintain records describing why they did not 
classify such an investment as illiquid? Should we require funds to 
disclose on Form N-PORT any circumstances in which they did not 
classify such an investment as illiquid?
    23. Are there other types or characteristics of investments that we 
should include in the definition of illiquid investment? If so, which 
ones?
    24. Should we amend the definition of moderately liquid investment, 
as proposed? Alternatively, should we retain the details in the current 
definition that specify the number of days in which a fund must 
reasonably expect an investment to be convertible to U.S. dollars in 
order to classify it as moderately liquid?
    25. Would the proposed changes to the liquidity classifications 
affect investment options available to investors? For example, would 
bank loan funds only be available in non-open-end investment vehicles? 
What effect would these proposed changes have on those asset classes 
that are less available for investment by open-end funds for liquidity 
reasons, the availability of credit to borrowers, and more generally, 
on capital formation?
    26. Should we amend the definition of convertible to cash and other 
references to cash in rule 22e-4 to refer to U.S. dollars, as proposed? 
Would these amendments raise issues for specific types of funds? If so, 
which ones and how? Would these amendments affect funds' investment 
strategies, including their allocation to foreign investments and U.S. 
dollars, or their performance?
    27. Are there circumstances in which a fund would pay redemptions 
in a different currency than U.S. dollars? If so, would it be 
appropriate for that fund to be able to assess the time in which an 
investment could convert to that other currency for purposes of the 
rule?
    28. In addition to sale and disposition, are there other ways an 
investment may be converted to U.S. dollars that should be included in 
the definition of convertible to U.S. dollars? If so, what are they?
    29. Would the amendment to refer to U.S. dollars instead of cash in 
the definitions of highly liquid investment and convertible to cash 
materially change how funds classify highly liquid investments 
currently? If so, how?
    30. Should we require funds to include the day of classification 
when counting the number of days to convert to U.S. dollars as 
proposed, or should we require funds to begin to count the number of 
days to convert to U.S. dollars on the following day? What are the 
advantages and disadvantages of this alternative? Would this 
alternative result in less conservative liquidity classifications for 
some funds or investments (i.e., by causing some investments that 
otherwise would have been classified as moderately liquid to be 
classified as highly liquid) or impair a fund's ability to meet 
redemptions?
    31. Instead of using the days an investment would be convertible to 
U.S. dollars in the liquidity classifications as proposed, should we 
separately set the number of days to: (1) make the trade; and (2) 
settle the trade or otherwise dispose of an investment, in determining 
liquidity classifications? Why or why not? Is there a different way the 
rule should measure the period that an investment is convertible to 
U.S. dollars?
c. Frequency of Classifications
    Rule 22e-4 currently requires that funds review their liquidity 
classifications at least monthly in connection with reporting on Form 
N-PORT, and more frequently if changes in relevant market, trading, and 
investment-specific considerations are reasonably expected to 
materially affect one or more of their investments' 
classifications.\124\ The current rule also requires a fund to monitor 
and take timely actions related to the liquidity of its investments, 
including changes to its liquidity profile. Specifically, the rule 
prohibits a fund from acquiring any illiquid investment if, immediately 
after the acquisition, the fund would have invested more than 15% of 
its net assets in illiquid investments that are assets.\125\ In 
addition, the rule requires a fund to provide timely notice to its 
board, and to the Commission on Form N-RN, if the fund exceeds the 15% 
limit on illiquid investments, or if there is a shortfall of the fund's 
highly liquid investments below its highly liquid investment minimum 
for seven consecutive calendar days.\126\
---------------------------------------------------------------------------

    \124\ See rule 22e-4(b)(1)(ii).
    \125\ See rule 22e-4(b)(1)(iv).
    \126\ See rule 22e-4(b)(1)(iv)(A) and rule 22e-
4(b)(1)(iii)(A)(3); Form N-RN Parts B through D.
---------------------------------------------------------------------------

    We propose amendments to require a fund to classify all of its 
portfolio investments each business day instead of at least 
monthly.\127\ Daily classification would reflect current market 
conditions more accurately and would provide funds with more data for 
analysis to prepare for future stressed conditions. We believe that 
daily classifications would assist liquidity risk program 
administrators in better monitoring of a fund's liquidity and enhance a 
fund's ability to more rapidly respond to changes that affect the 
liquidity of the fund's portfolio, reflecting more effective practices 
we have observed. In addition, daily classifications would help ensure 
that funds timely report shortfalls below the highly liquid investment 
minimum or breaches of the 15% limit on illiquid investments to the 
fund's board and to the Commission, which would better achieve the 
goals of the current provisions to provide board and Commission 
oversight of the fund's liquidity risk management program and its 
effectiveness.
---------------------------------------------------------------------------

    \127\ See proposed rule 22e-4(b)(1)(ii). Although rule 22e-4 
currently requires funds to classify each of the fund's portfolio 
investments (including each of the fund's derivatives transactions), 
we have observed that some funds are not classifying all investments 
in their portfolios, such as positions in to-be-announced (TBA) 
contracts to trade mortgage-backed securities or the reinvestment of 
cash collateral received in securities lending arrangements.
---------------------------------------------------------------------------

    Most funds did not report reclassifications of their portfolio 
investments despite extraordinary liquidity constraints in March 
2020.\128\ Based on the liquidity classification practices we observed 
in March 2020 and on filings covering this period, we are concerned 
that some funds effectively are equipped to classify their investments 
primarily on a monthly basis to meet reporting requirements and are not 
prepared to review classifications intra-month. Because intra-month 
analyses for these funds would be out of the ordinary and only occur 
when a fund determines that changes in relevant market, trading, and 
investment-specific considerations are reasonably expected to 
materially affect one or more of their investments' classifications, it 
may be especially challenging during stressed conditions for these 
funds to reclassify their investments intra-month. Requiring daily 
classification, while involving costs, may ultimately lead to a more 
efficient classification process for funds than monitoring trading 
conditions to determine if and when intra-month classifications are 
required. For

[[Page 77195]]

example, a daily classification requirement, in combination with the 
minimum standards we propose for trade size and value impact, may lead 
funds to modify their liquidity classification processes, which would 
make the process more standardized, timely, and efficient.
---------------------------------------------------------------------------

    \128\ Despite the liquidity constraints in Mar. 2020, we 
observed through Form N-PORT filings that roughly 75% of funds did 
not reclassify any investment held in both Feb. and Mar. 2020. 
Specifically, roughly 80% of U.S. equity funds did not reclassify 
any holding that was held in both Feb. and Mar. 2020, while roughly 
10% reclassified at least one investment into a more liquid category 
and roughly 13% reclassified at least one investment into a less 
liquid category. Roughly 55% of taxable bond funds reclassified on 
average 4% of their portfolios, with the median fund reclassifying 
1% of its portfolio. Of the funds that reclassified, roughly 30% 
reclassified at least one investment into a more liquid category and 
roughly 44% reclassified at least one investment into a less liquid 
category. More funds did, however, reclassify in Mar. 2020 period 
than for either Feb. or Apr. 2020.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to require funds to 
classify the liquidity of their investments on a daily basis.
    32. Should we require funds to classify all portfolio investments 
on a daily basis, as proposed? Would this proposed amendment result in 
a material change to how funds are currently classifying? To what 
extent do funds already classify the liquidity of their investments on 
a daily basis or collect the information they would need to classify 
daily? Would this proposed amendment better integrate liquidity risk 
management and portfolio management systems?
    33. We also are proposing that funds use a stressed trade size and 
a defined value impact standard in determining liquidity 
classifications. Would those changes affect the burdens of classifying 
on a daily basis? Would those effects be different for different types 
of funds? For example, would it be easier to determine on a daily basis 
whether the sale of a stressed trade size of shares listed on an 
exchange would exceed 20% of the average daily trading volume for those 
shares than to determine whether the sale of a stressed trade size of 
other investments would result in a price decline of more than 1%?
    34. Instead of classifying on a daily basis, should we require 
funds to classify the liquidity of their investments at some other 
frequency (e.g., weekly, biweekly, or monthly)? If so, should we 
maintain the requirement for a fund to classify more frequently if 
changes in relevant market, trading, and investment-specific 
considerations are reasonably expected to materially affect one or more 
of its investments' classifications? Is there a different approach we 
should use effectively to require a fund to classify its investments in 
response to changing conditions? Are there certain types of funds that 
should be excluded from daily classifications? If so, which funds?
    35. If we require funds to classify on a non-daily frequency, how 
would they monitor for compliance with the 15% limit on illiquid 
investments and the highly liquid investment minimum? How are those 
limits monitored for compliance now?
2. Highly Liquid Investment Minimums
a. Proposed Scope of the Requirement and Determination of the Minimum
    Rule 22e-4 currently requires a fund to determine a highly liquid 
investment minimum if it does not primarily hold assets that are highly 
liquid investments. Funds that are subject to the highly liquid 
investment minimum requirements must determine a highly liquid 
investment minimum considering several factors, review the minimum at 
least annually, and adopt policies and procedures to respond to a 
shortfall of the fund's highly liquid investments below the minimum 
required.\129\ We propose to require all funds to determine and 
maintain a highly liquid investment minimum of at least 10% of the 
fund's net assets, which is equivalent to the stressed trade size. In 
connection with this proposed requirement, we would remove the 
exclusion for funds that primarily invest in highly liquid investments 
(the ``primarily exclusion''). The proposed amendments are designed to 
ensure that funds have sufficient liquid investments for managing 
stressed conditions and heightened levels of redemptions.
---------------------------------------------------------------------------

    \129\ See rule 22e-4(b)(1)(iii).
---------------------------------------------------------------------------

    We assessed liquidity-related data reported on Forms N-PORT, as 
well as the development of liquidity risk management programs, through 
staff outreach to funds and advisers. Based on Form N-PORT filings, 
most funds do not determine a highly liquid investment minimum and 
instead rely on the primarily exclusion.\130\ For those funds that have 
highly liquid investment minimums, the rule currently requires that 
they consider various liquidity factors, such as their investment 
strategy and cash-flow projections, in both normal and reasonably 
foreseeable stressed conditions.\131\ We understand that those funds 
additionally consider factors such as asset class, market volatility, 
and shareholder concentration in their determinations.
---------------------------------------------------------------------------

    \130\ Approximately 83% of funds holding 85% of net assets do 
not report setting a highly liquid investment minimum on Form N-
PORT.
    \131\ For these purposes, funds are required to consider certain 
factors during stressed conditions only to the extent they are 
reasonably foreseeable during the period until the next review of 
the highly liquid investment minimum. See rule 22e-
4(b)(1)(iii)(A)(1).
---------------------------------------------------------------------------

    As discussed above, by requiring fund liquidity classifications to 
assume the sale or disposition of a set stressed trade size, the 
proposal is intended to better prepare all funds for future stressed 
conditions.\132\ To help further prepare a fund for heightened levels 
of redemptions in stressed conditions, we are proposing to require the 
highly liquid investment minimum to be equal to or higher than the 
assumed stressed trade size. In setting the highly liquid investment 
minimum to be at least the stressed trade size, we considered data on 
fund flows for setting the stressed trade size as well as data reported 
on Form N-PORT on funds' current highly liquid investment minimums. As 
of March 2020, for funds that had determined a highly liquid investment 
minimum, the majority of those funds reported setting a highly liquid 
investment minimum of less than 10% of the fund's net assets. In 
contrast, approximately 8% of those funds reported setting a highly 
liquid investment minimum of more than 50% of the fund's net assets. 
Thus, while there is a wide divergence in highly liquid investment 
minimums, most of these funds have a minimum that is lower than the 
proposed 10% level. Given the level of weekly outflows some funds have 
experienced and the difficulty in predicting future stress events, we 
believe that a regulatory minimum of 10% for the highly liquid 
investment minimum would benefit investors by improving the ability of 
funds to meet shareholder redemptions in stressed scenarios.
---------------------------------------------------------------------------

    \132\ See supra section II.A.1.a.i for discussion of the 
stressed trade size and of fund flow data.
---------------------------------------------------------------------------

    In addition, the proposal's requirement for funds to both assume a 
stressed trade size to determine liquidity classifications and also 
maintain an equal or higher minimum of highly liquid investments is 
intended to work together to better prepare them for future stressed 
conditions and to reduce the risk of dilution. Not only would funds 
have highly liquid investments in an amount needed to meet the stressed 
trade size, they would also have more highly liquid assets to meet 
redemptions without having to sell less liquid investments at 
discounted prices. Funds would continue to be required to periodically 
review the highly liquid investment minimum and have policies and 
procedures to address any shortfall in highly liquid investments below 
the minimum.
    While the proposed minimum of 10% of a fund's net assets may be a 
suitable highly liquid investment minimum for most funds, certain funds 
may find a higher amount appropriate depending on a fund's liquidity 
risk factors and investment objectives. Consistent with the current 
rule, a fund would be required to consider a specified set of liquidity 
risk factors to determine whether its highly liquid investment

[[Page 77196]]

minimum should be above 10%.\133\ We continue to believe that the 
liquidity risk factors funds must consider in determining a highly 
liquid investment minimum under the current rule and the associated 
guidance the Commission provided in the Liquidity Rule Adopting Release 
regarding these factors are appropriate for a fund to take into account 
for these purposes.\134\
---------------------------------------------------------------------------

    \133\ See Liquidity Rule Adopting Release, supra note 8, at 
paragraph following n.669.
    \134\ See id., at section III.B.2.
---------------------------------------------------------------------------

    A broad variety of investments, as well as cash, may qualify 
towards the highly liquid investment minimum.\135\ Since approximately 
83% of funds currently rely on the primarily exclusion, we would not 
expect this proposal to affect their strategies. We recognize, however, 
that imposing a highly liquid investment minimum of at least 10% would 
require some other funds to hold a larger amount of highly liquid 
assets than they currently do, and thus may affect these funds' 
performance or strategies.\136\ For funds with strategies focused on 
investments that would not be considered highly liquid, they would have 
to determine how to constitute a portfolio of investments that would 
allow the fund to meet its strategy and investing parameters while 
maintaining a highly liquid investment minimum of at least 10%. All 
funds would be subject to the same highly liquid investment minimum of 
at least 10%, which would minimize any competitive advantage for 
similar funds associated with the proposed highly liquid investment 
minimum requirements. We believe it is important that all funds be 
prepared to meet redemptions in future stressed scenarios, and that 
funds would be better able to do so with the proposed highly liquid 
investment minimum requirements.
---------------------------------------------------------------------------

    \135\ See id., at n.663 and accompanying text.
    \136\ As recognized above, being unprepared for higher than 
normal redemptions also can affect a fund's performance when such 
redemptions occur. See supra note 81. For instance, although less 
liquid assets generally offer a higher return, the trading costs 
associated with selling these assets during periods of increased 
redemptions may offset this risk premium, potentially resulting in a 
lower overall return for fund investors. See infra note 351 and 
accompanying text.
---------------------------------------------------------------------------

    In establishing a uniform floor for the highly liquid investment 
minimum, we are also proposing to remove the exclusion for funds that 
invest primarily in highly liquid investments. The Commission adopted 
the primarily exclusion because it believed the benefits associated 
with requiring such funds to determine and review a highly liquid 
investment minimum, or to adopt shortfall procedures, would not justify 
the associated burdens.\137\ Since that time, however, we have observed 
that a fund relying on the primarily exclusion may experience 
significant declines in its liquidity that result in the fund holding 
less than 50% of its portfolio in highly liquid investments for a 
period of time. For example, a fund that invests significantly in a 
given foreign market and that generally classifies those investments as 
highly liquid can experience substantial declines in the amount of its 
highly liquid investments if, for example, there is political or 
economic turmoil in or an extended holiday closure of that foreign 
market. Funds that currently use the primarily exclusion instead of 
determining and maintaining a highly liquid investment minimum do not 
have the benefit of shortfall procedures, including board oversight, to 
respond to events or market conditions that may cause the fund to fall 
under its previously determined level of primarily held highly liquid 
investments. By requiring a highly liquid investment minimum for all 
funds, investors would enjoy the benefit of policies and procedures 
that are designed to ensure not only oversight by the liquidity risk 
program administrator but also the fund's board.
---------------------------------------------------------------------------

    \137\ Liquidity Rule Adopting Release, supra note 8, at 
paragraph accompanying n.724.
---------------------------------------------------------------------------

    Moreover, the burdens of complying with highly liquid investment 
minimum requirements for funds that currently use the primarily 
exclusion may be reduced because many fund complexes already have 
experience developing highly liquid investment minimum shortfall 
policies and procedures. It may be possible for funds in the same 
complex to leverage this experience to reduce the burdens of developing 
these policies and procedures for funds that previously qualified for 
the primarily exclusion. As liquidity risk management programs have 
matured, and continue to mature, many fund complexes continue to gain 
experience with highly liquid investment minimum shortfall policies and 
procedures, which may also reduce burdens. By requiring all funds to 
adopt a highly liquid investment minimum, we are seeking to help ensure 
that funds would be better prepared to handle future stressed 
conditions, which may occur suddenly and unexpectedly, as they would 
have sufficient liquid investments for managing heightened levels of 
redemptions.
    We request comment on the proposed amendments to highly liquid 
investment minimum requirements.
    36. Should we require all funds to determine and maintain a highly 
liquid investment minimum, as proposed? What effect would this proposal 
have on funds? For example, would some funds have to change their 
strategies or expect effects on performance?
    37. Should some types of funds be excluded from the requirement to 
have a highly liquid investment minimum? If yes, which ones and why? 
For example, should we preserve the exclusion for funds that primarily 
hold highly liquid assets? Alternatively, should funds currently using 
the primarily exclusion have a higher highly liquid investment minimum 
requirement? Would funds using the primarily exclusion be as prepared 
to meet redemptions in stressed scenarios without a highly liquid 
investment minimum and its corresponding policies and procedures?
    38. If the primarily exclusion is kept, should we define the amount 
of highly liquid assets a fund must maintain under this standard (e.g., 
investing at least 51% of the fund's net assets in highly liquid 
assets, or a higher or lower amount)?
    39. Should we establish a regulatory minimum for the amount of 
highly liquid investments of 10%, as proposed, or should it be set at 
15% or 5% (or some other higher or lower amount)? Would establishing a 
regulatory minimum reduce the burdens associated with determining and 
periodically reviewing the fund's highly liquid investment minimum?
    40. Rather than propose a regulatory minimum with factors that a 
fund must consider to determine whether its own highly liquid 
investment minimum should be higher, should we require all funds to use 
the same highly liquid investment minimum? Would this set a level 
playing field for all funds and diminish any competitive advantage for 
a fund with a lower highly liquid investment minimum? If so, what 
amount would be appropriate for a uniform highly liquid investment 
minimum for all funds (e.g., 5%, 10%, 15%, or a higher or lower 
amount)?
    41. Would providing more detail or guidance on the liquidity risk 
factors be helpful? If so, which factors?
    42. Would funds that do not currently have a highly liquid 
investment minimum be able to leverage policies and procedures already 
developed for highly liquid investment minimums, for example by other 
funds in the same complex, to reduce the burdens of developing these 
policies and procedures? If not, what costs would funds incur to adopt 
and implement highly liquid investment minimum policies and procedures?

[[Page 77197]]

b. Calculation of the Highly Liquid Investment Minimum
    We are proposing amendments to rule 22e-4 that are designed to help 
ensure that the highly liquid investments a fund holds to meet its 
highly liquid investment minimum are available to support the fund's 
ability to meet redemptions. A key aim of the highly liquid investment 
minimum requirement is to decrease the likelihood that funds would be 
unable to meet their redemption obligations.\138\ Building on existing 
aspects of rule 22e-4, the proposed amendments would require that, when 
determining the amount of assets a fund has classified as highly liquid 
that count toward the highly liquid investment minimum, the fund 
account for limitations in its ability to use some of those assets to 
meet redemptions.\139\ Specifically, in assessing compliance with the 
fund's highly liquid investment minimum, the fund would be required to: 
(1) subtract the value of any highly liquid assets that are posted as 
margin or collateral in connection with any derivatives transaction 
that is classified as moderately liquid or illiquid; and (2) subtract 
any fund liabilities.\140\
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    \138\ See Liquidity Rule Adopting Release, supra note 8, at text 
following n.117.
    \139\ As the Commission explained at the time it adopted rule 
22e-4, this is not meant to suggest that a fund should only, or 
primarily, use highly liquid investments to meet shareholder 
redemptions. Instead, we believe that a fund holding sufficient 
highly liquid assets will support the fund in meeting redemption 
requests in a non-dilutive manner, and assist it in readjusting its 
portfolio in times of market stress, heightened volatility, and 
managing its obligations to derivatives counterparties. See 
Liquidity Rule Adopting Release, supra note 8, at n.680 and 
accompanying text.
    \140\ Proposed rule 22e-4(b)(1)(iii)(B)(1); 22e-
4(b)(1)(iii)(B)(2). Rule 22e-4 currently refers to a ``pledge'' of 
margin or collateral, rather than ``posting.'' We are proposing to 
use the term ``post'' because we believe this term is more commonly 
used within the industry and by other regulators to refer to 
instances where a party provides margin or collateral to its 
counterparty to meet the performance of its obligation under one or 
more derivatives transactions as a result of a change in the value 
of such obligations since the trade was executed or the last time 
such collateral was provided (commonly referred to as variation 
margin) or is provided to secure potential future exposure following 
default of a counterparty (commonly referred to as initial margin). 
See, e.g., Margin Requirements for Uncleared Swaps for Swap Dealers 
and Major Swap Participants, 86 FR 6850 (Jan. 25, 2021).
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i. Margin or Collateral of Moderately Liquid and Illiquid Derivatives
    The requirement for a fund to reduce the value of its highly liquid 
assets by the amount posted as margin or collateral in connection with 
a non-highly liquid derivatives transaction reflects that this amount 
of highly liquid assets is not available for the fund to use to meet 
redemptions.\141\ This is because, where a fund enters into a 
moderately liquid or illiquid derivative and posts highly liquid assets 
as margin or collateral, the posted collateral is highly liquid, but 
the fund cannot access the value of posted assets unless the fund exits 
the derivatives transaction. Since the fund has classified the 
derivative as moderately liquid or illiquid, it does not reasonably 
expect to be able to exit the derivatives transaction within three 
business days. We recognize that the fund may be able to access the 
specific assets posted as margin or collateral by replacing them with 
other assets acceptable to the fund's counterparty. But regardless of 
the specific assets posted, the value of collateral posted in 
connection with a moderately liquid or illiquid derivative would not be 
convertible to U.S. dollars within three business days or less.
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    \141\ See Liquidity Rule Adopting Release, supra note 8, at 
nn.727-730 and accompanying text. This aspect of the proposed rule 
would only require an adjustment to the amount of a fund's highly 
liquid investments that are assets, since investments that are in a 
liability position are unable to be used to meet redemption 
requests. See proposed rule 22e-4(b)(1)(iii)(B)(1).
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    Under the current rule, a fund is required to identify the 
percentage of the fund's highly liquid investments that it has posted 
as margin or collateral in connection with derivatives transactions 
that the fund has classified as less than highly liquid.\142\ The 
Commission believed that this approach struck an appropriate balance 
between providing transparency and reducing burdens on funds.\143\ The 
Commission observed that a fund generally would not need to 
specifically identify particular assets that are posted as margin or 
collateral to cover particular derivatives transactions, but instead 
would calculate the percentage of highly liquid investments posted as 
margin or collateral for derivatives transactions classified in each of 
the other classification categories.\144\ Under the rule, a fund that 
has posted both highly liquid investments and non-highly liquid 
investments as margin or collateral in connection with a non-highly 
liquid derivatives transaction should reduce its highly liquid 
investments, rather than assume that posted non-highly liquid 
investments would first cover the derivatives transaction, unless the 
fund specifically identifies non-highly liquid investments as margin or 
collateral in connection with a derivatives transaction.\145\ Finally, 
the Commission observed that the current approach responds to 
commenters' concerns that linking the liquidity of specific assets 
posted as margin or collateral to the liquidity of a fund's derivatives 
transactions could understate the liquidity of those assets, since a 
fund may be able to readily substitute another liquid asset for the 
asset posted as margin or collateral.\146\
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    \142\ Rule 22e-4(b)(1)(ii)(C). In addition, funds currently also 
are required to exclude highly liquid assets that are posted as 
margin or collateral in connection with non-highly liquid 
derivatives transactions when determining whether the fund primarily 
holds highly liquid assets. Rule 22e-4(b)(1)(iii)(B).
    \143\ See Liquidity Rule Adopting Release, supra note 8, at 
n.476 and accompanying text.
    \144\ Id. at n.489 and accompanying text.
    \145\ Note 1 to proposed rule 22e-4(b)(1)(iii)(B)(1). Cf. Note 1 
to rule 22e-4(b)(1)(ii)(C). See also Liquidity Rule Adopting 
Release, supra note 8, at nn.489-490 and accompanying text 
(explaining that in the absence of such an instruction, some funds 
might instead take the opposite approach, and assume that posted 
non-highly liquid investments first cover these less liquid 
derivatives transactions, creating inconsistencies between funds).
    \146\ We recognize that margin or collateral may be determined 
and paid by funds on the basis of a group of derivatives 
transactions, with the fund posting or receiving a net amount of 
margin or collateral. When a fund pays margin or collateral in 
connection with a group that includes derivatives transactions that 
are highly liquid and non-highly liquid, funds already must 
determine the amount of margin or collateral attributable to the 
non-highly liquid derivatives under the current rule. For example, a 
fund must perform this attribution in order to identify the 
percentage of the fund's highly liquid investments that it has 
posted as margin or collateral in connection with derivatives 
transactions that are not themselves highly liquid.
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    The proposed approach is intended to enhance investor protection 
while continuing to strike an appropriate balance with the potential 
increased burdens on funds. The proposed approach would not require 
funds to identify and reclassify specific assets posted as margin or 
collateral, but rather to reduce the value of the fund's highly liquid 
assets available to meet the fund's highly liquid investment minimum by 
the value of the assets posted as margin or collateral. We also propose 
to maintain, with conforming changes, the explanatory note discussed 
above guiding the allocation of amounts posted as margin or 
collateral.\147\ By reducing the fund's highly liquid investments by 
the value of amounts posted as margin or collateral, the proposed 
approach would avoid burdens associated with tracking specific 
securities posted as margin or collateral and reclassifying investments 
as they are posted as margin or collateral and recalled. It also would 
not

[[Page 77198]]

understate the liquidity of specific securities that are posted as 
margin or collateral because each security would continue to be 
classified based on its own characteristics, and instead the 
adjustments would only be made at the aggregate level.\148\ Moreover, 
many of the operational concerns commenters raised when rule 22e-4 was 
proposed, which led the Commission to adopt the current approach, 
related to the treatment of assets segregated under the Commission's 
Investment Company Act Release 10666, which the Commission has since 
rescinded, effective August 19, 2022.\149\ We therefore believe the 
proposed amendments would enhance investor protections by helping to 
ensure a fund's highly liquid assets are in fact available to meet 
redemptions, while continuing to balance the value of the provision 
against the operational burdens to implement it.
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    \147\ See supra note 145. In connection with the proposed 
amendments to the rule's highly liquid investment minimum 
provisions, we propose to re-number certain existing paragraphs and 
to add paragraphs to the rule. As a result, we propose to update 
cross-references to the highly liquid investment minimum provisions 
within the rule. See proposed rule 22e-4(b)(1)(iii)(C) through (E) 
and proposed rule 22e-4(b)(3)(iii).
    \148\ See Liquidity Rule Adopting Release, supra note 8, at 
n.491 and accompanying text.
    \149\ See Liquidity Rule Adopting Release, supra note 8, at 
nn.468-472 and accompanying text (operational concerns); Derivatives 
Adopting Release, supra note 21, at section II.L (withdrawal of 
Investment Company Act Release 10666).
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ii. Fund Liabilities
    Under the proposal, a fund would also be required to reduce the 
amount of highly liquid assets that count toward the fund's highly 
liquid investment minimum by the amount of the fund's liabilities. This 
proposed change is intended to result in a more accurate calculation of 
the highly liquid investment minimum.\150\ The proposed approach would 
include any liabilities, as defined in 17 CFR 210.6-04 (rule 6.04 of 
Regulation S-X). For example, this would include investment liabilities 
and amounts payable for investment advisory, management, and service 
fees. Reducing the amount of highly liquid assets by fund liabilities 
reflects that fund liabilities are generally paid in cash, meaning that 
highly liquid assets may need to be liquidated in order to satisfy 
those liabilities rather than to meet redemptions.
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    \150\ The highly liquid investment minimum is the percentage of 
a fund's net assets that it invests in highly liquid assets that are 
eligible to count toward the minimum under the rule. See rule 22e-
4(a)(7) (defining highly liquid investment minimum). Because this 
calculation uses net assets as the denominator (which reflects the 
amount of assets less any liabilities), we believe the numerator of 
eligible highly liquid assets similarly should be net of 
liabilities.
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    Based on staff outreach, it is our understanding that the proposal 
reflects many funds' existing practices. For example, when a fund has 
significant liabilities, they generally will be incurred in connection 
with derivatives transactions or other investments that give rise to a 
fund liability. Because funds are required to classify all investments, 
including liabilities, investments such as highly liquid derivatives in 
a liability position will reduce the value of the fund's highly liquid 
investments that are assets. To enhance investor protection by 
preventing assets that a fund may in the future use to pay liabilities 
from also being counted toward the fund's highly liquid investment 
minimum, and to promote consistency in how funds calculate their highly 
liquid investment minimum, we are proposing to require that all funds 
reduce their highly liquid assets used to satisfy their highly liquid 
investment minimum by the amount of the fund's liabilities.\151\
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    \151\ Depending on the rules of any applicable exchange and 
local law, a variation margin payment with respect to a derivatives 
transaction may be deemed to settle the fund's liability for the 
daily mark-to-market loss on the transaction. In that case or any 
other case where a fund does not have a liability in connection with 
a given transaction, the fund would not be required to reduce its 
highly liquid investments in connection with that transaction under 
the proposal.
---------------------------------------------------------------------------

    We request comment on these aspects of the proposal, including:
    43. Should we, as proposed, require a fund to reduce the amount of 
its highly liquid investments computed for the purposes of determining 
compliance with its highly liquid investment minimum by the value of 
any highly liquid assets that are posted as margin or collateral in 
connection with any derivatives transaction that is classified as 
moderately liquid or illiquid? Why or why not? Should we also require 
that amounts posted as margin or collateral in connection with 
derivatives transactions that are classified as highly liquid be 
treated in this way? Alternatively, should we exempt amounts posted as 
margin or collateral in connection with certain types or categories of 
derivatives transactions from this requirement?
    44. How frequently do funds calculate the percentage of their 
highly liquid assets posted as margin or collateral in connection with 
non-highly liquid derivatives transactions today? Would the proposed 
requirement to calculate this value on a daily basis present new 
challenges?
    45. Should we, as proposed, require a fund to reduce the amount of 
its highly liquid assets computed for the purpose of determining 
compliance with its highly liquid investment minimum by the value of 
any liabilities? Do funds already make this reduction when determining 
compliance with highly liquid investment minimums? Should we instead 
require a fund to reduce the amount of its highly liquid assets by a 
different amount, such as the percentage of the fund's total assets 
that its liabilities represent? Are there certain classes or types of 
fund liabilities that should not be counted? For example, should we 
provide an exception for liabilities associated with fund borrowings 
that are used to meet redemptions in order to avoid a disincentive for 
funds to borrow for this purpose under appropriate circumstances?
    46. We propose that, for these purposes, the amount of a fund's 
liabilities would be computed in the same manner as a fund computes its 
liabilities for purposes of rule 6-04 of Regulation S-X. If we use this 
standard, as proposed, would the amount by which funds should reduce 
their highly liquid assets be clear? Are there any issues that may 
arise from using the standard funds use to prepare their balance 
sheets? Would a different definition of ``liabilities'' be more 
appropriate?
3. Limit on Illiquid Investments
    Rule 22e-4 currently limits a fund's ability to acquire illiquid 
investments. Specifically, the rule prohibits a fund from acquiring any 
illiquid investment if, immediately after the acquisition, the fund 
would have invested more than 15% of its net assets in illiquid 
investments that are assets.\152\ We are proposing to amend the rule's 
limitation on illiquid investments to provide that the value of margin 
or collateral that a fund could only receive upon exiting an illiquid 
derivatives transaction would itself be treated as illiquid for these 
purposes.\153\ As the Commission stated in 2016, the potential effects 
of a fund's use of derivatives are relevant to assessing, managing, and 
periodically reviewing a fund's liquidity risk.\154\ The potential 
effects may be heightened when the derivatives transaction is itself 
illiquid, and thus may be difficult for a fund to exit quickly enough 
to use the associated margin or collateral to meet redemption requests, 
or at all. Funds' use of illiquid derivatives is subject to several 
limitations but, for open-end funds, the risks associated with illiquid 
derivatives may be heightened as a result of the funds' 
redeemability.\155\
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    \152\ See rule 22e-4(b)(1)(iv). A fund also must notify its 
board, and report confidentially to the Commission on Form N-RN, if 
its illiquid investments that are assets exceed 15% of net assets.
    \153\ See proposed rule 22e-4(b)(1)(iv).
    \154\ See Liquidity Rule Adopting Release, supra note 8, at text 
accompanying nn.218-223.
    \155\ The limitations on funds' issuance of senior securities, 
which include derivatives creating certain payment or delivery 
obligations, in section 18 of the Act and 17 CFR 270.18f-4 (rule 
18f-4) provide certain protections to investors, and the proposed 
amendments are designed to complement those protections. See 
Derivatives Adopting Release, supra note 21 (stating that a fund's 
derivatives risk management program would be part of an adviser's 
overall management of portfolio risk and would complement--but would 
not replace--a fund's other risk management activities, such as a 
fund's liquidity risk management program adopted under rule 22e-4).

---------------------------------------------------------------------------

[[Page 77199]]

    Under the proposal, for purposes of determining whether the fund is 
in compliance with the limitation on illiquid investments, the fund 
would treat as illiquid the amount of margin or collateral it has 
posted in connection with a derivatives transaction that is classified 
as an illiquid investment and that the fund would receive if it exited 
the derivatives transaction (``excess collateral'').\156\ This proposed 
requirement recognizes that, because a fund does not reasonably expect 
to be able to convert an illiquid derivatives investment to U.S. 
dollars within seven days, the fund likewise would not be able to 
convert to U.S. dollars the value of excess collateral posted as margin 
or collateral in connection with the derivatives transaction within 
seven days. Therefore, the proposal would require a fund to include the 
value of the excess collateral or margin when it determines the amount 
of illiquid assets it holds for purposes of the 15% limit on illiquid 
investments.
---------------------------------------------------------------------------

    \156\ This does not mean that the investment acting as margin or 
collateral would need to be classified as an illiquid investment 
under the rule. A fund would classify the relevant investment 
according to the rule's classification framework. In order to aid 
understanding of the reported data, we propose to require a fund to 
report the value of investments treated as illiquid as a result of 
this provision. See section II.E.1.d, infra and Item B.8.b of 
proposed Form N-PORT.
---------------------------------------------------------------------------

    As with the proposed amendments related to the amounts posted as 
margin or collateral for non-highly liquid derivatives, a fund would 
not be required to specifically identify particular assets that it 
posted as margin or collateral to cover specific derivatives 
transactions. Instead, a fund would calculate the value of its assets 
posted as margin or collateral in connection with illiquid derivatives 
transactions and treat that value of assets as illiquid.\157\
---------------------------------------------------------------------------

    \157\ See Item B.8.b of proposed Form N-PORT.
---------------------------------------------------------------------------

    We request comment on this aspect of the proposal, including:
    47. Should we, as proposed, require funds to treat as illiquid 
investments the value of excess collateral the fund has posted in 
connection with a derivatives transaction that is classified as an 
illiquid investment? Are there circumstances where a fund would have 
ready access to the value of such collateral even though the associated 
derivatives transaction is illiquid?
    48. Are there challenges to identifying and monitoring the amount 
of excess collateral a fund has posted in connection with a derivatives 
transaction that is classified as an illiquid investment? If so, are 
there ways to address those challenges?
    49. Are there other instances where we should treat an investment 
as illiquid for purposes of the rule's limit on illiquid investments 
that the current rule and the proposal do not contemplate?
    50. Should we amend any other aspects of the illiquid investment 
limitations in the rule? For example, should we change the amount of 
the limit on illiquid investments from 15% to a lower amount, such as 
10% or 5%, or a higher amount, such as 20% or 25%?

B. Swing Pricing

    We are proposing amendments to rule 22c-1 that would require all 
registered open-end management investment companies to engage in swing 
pricing under certain conditions, except for money market funds and 
ETFs (the latter, ``excluded funds'').\158\ Swing pricing is a process 
of adjusting a fund's current NAV when certain conditions are met, such 
that the transaction price effectively passes on costs stemming from 
shareholder inflows or outflows to the shareholders engaged in that 
activity. Trading activity and other changes in portfolio holdings 
associated with purchases and redemptions may impose costs, including 
trading costs and costs of depleting a fund's liquidity. These costs, 
which currently are borne by the non-transacting shareholders in the 
fund, can dilute the interests of these shareholders. In addition, this 
can create incentives for shareholders to redeem quickly to avoid 
losses, particularly in times of market stress. If shareholder 
redemptions are motivated by this first-mover advantage, they can lead 
to increasing outflows, and as the level of outflows from a fund 
increases, the incentive for remaining shareholders to redeem may also 
increase.\159\ By imposing the costs associated with net purchases or 
net redemptions on the shareholders who are purchasing or redeeming 
from the fund at that time, swing pricing can more fairly allocate 
costs, reduce the potential for dilution of investors who are not 
currently transacting in the fund's shares, and reduce any potential 
first-mover advantages.
---------------------------------------------------------------------------

    \158\ See proposed rule 22c-1(b). We refer to registered open-
end management investment companies other than excluded funds as 
``funds'' or ``open-end funds'' when discussing the swing pricing 
requirement. We continue to believe it is appropriate to limit swing 
pricing to these funds and to not include other fund types, such as 
unit investment trusts or closed-end funds. See Swing Pricing 
Adopting Release, supra note 8, at nn.62-72 and accompanying text. 
With respect to excluded funds, the Commission recently proposed to 
require certain money market funds to engage in swing pricing under 
rule 2a-7, but those money market funds would not be subject to the 
proposed swing pricing requirement under rule 22c-1(b). See Money 
Market Fund Reforms, Investment Company Act Release No. 34441 (Dec. 
15, 2021) [87 FR 7248 (Feb. 8, 2022)] (``Money Market Fund Proposing 
Release''). ETFs, including an ETF share class of any fund that 
issues multiple classes of shares representing interests in the same 
portfolio, would not be subject to the swing pricing requirement, as 
discussed below. See definition of ``Exchange-traded fund'' in 
proposed rule 22c-1(d).
    \159\ Some research suggests that a first-mover advantage in 
open-end funds may lead to cascading anticipatory redemptions akin 
to traditional bank runs. This research generally models an 
exogenous response to negative fund returns and not trading costs. 
However, these results may extend to trading costs to the degree 
that cost based dilution may reduce subsequent fund returns, which 
would trigger runs in these models. See, e.g., Chen, Qi, Itay 
Goldstein, and Wei Jiang. 2010. ``Payoff Complementarities and 
Financial Fragility: Evidence from Mutual Fund Outflows.'' Journal 
of Financial Economics 97(2): 239-262. See also Goldstein, Itay, Hao 
Jiang, and David Ng. 2017. ``Investor Flows and Fragility in 
Corporate Bond Funds.'' Journal of Financial Economics 126(3):592-
613. See also Morris, Stephen, Ilhyock Shim, and Hyun Song Shin. 
2017. ``Redemption Risk and Cash Hoarding by Asset Managers.'' 
Journal of Monetary Economics 89: 71-87. See also Zeng, Yao. 2017. 
``A Dynamic Theory of Mutual Fund Runs and Liquidity Management.'' 
Working Paper. See also Ma, Yiming, Kairong Xiao, and Yao Zeng. 
2021. ``Mutual Fund Liquidity Transformation and Reverse Flight to 
Liquidity.'' Working Paper. See also Ma, Yiming, Kairong Xiao, and 
Yao Zeng. 2021. ``Bank Debt versus Mutual Fund Equity in Liquidity 
Provision.'' Working Paper. See also Christof W. Stahel. 2022. 
``Strategic Complementarity Among Investors with Overlapping 
Portfolios'', available at https://ssrn.com/abstract=3952125 
(positing that investors behave similarly regardless of whether they 
hold assets indirectly through a fund or directly through a 
separately managed account and the general explanation for investor 
decisions to sell assets is that all market participants compete for 
finite market liquidity).
---------------------------------------------------------------------------

1. Proposed Swing Pricing Requirement
    Under the proposal, every open-end fund other than an excluded fund 
would be required to establish and implement swing pricing policies and 
procedures that adjust the fund's current NAV per share by a swing 
factor either if the fund has net redemptions or if it has net 
purchases that exceed an identified threshold.\160\ We are proposing to 
require these funds to use swing pricing as an anti-dilution tool, in 
contrast to the optional framework that currently exists in rule 22c-1. 
Based on our observations from the events in March 2020, including in 
other jurisdictions where swing pricing is a common tool, requiring 
funds to use

[[Page 77200]]

swing pricing could result in benefits for investors, as discussed 
below.\161\ However, at present no U.S. funds have implemented swing 
pricing. One reason funds have not implemented swing pricing is that 
they lack timely flow information to operationalize this anti-dilution 
tool. However, even if all funds had access to sufficient flow 
information in order to implement swing pricing, some may nonetheless 
choose not to implement it due to implementation costs or because 
investors in U.S. funds are unfamiliar with swing pricing. Therefore, 
funds may not be incentivized to be the first to adopt swing pricing. 
We believe that a regulatory requirement, rather than a permissive 
framework, would accrue benefits to investors that justify the 
implementation costs and would overcome these collective action 
problems that may have prevented swing pricing implementation. In 
addition, we continue to believe the information a fund that uses swing 
pricing must disclose in its prospectus will improve public 
understanding regarding a fund's use of swing pricing.\162\
---------------------------------------------------------------------------

    \160\ See proposed rule 22c-1(b)(1) and definition of ``Inflow 
swing threshold'' in proposed rule 22c-1(d).
    \161\ See supra notes 59 to 63 and accompanying text (stating 
that some fund managers with both U.S. and European operations 
indicated to the staff that swing pricing would have been a useful 
tool for U.S. funds to have had to combat dilution in Mar. 2020).
    \162\ See Swing Pricing Adopting Release, supra note 11, at 
n.360 and accompanying text. In 2016, when the Commission adopted 
the optional swing pricing rule for open-end funds that are not 
excluded funds, it also adopted certain amendments to Form N-1A to 
enhance disclosure related to a fund's use of swing pricing, if 
applicable. Among other things, these amendments required that a 
fund that uses swing pricing explain the fund's use of swing 
pricing, including its meaning, the circumstances under which the 
fund will use it, the effects of swing pricing on the fund and 
investors, and the upper limit it has set on the swing factor. See 
Item 6(d) of Form N-1A. Although no funds currently use swing 
pricing, and therefore do not provide swing pricing disclosures to 
their investors, under the proposed rule all funds other than 
excluded funds would be required to provide these disclosures, other 
than the swing factor upper limit disclosure, to their investors.
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    Some academics and market participants have suggested that swing 
pricing has provided significant benefits to long-term investors in 
funds in other jurisdictions, reducing dilution attributable to the 
transaction costs associated with shareholder activity.\163\ As an 
example, one foreign fund industry group has suggested that funds using 
swing pricing exhibit superior performance returns over time compared 
to funds with identical investment strategies and trading patterns that 
do not employ anti-dilution measures.\164\ In terms of performance 
benefits, one study found that, for a 10% rise in monthly outflows, the 
associated decline in monthly returns relative to a fund's benchmark 
was double the amount for a fund that does not use swing pricing in 
comparison to a fund that uses swing pricing (a 6 basis point decline 
versus a 3 basis point decline, respectively).\165\ And one investment 
manager reviewed the effects of swing pricing for twenty of its 
European funds in 2019 and found that the anti-dilution effect of swing 
pricing improved annual performance for these funds by around 10 to 
more than 60 basis points.\166\
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    \163\ See, e.g., Dunhong Jin, Marcin Kacperczyk, Bige Kahraman, 
and Felix Suntheim, Swing Pricing and Fragility in Open-end Mutual 
Funds, The Review of Financial Studies, 35(1) (2022), available at 
https://academic.oup.com/rfs/article/35/1/1/6162183 (``Jin, et 
al.''); BlackRock, Swing Pricing--Raising the Bar (Sept. 2021), 
available at https://www.blackrock.com/corporate/literature/whitepaper/spotlight-swing-pricing-raising-the-bar-september-2021.pdf (``BlackRock Swing Pricing Paper'').
    \164\ See Association of the Luxembourg Fund Industry, Swing 
Pricing Brochure (July 2022), available at https://www.alfi.lu/getattachment/3154f4f7-f150-4594-a9e3-fd7baaa31361/app_data-import-alfi-alfi-swing-pricing-brochure-2022.pdf.
    \165\ See CSSF Paper, supra note 61.
    \166\ See BlackRock Swing Pricing Paper, supra note 163.
---------------------------------------------------------------------------

    In addition, in March 2020, many European funds that used swing 
pricing lowered their swing thresholds and increased the size of their 
swing factors, suggesting there was a need to make more frequent and 
significant adjustments to the funds' NAVs at that time to avoid 
substantial dilution that otherwise would have occurred.\167\ One study 
found that surveyed funds using swing pricing during a three week 
period of elevated redemptions in March 2020 recouped roughly 6 basis 
points of total net assets on average from redeeming investors.\168\ 
The swing pricing policies that the proposed rule would require, which 
are similar to those used by some foreign funds, are designed to 
mitigate dilution arising from shareholders' purchase and redemption 
activity, particularly during times of stress when those dilution costs 
may increase. In addition to reducing dilution, some studies also 
suggest that swing pricing dampens redemption pressure, although some 
have found this effect to be minimal or nonexistent during certain 
periods of market stress.\169\
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    \167\ See notes 59 to 63 and accompanying text.
    \168\ See Claessens and Lewrick, supra note 61.
    \169\ See CSSF Paper, supra note 61 (stating that funds applying 
swing pricing are less exposed to redemption pressure during 
episodes of elevated market volatility, but this dampening effect 
appears to vanish during episodes of severe market volatility, such 
as in Mar. 2020); see also infra notes 354 to 355 and accompanying 
text.
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    Consistent with our current optional swing pricing framework, the 
proposed swing pricing requirement for open-end funds would apply to 
both net purchases and net redemptions. Although liquidity and 
transaction costs associated with meeting net redemptions can present 
heightened risks of dilution, particularly in stress periods, we 
continue to believe that net purchases also may cause shareholder 
dilution.\170\ However, when a fund has net purchases, we propose to 
require swing pricing only if the amount of net purchases exceeds a 
specified threshold.
---------------------------------------------------------------------------

    \170\ See Swing Pricing Adopting Release, supra note 13, at 
paragraph accompanying n.166.
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    While the proposed swing pricing requirement generally would apply 
to all registered open-end funds other than excluded funds, we propose 
to retain the current provision that does not permit feeder funds in a 
master-feeder fund structure to use swing pricing.\171\ The use of 
swing pricing would generally be inappropriate for feeder funds, 
because that level of a fund structure does not actually transact in 
underlying portfolio assets as a result of net purchase or net 
redemption activity. A master fund, however, generally would be subject 
to the swing pricing requirement. The master fund may purchase 
portfolio assets to invest purchasing shareholders' cash (as 
transferred through the feeder fund) or sell portfolio assets to pay 
redemption proceeds (reducing the feeder fund's interest in the master 
fund). Thus, to the extent that net purchases into or redemptions from 
the master fund by one or more feeder funds, or any other investors in 
the master fund, would trigger the application of swing pricing under 
the proposed rule, the swing factor would be applied at the level of 
the master fund.
---------------------------------------------------------------------------

    \171\ See proposed rule 22c-1(b)(5) and current rule 22c-
1(a)(3)(iv).
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    Consistent with current rule 22c-1, we propose to exclude ETFs from 
the swing pricing requirement because ETFs often impose fees in 
connection with the purchase or redemption of creation units that are 
intended to defray operational processing and brokerage costs to 
prevent possible shareholder dilution.\172\ We also are not including 
ETFs within the scope of the proposed requirement because we believe 
that swing pricing could impede the effective functioning of an ETF's 
arbitrage mechanism. Additionally, notwithstanding section 18(f)(1) of 
the Act, a fund with a share class that is an exchange-traded fund is 
subject to the swing pricing requirement only with respect to any share 
classes that are not

[[Page 77201]]

exchange-traded funds.\173\ The proposed rule provides this exemption 
to allow funds with both mutual fund and ETF share classes to apply 
swing pricing to only their mutual fund share classes. Absent an 
exemption, differences between the ETF and mutual fund share classes 
created by swing pricing could result in a fund being deemed to issue a 
senior security, which would otherwise be prohibited under the 
Act.\174\ Thus, a fund with an ETF share class would exclude the ETF 
share class's flow information when determining whether and how to 
apply swing pricing, and would not adjust the NAV of the ETF share 
class by the swing factor in computing the share price of that class.
---------------------------------------------------------------------------

    \172\ See Swing Pricing Adopting Release, supra note 13, at 
paragraph accompanying n.68.
    \173\ See proposed rule 22c-1(b)(6).
    \174\ Section 18(f)(1) of the Act generally makes it unlawful 
for any registered open-end company to issue any class of senior 
security. Section 18(g) defines senior security to include any stock 
of a class having a priority over any other class as to distribution 
of assets or payment of dividends.
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    We request comment on our proposal to require any fund that is not 
an excluded fund to implement swing pricing.
    51. As proposed, should we require any fund that is not an excluded 
fund to implement swing pricing? Should we provide any additional 
exclusions from the swing pricing requirement? For example, should 
funds that invest solely or primarily in highly liquid investments be 
permitted, but not required, to use swing pricing? If we provide an 
exclusion for funds that primarily invest in highly liquid investments, 
how should we define primarily for these purposes (e.g., more than 50%, 
66%, or 75%)? Should we use the same definition of highly liquid 
investment as the liquidity rule for these purposes? If not, how should 
we define highly liquid investments for purposes of an exclusion from 
the swing pricing requirement? If a fund primarily invested in highly 
liquid investments were to no longer qualify for this exclusion, when 
should it be required to adopt swing pricing (e.g., immediately or 
within a certain grace period)? Alternatively, should we limit the 
exclusion from swing pricing to funds that do not invest more than a 
certain percentage of assets in illiquid investments? What maximum 
level of illiquid investments would be appropriate to qualify for the 
exclusion (e.g., 1%, 2%, 5%, or 10%)? When should a fund be required to 
adopt swing pricing if it no longer complies with this exclusion (e.g., 
immediately or within a certain grace period)? Should we use the same 
definition of illiquid investments as the liquidity rule for these 
purposes?
    52. Should we limit the swing pricing requirement to only certain 
types of mutual funds and retain an optional framework for other mutual 
funds? If so, how should we identify by rule the types of mutual funds 
that would most benefit from a swing pricing requirement? As an 
example, would it be appropriate to require swing pricing for fixed-
income mutual funds only, and to retain an optional approach for other 
funds? If so, how would a fixed-income fund be defined for this purpose 
(e.g., a mutual fund that invests at least a certain percentage in 
fixed-income investments, such as 50%, 75%, or 80%)? How would fixed-
income investments, or any other type of portfolio investment, be 
defined for this purpose?
    53. Should we adopt swing pricing as a default tool, with a 
requirement that an open-end fund, other than an excluded fund, 
implement swing pricing unless certain conditions are met? For example, 
should a fund be required to implement swing pricing unless its board 
of directors makes certain determinations (e.g., that the fund and its 
shareholders are unlikely to experience significant dilution in 
connection with investor purchases and redemptions) and the fund 
maintains records of such determinations? Should a fund be required to 
report information about the reasons for such a determination publicly?
    54. Should swing pricing remain an optional tool for all mutual 
funds, other than excluded funds? If so, how likely are funds to use 
the tool if we adopt the proposed hard close requirement or take other 
steps to facilitate a fund's ability to determine its daily flows 
before the NAV is finalized? Are certain types of funds more likely to 
use swing pricing if it remained an optional tool? If so, why are these 
funds more likely to use swing pricing than others? Are the funds that 
would use swing pricing if it remained optional the same funds that 
would benefit most from addressing dilution associated with shareholder 
transactions?
    55. As proposed, should we retain the current provision in the rule 
that does not allow feeder funds in a master-feeder structure to engage 
in swing pricing?
    56. Under the proposal, ETFs, the shares of which are listed and 
traded on a national securities exchange, and that are formed and 
operate under an exemptive order under the Investment Company Act or in 
reliance on rule 6c-11, would not be subject to swing pricing. Is the 
proposed definition of ETF appropriate? If we adopt the swing pricing 
requirement, would mutual funds seek to convert to an ETF structure? 
Are there any actions or exemptive relief that the Commission should 
take or grant to facilitate the conversion of mutual funds to ETFs? If 
ETFs were to become the predominant form of open-end fund under the 
Investment Company Act, would that affect the need to impose swing 
pricing? And likewise, if ETFs were to become the predominant form of 
open-end fund, would that benefit or harm investors, and if so, how and 
to what extent?
    57. Should we provide that funds with an ETF share class must 
exclude the ETF share class from the application of swing pricing, as 
proposed? What, if any, operational challenges would exist for such 
funds under this approach? Should we instead require that ETF share 
classes be subject to the swing pricing requirement, which would result 
in authorized participant purchases and redemptions being effected at 
an adjusted NAV?
    58. Should we require swing pricing for both net redemptions and 
net purchases, as proposed, or only for net redemptions? Do dilution 
and liquidity concerns exist for open-end funds in both scenarios?
    59. What would be the operational challenges and costs for funds to 
adopt and implement swing pricing, as proposed? If funds 
operationalized swing pricing in March 2020, would it have been an 
effective tool to address dilution during that period? To what extent 
were funds selling portfolio assets and incurring transaction costs to 
meet redemptions, or in anticipation of future redemptions, during that 
period?
    60. Will the existing swing pricing disclosures required in Form N-
1A be sufficient to help investors understand swing pricing? How 
familiar are U.S. investors with swing pricing? Are there any 
amendments we should make to the swing pricing disclosure requirements 
in Form N-1A that would help investors better understand the concept of 
swing pricing? For example, should funds be required to disclose in 
their registration statements the frequency they have applied, or would 
have applied, a swing factor over a specified period of time (e.g., 1, 
3, or 5 years) based on historical flow information? Should we require 
a fund to provide additional disclosure about swing pricing to 
investors outside of the registration statement? For example, should we 
require funds to disclose the effects of swing pricing in shareholder 
reports (e.g., in management's discussion of fund performance)?

[[Page 77202]]

    61. Is the experience with swing pricing in certain foreign 
jurisdictions relevant to an analysis of whether swing pricing would be 
an effective tool for U.S. funds? Beyond the operational differences 
identified in this release, are there differences in regulatory 
frameworks, markets, fund investors, or other factors between the U.S. 
and these other jurisdictions that might cause U.S. funds' experiences 
with swing pricing to differ? \175\
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    \175\ See infra note 225 (discussing that European jurisdictions 
in which funds use swing pricing generally already have a hard 
close, which results in European funds receiving order flow much 
earlier than U.S. funds).
---------------------------------------------------------------------------

    62. Rule 2a-4 under the Act requires a fund, when determining its 
current NAV, to reflect changes in holdings of portfolio securities and 
changes in the number of outstanding shares resulting from 
distributions, redemptions, and repurchases no later than the first 
business day following the trade date. Are there any changes we should 
make to rule 2a-4 to address dilution? For example, should we amend 
that rule to require that funds reflect these changes on trade date?
2. Amendments to Swing Threshold Framework
    The current rule permits a fund to determine its own swing 
threshold for net purchases and net redemptions, based on a 
consideration of certain factors the rule identifies.\176\ We are 
proposing to specify when a fund must use swing pricing to adjust its 
current NAV, which would differ depending on whether the fund has any 
net redemptions or has net purchases above a specified threshold on a 
given day.
---------------------------------------------------------------------------

    \176\ The factors a fund currently must consider in determining 
the size of its swing threshold are: (1) the size, frequency, and 
volatility of historical net purchases or net redemptions of fund 
shares during normal and stressed periods; (2) the fund's investment 
strategy and the liquidity of the fund's portfolio investments; (3) 
the fund's holdings of cash and cash equivalents, and borrowing 
arrangements and other funding sources; and (4) the costs associated 
with transactions in the markets in which the fund invests. See rule 
22c-1(a)(3)(i)(B).
---------------------------------------------------------------------------

    When the Commission adopted the swing pricing provisions in 2016, 
it determined to require a swing threshold and not to prescribe a swing 
threshold floor applicable to all funds because it believed that 
different levels of net purchases and net redemptions would create 
different risks of dilution for funds with different strategies, 
shareholder bases, and other liquidity-related characteristics.\177\ At 
that time, the Commission believed consideration of the swing threshold 
factors--which took into account these different liquidity-related 
characteristics--would lead a fund to set a threshold at a level that 
would trigger the fund's investment adviser to trade portfolio assets 
in the near term to a degree or of a type that may generate material 
liquidity or transaction costs for the fund. We further believed that 
after considering these factors, a fund would be unable to set the 
swing threshold at zero. Thus the current rule does not contemplate 
full swing pricing, but assessment of the swing threshold factors could 
lead certain funds to set low swing thresholds approximating full swing 
pricing.
---------------------------------------------------------------------------

    \177\ For considerations relating to the swing threshold in the 
current rule, see generally Swing Pricing Adopting Release, supra 
note 11, at nn.150-155 and accompanying text.
---------------------------------------------------------------------------

    In the intervening period, however, we have observed that the size 
of funds' swing thresholds in certain other jurisdictions has depended 
more on uniform decisions by the manager of a fund complex than on an 
individual fund's liquidity-related circumstances.\178\ In addition, we 
considered our experience with the liquidity rule discussed above, 
where currently allowed discretion has led to favorable liquidity 
assessments that tend to over-estimate funds' liquidity during stressed 
market conditions and that fail to change dynamically during stressed 
market conditions. A similar experience translated to swing pricing 
could cause high swing thresholds set during calm market conditions 
that do not adjust downward as may be appropriate in some cases during 
stressed market conditions. As a result of these experiences, we are 
concerned that retaining the principles-based framework for setting 
swing thresholds under the current rule would not result in the level 
of fund-specific tailoring the Commission contemplated and, instead, 
would simply result in undue variation among similarly situated funds 
and, in some cases, swing thresholds high enough that swing pricing 
does not adequately address dilution.
---------------------------------------------------------------------------

    \178\ See Bank of England Survey, supra note 60 (``In most cases 
we observed that funds with different primary strategies and assets, 
but managed by the same fund manager, used both the same thresholds 
for applying swing pricing, and the same calculation of the 
standardised swing factor. This appears to indicate that managers 
may not be fully considering specific factors such as in the 
investor base or asset-specific factors for individual funds.'').
---------------------------------------------------------------------------

    In the case of net redemptions, the proposed rule would require a 
fund to apply swing pricing always (i.e., without a swing 
threshold).\179\ Because every net redemption can potentially involve 
trading or borrowing costs that dilute the value of the fund, as well 
as depletion of a fund's liquidity for remaining shareholders that 
increases the likelihood of future dilution, the proposal, in setting a 
uniform approach to triggering swing pricing in all circumstances, 
would require a fund to apply a swing factor regardless of the size of 
its net redemptions, which is intended to fairly allocate costs and 
reduce dilution. Applying swing pricing regardless of the size of net 
redemptions may help reduce any potential first-mover advantage 
associating with redeeming before other investors. However, the types 
of costs the swing factor must take into account would depend on the 
size of net redemptions. Specifically, the proposed rule would require 
a fund to include market impacts in its swing factor only if net 
redemptions exceed 1% of the fund's net assets (the ``market impact 
threshold'').\180\ Market impact costs are the costs incurred when the 
price of a security changes as a result of the effort to purchase or 
sell the security.\181\
---------------------------------------------------------------------------

    \179\ See proposed rule 22c-1(b)(1)(i).
    \180\ See proposed rule 22c-1(b)(2)(i)(C) and definition of 
``Market impact threshold'' in proposed rule 22c-1(d).
    \181\ Market impact costs reflect price concessions (amounts 
added to the purchase price or subtracted from the selling price) 
that are required to find the opposite side of the trade and 
complete the transaction.
---------------------------------------------------------------------------

    We understand that there may be operational challenges and 
complexities to estimating market impact costs. Recognizing these 
difficulties, and that market impacts are likely to be minimal or even 
negligible when redemptions are not significant, the proposal sets a 
market impact threshold below which estimates of market impact would 
not be necessary. Based on our analysis of historical daily flow data 
over a period of more than 10 years for equity and fixed-income mutual 
funds, a given fund had daily outflows of more than 1% on slightly more 
than 1% of trading days.\182\ We propose a 1% market impact threshold 
to balance the operational challenges of frequently estimating market 
impacts with the goal of reducing dilution, particularly in times of 
stress (i.e., when a fund is more likely to experience redemptions of 
more than 1% of net assets and market impacts are likely to be larger). 
We recognize that smaller funds may be less likely than larger ones to 
have market impacts at a 1% threshold, because they generally would be 
selling smaller investment sizes than larger funds would at that 
threshold. However, there are circumstances in which smaller funds may 
also experience market impact costs at the 1% threshold; for example, 
if the fund holds substantial

[[Page 77203]]

illiquid investments or during periods of market stress. Therefore, the 
proposal requires all funds to assess whether market impact costs would 
occur when net redemptions exceed a 1% threshold and, if they do occur, 
to include such costs in the swing factor. A uniform market impact 
threshold for all funds would provide a consistent and objective 
threshold for all funds to consider market impacts.
---------------------------------------------------------------------------

    \182\ Based on Morningstar data for the period of Jan. 2009 
through Dec. 2021.
---------------------------------------------------------------------------

    When a fund has net purchases, we propose to only require swing 
pricing--including market impact--if the amount of net purchases 
exceeds 2% of the fund's net assets (the ``inflow swing 
threshold'').\183\ We recognize that smaller levels of net purchases 
are less likely to result in dilution than net redemptions. This is 
because funds, while required to pay redemptions within seven days, are 
not required to invest cash inflows within a specified period. 
Therefore, if bid-ask spreads have widened on a day that the fund 
receives the cash inflows, the fund manager generally can wait to 
invest the cash to reduce transaction costs.\184\ In addition, while 
investing the cash inflows could decrease the liquidity of the fund, 
particularly if the cash is used to purchase illiquid investments, the 
liquidity rule curbs this possibility by limiting the amount of 
illiquid investments a fund can acquire.
---------------------------------------------------------------------------

    \183\ See definition of ``Inflow swing threshold'' in proposed 
rule 22c-1(d).
    \184\ Regardless of bid-ask spreads, a fund manager also may 
choose to use cash inflows to invest in derivatives to obtain market 
exposure quickly while strategizing where to invest that cash on a 
longer-term basis. Funds may be incentivized to invest promptly in 
an effort to avoid reduced returns and tracking error.
---------------------------------------------------------------------------

    For these reasons, the proposal sets a swing threshold for net 
purchases but not one for net redemptions. We also recognize that low 
levels of net purchases are less likely to result in dilution, but that 
higher levels of net purchases are more likely to result in dilution 
absent appropriate tools for mitigating it. Based on our analysis of 
historical daily flow data over a period of more than 10 years for 
equity and fixed-income mutual funds, a given fund had daily inflows of 
approximately 2% on about 1% of trading days.\185\ Therefore, similar 
to the proposed market impact threshold, we propose an inflow swing 
threshold of 2% to balance the operational challenges of frequently 
implementing swing factors for net purchases with the goal of reducing 
dilution, particularly when a fund has significant inflows.
---------------------------------------------------------------------------

    \185\ Based on Morningstar data for the period of Jan. 2009 
through Dec. 2021.
---------------------------------------------------------------------------

    Although the proposed rule would identify a market impact threshold 
that would apply to net redemptions and an inflow swing threshold for 
net purchases, the rule would permit the fund's swing pricing 
administrator to use smaller thresholds than the rule identifies in 
either of these instances as the administrator determines is 
appropriate to mitigate dilution.\186\ Flexibility to use a smaller 
threshold is designed to recognize that there may be circumstances in 
which a smaller threshold than the rule requires would help reduce 
dilution, such as when the fund holds a larger amount of investments 
that are less liquid, in times of market stress, or in the case of a 
large fund (i.e., because a large fund is selling or purchasing a 
larger amount of instruments than a small fund at a 1% market impact 
threshold for net redemptions or a 2% inflow swing threshold for net 
purchases). For example, a fund might elect to implement swing pricing 
if the fund experiences net purchases of any amount.
---------------------------------------------------------------------------

    \186\ See definitions of ``Inflow swing threshold'' and ``Market 
impact threshold'' in proposed rule 22c-1(d). Under the proposed 
rule, the term ``swing pricing administrator'' has the same meaning 
as the term ``person(s) responsible for administering swing 
pricing'' under the current rule. See proposed rule 22c-1(d); 
current rule 22c-1(a)(3)(ii)(C). The swing pricing administrator is 
the fund's investment adviser, officer, or officers responsible for 
administering the fund's swing pricing policies and procedures. The 
proposed rule specifies that the swing pricing administrator may 
consist of a group of persons. As with the current rule, the fund's 
board of directors must designate this person or group of persons.
---------------------------------------------------------------------------

    We understand that in having the option to set a lower market 
impact threshold for net redemptions and inflow swing threshold for net 
purchases, the swing pricing administrator would have discretion that 
it potentially could use to enhance fund performance in a misleading 
manner by adjusting the fund's NAV more frequently or more 
substantially than is needed to address dilution. To help address this 
risk, under the proposal the administrator would be required to include 
in its written reports to the board the information and data supporting 
its determination to use lower thresholds.\187\ Additionally, 
consistent with the current rule, a fund's portfolio manager could not 
be designated as the swing pricing administrator.\188\
---------------------------------------------------------------------------

    \187\ See proposed rule 22c-1(b)(3)(iii)(C). Consistent with the 
current rule, a fund would be required to maintain a written copy of 
the report provided to the board for six years, the first two years 
in an easily accessible place. See rule 22c-1(a)(3)(iii); proposed 
rule 22c-1(b)(4).
    \188\ See rule 22c-1(a)(3)(ii)(C) and proposed rule 22c-
1(b)(3)(ii). See also Swing Pricing Adopting Release, supra note 11, 
at n.269 and accompanying text.
---------------------------------------------------------------------------

    We request comment on our proposed amendments to the swing pricing 
threshold.
    63. Should we adopt a framework that, in the case of net 
redemptions, requires a fund to adjust its NAV by a swing factor only 
when those net redemptions exceed an identified threshold (i.e., as we 
propose for net purchases)? If so, should that threshold be the same 
size as the 1% market impact threshold, or a lower or higher amount 
(e.g., 0.5%, 1.5%, or 2%)?
    64. Should we require the application of the swing factor 
regardless of the size of net purchases or net redemptions, or only 
when they exceed a certain percentage of a fund's net assets? Should 
funds have discretion to set their own thresholds? If so, should that 
discretion be based on the swing threshold factors currently in the 
rule or should we adjust those factors?
    65. Should we include a market impact threshold for net 
redemptions, as proposed? Is 1% an appropriate level for the market 
impact threshold? Should it be a lower or higher amount (e.g., 0.5%, 
1.5%, or 2%)? Is there different data or analysis that we should take 
into account to determine the market impact threshold?
    66. Should we include an inflow swing threshold for net purchases, 
as proposed? Is 2% an appropriate level for the inflow swing threshold? 
Should it be a lower or higher amount (e.g., 0.5%, 1%, 1.5%, or 3%)? Is 
there different data or analysis that we should take into account to 
determine the inflow swing threshold?
    67. Would the proposed inflow swing threshold, or a requirement to 
use swing pricing in the case of net purchases more generally, cause a 
fund to limit the total amount an investor can invest in the fund? If 
so, what effects would this have on investors?
    68. Should we permit the swing pricing administrator to use 
discretion to establish a smaller market impact threshold for net 
redemptions or a smaller inflow swing threshold for net purchases if 
the administrator determines a smaller threshold is appropriate to 
mitigate dilution, as proposed? Should we prescribe the circumstances 
in which a smaller threshold would be permitted, the timing of such a 
determination by the swing pricing administrator (e.g., if a swing 
pricing administrator must formally establish a smaller threshold that 
will remain in place for a period of time), disclosure of such a 
determination to the fund's investors, and recordkeeping requirements 
in support of the determination? Should we require the fund's board, 
instead of

[[Page 77204]]

the swing pricing administrator, to approve use of a smaller threshold? 
Should we permit the swing pricing administrator to exclude certain 
types of costs from the swing factor if it uses a lower-than-required 
threshold? For example, should a swing pricing administrator be 
permitted to exclude market impact estimates from the swing factor if 
it uses an inflow swing threshold that is lower than 2%, and instead 
only include market impact estimates when inflows also exceed 2%?
    69. Should the swing pricing administrator or the board have 
flexibility to establish larger thresholds than proposed (i.e., to 
apply a swing factor only when net redemptions exceed a specified 
percentage, to include market impacts in the swing factor when net 
redemptions are an identified amount that is greater than 1%, or to 
apply a swing factor only when net purchases exceed an identified 
amount that is greater than 2%)? If so, what are the circumstances in 
which a fund board or the swing pricing administrator should have 
flexibility to use larger thresholds that the proposed rule identifies?
    70. Should we allow certain types of funds to use different 
thresholds than those the proposed rule identifies? For example, should 
we permit or require smaller funds to use larger thresholds? If so, how 
should we identify smaller funds for these purposes? Should the rule 
identify larger thresholds for smaller funds, or should smaller funds 
have flexibility to determine their own thresholds? As another example, 
should we permit or require funds that hold significant amounts of 
highly liquid investments to use larger thresholds? If so, how should 
we identify funds that hold significant amounts of highly liquid 
investments for these purposes? Should the rule identify larger 
thresholds for these funds, or should they have flexibility to 
determine their own thresholds?
3. Determining Flows
    Consistent with the current rule, the swing pricing administrator 
must review investor flow information to determine if the fund has net 
purchases or net redemptions and the amount of net purchases or net 
redemptions.\189\ For these purposes, investor flow information means 
information about the fund investors' daily purchase and redemption 
activity. Investor flow information may consist of individual, 
aggregated, or netted eligible orders, and excludes any purchases or 
redemptions that are made in kind and not in cash.\190\ Currently it 
would be difficult to determine investor flow information on a given 
day because some intermediaries do not provide order flow until after 
the fund has finalized its NAV. In recognition of these challenges, the 
current rule permits a swing pricing administrator to make swing 
pricing determinations based on receipt of sufficient investor flow 
information to allow the fund to estimate reasonably whether it has 
crossed a swing threshold with high confidence.\191\ While the hard 
close provision in the proposed rule is intended to result in funds 
generally having flow information in a timely manner, and therefore 
greatly reduce the need for estimation, we recognize some estimation 
may still be required. The proposed rule would, therefore, continue to 
permit the swing pricing administrator to make swing pricing 
determinations based on reasonable, high confidence estimates of 
investor flows.\192\
---------------------------------------------------------------------------

    \189\ See rule 22c-1(a)(3)(i)(A) and proposed rule 22c-
1(b)(1)(i).
    \190\ See definition of ``Investor flow information'' in 
proposed rule 22c-1(d). See also infra section II.C.2 (discussing 
the proposed definition of ``eligible order'' for purposes of the 
hard close requirement).
    \191\ See rule 22c-1(a)(3)(i)(A).
    \192\ Under the current rule, the swing pricing administrator is 
permitted to make swing threshold determinations based on receipt of 
sufficient flow information ``to allow the fund to reasonably 
estimate whether it has crossed the swing threshold(s) with high 
confidence.'' See rule 22c-1(a)(3)(i)(A).
---------------------------------------------------------------------------

    Under our proposal, the swing pricing administrator would be 
required to review investor flow information on a daily basis to 
determine: (1) if the fund experiences net purchases or net 
redemptions; and (2) the amount of net purchases or net redemptions. We 
propose to permit the swing pricing administrator to make these 
determinations based on ``reasonable, high confidence estimates.'' 
While there would be less of a need to estimate flows under the 
proposed hard close requirement, we understand that a swing pricing 
administrator still would need to use estimates in some cases. For 
instance, if an investor submits an exchange order to redeem its shares 
from Fund A and simultaneously invest the proceeds in Fund B, the swing 
pricing administrator for Fund B may need to estimate the incoming cash 
by multiplying the number of shares redeemed from Fund A by an estimate 
of Fund A's NAV, which may be the prior day's transaction price. In 
this situation, we recognize it will not be possible for the swing 
pricing administrator to determine the exact size of the related flow 
information until a later time. Therefore, we propose to permit the use 
of reasonable, high confidence estimates to make swing pricing 
determinations. Furthermore, some funds groups with both U.S. and 
European operations may already have experience with this type of 
estimation, because European funds that have adopted swing pricing 
generally use the prior day's price to estimate today's flows.
    We request comment on our proposal requirements related to 
shareholder flow information.
    71. Should we permit a swing pricing administrator to make 
reasonable, high confidence estimates of investor flows, as proposed? 
Are there operational complexities to this approach? Is the rule's 
reference to reasonable, high confidence estimates of investor flows 
sufficiently clear? If not, how should we revise the rule to provide 
greater clarity about permitted estimates?
    72. As proposed, should we remove references to receipt of 
sufficient investor flow information in the rule in light of the 
proposed hard close requirement?
    73. Is the proposed definition of ``investor flow information'' 
clear and understandable? Should the rule continue to exclude any 
purchases or redemptions that are made in kind and not in cash, as 
proposed?
    74. Should we provide additional guidance about circumstances in 
which a swing pricing administrator may need to use estimates in 
connection with arriving at a reasonable, high confidence estimate of 
the fund's investor flow information and how the administrator should 
arrive at those estimates? Are there other types of investor orders, 
beyond orders that identify the number of shares to be purchased or 
sold and exchanges, that would still require estimation under a hard 
close approach? Should funds be able to use the prior day's transaction 
price for purposes of estimating flows where the amount of such flows 
are dependent on having a transaction price? Should funds be permitted 
to make adjustments to the prior day's price for these purposes (e.g., 
to reflect market movements relative to fund benchmarks that occurred 
after the prior day's NAV was struck)? If so, under what circumstances 
should we permit such adjustments?
    75. If we adopt the proposed hard close requirement, would there be 
scenarios in which a swing pricing administrator would be unable to 
arrive at a reasonable, high confidence estimate of investor flows? If 
so, when would this occur? How should a fund comply with the swing 
pricing requirement if the administrator is unable to arrive at a 
reasonable, high

[[Page 77205]]

confidence estimate of investor flows on a given day?
    76. Would the use of reasonable, high confidence estimates of 
investor flows subject swing pricing determinations to abuse? Should 
the use of estimates be limited to specific circumstances? Are there 
other ways for the swing pricing administrator to make swing pricing 
determinations without the use of reasonable, high confidence estimates 
of investor flows?
    77. Do fund groups with both U.S. and European operations already 
have experience with investor flow estimation? If so, would experience 
with European operations help these fund groups use estimates in their 
U.S. funds? What changes to the proposed rule, if any, would help fund 
groups without prior experience with investor flow estimation?
4. Swing Factors
    In determining the swing factor, the proposed rule would require a 
fund's swing pricing administrator to make good faith estimates, 
supported by data, of the costs the fund would incur if it purchased or 
sold a pro rata amount of each investment in its portfolio to satisfy 
the amount of net purchases or net redemptions (i.e., a vertical 
slice).\193\ The current swing pricing framework requires that the 
swing factor take into account only the near-term costs expected to be 
incurred by the fund as a result of net purchases or net redemptions 
that occur on the day the swing factor is used, as well as borrowing-
related costs associated with satisfying redemptions.\194\ Under our 
proposal, a fund would be required to assume it would purchase or sell 
a pro rata amount of each investment in its portfolio, rather than 
consider the specific investments it would purchase to invest the 
proceeds from subscriptions or sell to meet redemptions.\195\ Because a 
fund would need to calculate its costs based on the purchase or sale of 
a vertical slice of its portfolio, rather than selecting specific 
investments or borrowing to meet redemptions, we have proposed to 
remove borrowing costs from the swing factor calculation. We recognize 
that there are many ways a fund could pay redemptions or invest 
proceeds from investor purchases, and a fund may not necessarily sell 
or purchase a vertical slice of its portfolio holdings to do so. 
However, we believe analyzing costs based on an assumed purchase or 
sale of a vertical slice of the fund's portfolio would more fairly 
reflect the costs imposed by redeeming or purchasing investors than an 
approach that focuses solely on the costs associated with the 
instruments that the fund expects to buy or sell (or expected borrowing 
costs, in the case of redemptions). For example, under the current 
rule, if a fund sells only highly liquid investments to meet 
redemptions, the swing factor would typically reflect relatively low 
transaction costs of selling those investments and any near-term 
rebalancing, and generally would not account for the effect of leaving 
remaining investors with a less liquid portfolio or potential longer-
term rebalancing costs. In contrast, the proposed requirement that a 
fund calculate costs to purchase or sell a vertical slice of the 
portfolio is designed to recognize the potential longer-term costs of 
reducing the fund's liquidity under these circumstances.
---------------------------------------------------------------------------

    \193\ See proposed rule 22c-1(b)(2).
    \194\ These near-term costs include spread costs, transaction 
fees and charges arising from asset purchases or asset sales 
resulting from those purchases or redemptions. See rule 22c-
1(a)(3)(i)(C).
    \195\ See proposed rule 22c-1(b)(2).
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    In addition, using a vertical slice is more objective than the 
current approach, because the swing factor administrator does not need 
to anticipate what actions the fund will take to pay redemptions or 
invest proceeds from investor purchases, which may vary from day to 
day. This should make the swing factor easier to administer. Further, 
under the proposed swing pricing framework and consistent with the 
current rule, a swing factor could generally be determined on a 
periodic basis, as long as developments that should affect the swing 
pricing administrator's good faith estimates of spreads, market impact, 
and other transaction costs, such as significant market developments, 
prompt a quicker reevaluation.\196\ A quicker reevaluation would be 
required to comply with the proposed amendments where developments 
would otherwise prevent the prior swing factor from reflecting the cost 
the fund would incur if it purchased or sold a pro rata amount of each 
portfolio investment under current market conditions. Accordingly, we 
believe a fund would have the incentive to reevaluate promptly its 
swing factor in these circumstances because having an accurate and fair 
transaction price is crucially important to investors. We believe that 
funds would address the frequency of swing factor determinations when 
designing their policies and procedures relating to swing pricing.
---------------------------------------------------------------------------

    \196\ See Swing Pricing Adopting Release, supra note 11, at 
paragraph accompanying n.268.
---------------------------------------------------------------------------

    Calculating the swing factor would differ depending on whether the 
fund is experiencing net purchases or net redemptions. In the case of 
net redemptions, the good faith estimates must include, for selling a 
pro rata amount of each investment in the fund's portfolio to satisfy 
the amount of net redemptions: (1) spread costs; (2) brokerage 
commissions, custody fees, and any other charges, fees, and taxes 
associated with portfolio investment sales; and (3) if the amount of 
the fund's net redemptions exceeds the market impact threshold, the 
market impact.\197\ In the case of net purchases, swing pricing would 
only be applied if the amount of the fund's net purchases exceeds 
2%.\198\ In such cases the good faith estimates must include, for 
purchasing a pro rata amount of each investment in the fund's portfolio 
to invest the proceeds from the net purchases: (1) spread costs; (2) 
brokerage commissions, custody fees, and any other charges, fees, and 
taxes associated with portfolio investment purchases; and (3) the 
market impact.\199\ We believe these components of the swing factor for 
both net redemptions and net purchases, taken together, approximate the 
aggregate costs associated with dilution. We also believe that 
providing a standard for calculating swing factors, including the 
vertical slice approach and the identification of the categories of 
costs funds must include, would help avoid the variability in how funds 
calculate swing factors, as observed in some other jurisdictions where 
funds use swing pricing.\200\
---------------------------------------------------------------------------

    \197\ See proposed rule 22c-1(b)(2)(i).
    \198\ See proposed rule 22c-1(b)(2)(ii).
    \199\ Id.
    \200\ See Bank of England Survey, supra note 60. This report 
states that in calculating swing factors, some surveyed UK funds 
only considered bid-ask spreads, some other funds also considered 
explicit transaction costs such as commissions, and a few funds 
considered market impact as well. Moreover, in reviewing the size of 
swing factors applied in Mar. 2020, the report found that corporate 
bond funds with net outflows applied swing factors ranging between -
5% and +0.5% from Mar. 10 to 23. The report states that the scale of 
variation suggests that fund-specific experiences are not the sole 
explanation for differences in swing factors and that different 
approaches fund managers took in applying swing pricing also 
contributed to these variations.
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    We understand that in calculating the swing factor, fund managers 
may have incentives to over-estimate costs in order to improve fund 
performance. However, doing so would be misleading. To help address 
this risk, under the proposal funds would be required to report their 
swing factor adjustments publicly on Form N-PORT. We believe this 
public transparency

[[Page 77206]]

should reduce a fund's incentive to over-estimate costs. Additionally, 
a fund's portfolio manager, who arguably might have the strongest 
incentives to over-estimate costs, could not be designated as the swing 
pricing administrator.\201\
---------------------------------------------------------------------------

    \201\ See proposed rule 22c-1(b)(3)(ii).
---------------------------------------------------------------------------

    The method for calculating a fund's spread costs would differ 
depending on how the fund values its portfolio holdings. We understand 
that funds may value portfolio holdings at the bid price or the mid-
market price when striking their NAVs.\202\ If a fund values its 
portfolio holdings at the bid price, it would not need to include 
spread costs in its swing factor when the fund has net redemptions. In 
contrast, if the fund has net purchases exceeding 2%, the fund would 
need to include spread costs, which would reflect the full bid-ask 
spread. For a fund that uses mid-market pricing, it would need to 
include spread costs in its swing factor any time it applies swing 
pricing. When a fund using mid-market pricing has net redemptions, or 
net purchases exceeding 2%, the spread cost component of its swing 
factor would reflect half of the bid-ask spread.
---------------------------------------------------------------------------

    \202\ See FASB ASC 820-10-35-36C (providing that if an asset 
measured at fair value has a bid price and an ask price, the price 
within the bid-ask spread that is most representative of fair value 
in the circumstance shall be used to measure fair value, and that 
the use of bid prices for asset positions is permitted but not 
required for these purposes); FASB ASC 820-10-35-36D (stating that 
use of mid-market pricing as a practical expedient for fair value 
measurements within a bid-ask spread is not precluded). Since a 
seller generally asks for a higher price for a security than a buyer 
bids for that security, the mid-market price is incrementally higher 
than the bid price for a security, but lower than its ask price.
---------------------------------------------------------------------------

    The proposal would require a fund to include market impact in its 
swing factor only if the amount of net redemptions exceeds the market 
impact threshold, and in all cases where the amount of net purchases 
exceeds the inflow swing threshold. The market impact component of the 
swing factor would reflect good faith estimates of the market impact of 
selling (in the case of net redemptions) or purchasing (in the case of 
net purchases) a vertical slice of a fund's portfolio to satisfy the 
amount of net redemptions or net purchases. The fund would estimate 
market impacts for each investment in its portfolio by first estimating 
the market impact factor. This factor is the percentage change in the 
value of the investment if it were purchased or sold, per dollar of the 
amount of the investment that would be purchased or sold. Then, the 
fund would multiply the market impact factor by the dollar amount of 
the investment that would be purchased or sold if the fund purchased or 
sold a pro rata amount of each investment in its portfolio to meet the 
net redemptions or net purchases.\203\
---------------------------------------------------------------------------

    \203\ See proposed rule 22c-1(b)(2)(iii).
---------------------------------------------------------------------------

    We understand that it may be difficult to produce timely, good 
faith estimates of the market impact of purchasing or selling a pro 
rata portion of each instrument the fund holds. Recognizing these 
difficulties, and because some securities held by mutual funds may have 
similar characteristics and would likely incur similar costs if 
purchased or sold, the proposed rule would permit the swing pricing 
administrator to estimate costs and market impact factors for each type 
of investment with the same or substantially similar characteristics 
and apply those estimates to all investments of that type rather than 
analyze each investment separately.\204\
---------------------------------------------------------------------------

    \204\ See proposed rule 22(c)-1(b)(iv).
---------------------------------------------------------------------------

    The existing swing pricing framework currently in rule 22c-1 does 
not permit a fund to include market impact costs relating to 
transacting in the fund's investments in the swing factor calculation. 
At the time of the rule's adoption, the Commission stated that it may 
be difficult for many funds to estimate readily market impact costs, 
and that subjective estimates of market impact costs could grant 
excessive discretion in a fund's determination of a swing factor.\205\ 
We understand that it may continue to be difficult to determine market 
impact costs with precision, while a fund would be able to determine 
other relevant factors more precisely.\206\ However, we believe the 
experiences of European funds that employed swing pricing through March 
2020 have highlighted the importance of considering market impact 
costs, given the stressed nature of markets at that time, the level of 
those funds' redemptions, and the size of those funds' swing factors. 
We understand that only some European funds consider market impact 
costs when determining their swing factors.\207\ A recent survey 
conducted by the Association of the Luxembourg Fund Industry 
(``ALFI''), however, observed an increase in asset managers including 
market impact in their swing factors, with 35% of surveyed asset 
managers including this component in the factor calculation.\208\
---------------------------------------------------------------------------

    \205\ See Swing Pricing Adopting Release, supra note 11, at 
paragraph accompanying n.240.
    \206\ Methodologies used to estimate market impact are often 
created by liquidity measurement vendors. These vendors typically 
create a model to gauge what size of trade will have a market impact 
on a security (using various factors such as bid-offer spreads, 
issue sizes, recent daily average volumes, and recent trade sizes), 
back-test the model to check its accuracy, and then adjust the 
weights of the various factors used in the model accordingly.
    \207\ See Bank of England Survey, supra note 60 (stating that 
most surveyed fund managers did not factor market impact explicitly 
into their swing factors, and few had models in place to estimate 
spreads when needed).
    \208\ See ALFI Swing Pricing Survey 2022 (July 2022), available 
at https://www.alfi.lu/getattachment/8417bf51-4871-41da-a892-f4670ed63265/app_data-import-alfi-alfi-swing-pricing-survey-2022.pdf.
---------------------------------------------------------------------------

    To address the concern that market impact estimation may be 
difficult, and that subjective estimates of market impact costs could 
grant excessive discretion in the determination of a swing factor, we 
are providing additional parameters for estimating market impact to 
make the calculation more objective as discussed above. These 
prescriptive requirements should help to limit subjectivity, and 
recordkeeping requirements would require funds to document their market 
impact factors, facilitating our staff's review and oversight of mutual 
fund swing pricing.\209\
---------------------------------------------------------------------------

    \209\ See rule 31a-2(a)(2) (requiring funds to preserve for a 
period of not less than six years all schedules evidencing and 
supporting each computation of an adjustment to the fund's NAV based 
on swing pricing policies and procedures). A fund's records under 
the proposed amendments should generally include the fund's unswung 
NAV, the level of net purchases or net redemptions that the fund 
encountered (and estimated) that triggered the application of swing 
pricing, the swing factor that was used to adjust the fund's NAV, 
and relevant data supporting the calculation of the swing factor, 
including the components of the swing factor such as market impact.
---------------------------------------------------------------------------

    The current swing pricing framework requires the establishment of 
an upper limit on the swing factor used.\210\ The Commission included a 
2% upper limit in the current rule to make sure that swing pricing 
would not operate as a ``de facto gate.'' \211\ We are not including an 
upper limit on the swing factor under our proposed framework. We 
propose to remove the requirement for the board to review and approve 
the fund's swing threshold and the upper limit on the swing factor(s) 
used, as well as any charges on these items, to conform to our proposed 
swing pricing framework.\212\ The more specific parameters in this 
proposal for determining a fund's swing factor are intended to 
sufficiently mitigate the

[[Page 77207]]

concerns that led to an upper limit in the existing swing pricing 
regime. In addition, although the current rule does not prescribe which 
investments a fund would purchase or sell, the current upper limit may 
provide an incentive for funds to sell their most liquid assets first, 
which may increase the risk of dilution when the fund later rebalances 
its portfolio. Furthermore, we understand that in certain other 
jurisdictions, several funds experienced costs and dilution that led to 
swing factors above 2% in March 2020.\213\ Those cases suggest that the 
swing factors helped mitigate dilution and did not constitute a de 
facto gate, given that they reflected market conditions at that time. 
We recognize that liquidity costs could vary widely across funds and 
under different market conditions, and we do not wish to limit the 
extent to which swing pricing could mitigate dilution. Finally, the 
policies and procedures for determining the swing factor would be 
required to be approved by the fund's board, which has an obligation to 
act in the best interests of the fund.
---------------------------------------------------------------------------

    \210\ See rule 22c-1(a)(3)(i)(C). Additionally, a fund's board 
of directors, including a majority of directors who are not 
interested persons of the fund must approve the fund's swing 
threshold(s) and the upper limit on the swing factor(s) used, and 
any changes to the swing threshold(s) or the upper limit on the 
swing factor(s) used. See rule 22c-1(a)(3)(ii).
    \211\ See Swing Pricing Adopting Release, supra note 13, at text 
accompanying nn.253-254.
    \212\ See proposed rule 22c-1(b)(3). We also propose to modify 
the board's review of a fund's swing pricing policies and procedures 
to include ``their effectiveness at mitigating dilution'' rather 
than ``the impact on mitigating dilution.'' See proposed rule 22c-
1(b)(3)(iii)(A).
    \213\ See, e.g., Commission de Surveillance du Secteur 
Financier, Swing Pricing Mechanism--FAQ, available at https://www.cssf.lu/en/Document/cssf-faq-swing-pricing-mechanism/(providing 
guidance for increasing the swing factor above the maximum level 
identified in a fund's prospectus under certain circumstances, and 
noting that typical maximum swing factors observed in fund 
prospectuses are between 1% and 3%).
---------------------------------------------------------------------------

    Additionally, Form N-1A currently requires funds that use swing 
pricing to disclose a fund's swing factor upper limit.\214\ Because we 
propose to remove the swing factor upper limit in the rule, we also 
propose to remove the requirement to provide an upper limit on the 
swing factor from Item 6(d) of Form N-1A.\215\
---------------------------------------------------------------------------

    \214\ Item 6(d) of Form N-1A.
    \215\ See Item 6(d) of proposed Form N-1A.
---------------------------------------------------------------------------

    We request comment on our proposed calculation of a fund's swing 
factor.
    78. Does our proposed requirement that a fund calculate the swing 
factor by assuming it would sell or purchase a pro rata amount of each 
investment in its portfolio properly account for liquidity costs? Are 
there other considerations related to liquidity costs that the swing 
pricing framework should take into account, such as shifts in the 
fund's liquidity management or other repositioning of the fund's 
portfolio?
    79. Should funds calculate the swing factor by estimating the costs 
of purchasing or selling only the investments the fund plans to buy or 
sell to satisfy shareholder purchases or redemptions (consistent with 
the current rule), rather than calculating the swing factor based on 
the costs the fund would incur if it sold a pro rata amount of each 
investment in its portfolio (as proposed)? Which approach would more 
fairly reflect the costs imposed by redeeming or purchasing investors?
    80. Should we permit a fund not to use the vertical slice 
assumption when doing so would require the fund to assume that it is 
purchasing or selling an amount of a given instrument that would not be 
permissible under other rules (e.g., if it would result in an 
assumption that a fund would purchase an amount of illiquid investments 
that exceeds 15%)? If so, how should we modify the assumption for these 
purposes? Should we require a vertical slice assumption in all cases 
for administrative ease and consistency in calculations?
    81. As proposed, should the swing factor calculation take into 
account spread costs; brokerage commissions, custody fees, and any 
other charges, fees, and taxes associated with portfolio investment 
sales; and the market impact under certain circumstances? Should we 
remove any of these types of costs from the calculation? Are there 
other types of costs we should include?
    82. Should the swing factor calculation take into account borrowing 
costs like under the current rule? Should the proposed rule only 
include borrowing costs for certain assets, such as illiquid assets? 
Should illiquid investments be defined for this purpose using the same 
definition as in rule 22e-4?
    83. Should the way in which a fund calculates spread costs depend 
on whether it uses midpoint or bid pricing when valuing its holdings? 
Should we allow a fund that uses bid pricing not to apply a swing 
factor when it has net redemptions unless the amount of net redemptions 
exceeds a threshold (e.g., the market impact threshold)? Should we 
require all funds to use bid pricing, either instead of or in 
combination with a swing pricing requirement? Would use of bid pricing 
effectively address dilution, particularly when net redemptions are 
small? Instead of requiring swing pricing as proposed, should we 
require a fund to use bid pricing to compute its share price or 
otherwise adjust its price to reflect spread costs on days the fund 
estimates that it has net redemptions? If so, should the fund also use 
ask pricing on days the fund estimates that it has net purchases? 
Should we require a fund to use bid pricing to compute its share price 
on all days, regardless of whether the fund has net redemptions or 
purchases?
    84. Should we require the swing factor to include market impact 
under certain circumstances, as proposed? Do some or all funds already 
estimate market impact factors, or perform similar analyses, to inform 
trading decisions or liquidity rule classifications? If so, would these 
funds' prior experience smooth the transition to making a good faith 
estimate of the market impact factor under the proposal? Would the 
proposed amendments to the liquidity rule further enhance funds' 
ability to estimate market impacts? What difficulties might funds 
experience in developing a framework to analyze market impact factors 
and in producing good faith estimates of market impact factors for 
purposes of the proposed swing pricing requirement? What are the 
specific operational challenges in estimating market impact? Are there 
ways we could reduce those difficulties, while still requiring 
redeeming investors to bear costs that reasonably represent the costs 
they would otherwise impose on the fund and its remaining shareholders?
    85. Should we permit funds to calculate swing factors on a periodic 
basis, as long as developments such as significant market developments 
prompt a quicker re-evaluation, as proposed? Does this approach have 
any effect on the goals of reducing dilution, improving fairness, and 
addressing potential first-mover advantages? Are there other 
circumstances in which a fund should be required to re-evaluate its 
swing factors or certain swing factor components, such as changes in 
the fund's investment strategy or liquidity? Should we instead require 
funds to calculate swing factors (or certain components of swing 
factors) on a daily basis or at some other defined minimum frequency 
(e.g., weekly or monthly) unless developments prompt a quicker re-
evaluation?
    86. Should the rule permit, rather than require, funds to follow 
the identified inflow swing threshold, market impact threshold, and 
swing factor calculations set forth in the rule? If so, what 
considerations or factors should the rule require a fund to consider 
when determining thresholds and swing factors if the fund determines 
not to follow the threshold or calculations set forth in the rule? For 
example, instead of removing the factors a fund must consider when 
setting swing threshold(s) under the current rule, should we maintain 
those or similar factors for purposes of determining a fund's market 
impact

[[Page 77208]]

threshold or the inflow swing threshold? \216\
---------------------------------------------------------------------------

    \216\ See rule 22c-1(a)(3)(i)(B).
---------------------------------------------------------------------------

    87. Should funds be subject to a numerical limit on the size of 
swing factors? If so, should we retain the current rule's 2% swing 
factor upper limit and the disclosure of the limit in Form N-1A? 
Alternatively, should the limit be higher or lower (e.g., 1% or 3%)?
    88. Should we allow a fund to use a set swing factor, such as 2% or 
3%, in times of market stress when estimating a swing factor with high 
confidence may not be possible? How would we define market stress for 
this purpose? Should a fund's swing pricing administrator, adviser, or 
a majority of the fund's independent directors, be permitted to 
determine market conditions were sufficiently stressed such that the 
fund would apply the set swing factor? Are there other circumstances in 
which we should permit or require a fund to use a default swing factor? 
For example, should the rule establish a default swing factor that 
would apply when a fund has illiquid investments that exceed 15% or 
when a fund drops below its highly liquid investment minimum under rule 
22e-4?
    89. Should the rule permit a fund to apply a market impact factor 
of zero for certain investments or under certain circumstances? For 
example, should a fund be able to use a market impact of zero for 
certain categories of investments, such as Treasuries or other 
investments that the fund classifies as highly liquid investments under 
rule 22e-4? Are there particular circumstances in which it would not be 
reasonable for the rule to permit a fund to use a market impact factor 
of zero, such as in stressed market conditions?
    90. Instead of specifying swing factor calculations and thresholds 
in the rule, should we require a fund to adopt policies and procedures 
that specify how the fund would determine swing pricing thresholds and 
swing factors based on principles set forth in the rule? If so, should 
the policies and procedures include the methodologies from the market 
impact factor calculation we proposed? Should the policies and 
procedures be required to include the swing factor calculation? Should 
the policies and procedures be required to define the market impact 
threshold with reference to a metric other than net purchases or net 
redemptions? If we require policies and procedures, should we specify 
the market impacts and dilution costs that a fund's swing pricing 
program must address, rather than specifying specific principles and 
calculation methodologies?
    91. Are there circumstances in which it would not be possible to 
estimate the market impact factor with a high degree of accuracy? If 
so, what modifications should we make to the proposal?
    92. Would our proposed swing pricing requirement cause or 
incentivize investors to move their assets out of the funds that must 
implement swing pricing into other investment vehicles that do not use 
swing pricing, such as ETFs, collective investment trusts (``CITs''), 
or separately managed accounts? What are the potential effects 
associated with these decisions? For example, when would such movements 
occur (e.g., before the end of the compliance period for a swing 
pricing requirement, if adopted, or over a longer time horizon)? Would 
retirement plan sponsors or others remove mutual funds as investment 
options if swing pricing is required? In the case of separately managed 
accounts, should the Commission take any action with respect to how the 
Investment Company Act may apply to investment advisory programs 
seeking to provide the same or similar professional management services 
on a discretionary basis to a large number of advisory clients having 
relatively small amounts to invest? \217\
---------------------------------------------------------------------------

    \217\ See, e.g., 17 CFR 270.3a-4.
---------------------------------------------------------------------------

    93. Would a swing pricing requirement change the behavior of funds? 
For example, would it cause any changes to fund strategies or 
practices?
    94. How might swing pricing affect investor behavior in a period of 
liquidity stress? Would swing pricing increase fund resilience by 
reducing the first-mover advantage that some investors may seek during 
periods of market stress? Would swing pricing encourage investors to 
redeem smaller amounts over a longer period of time because investors 
will not know whether the fund's flows during any given pricing period 
will trigger swing pricing and, if so, the size of the swing factor for 
that period?
    95. Based on historical data, how would our swing pricing framework 
affect funds' transaction prices under normal market conditions?
    96. Rather than requiring funds to adopt a swing pricing 
requirement, should we provide more than one approach to mitigate 
dilution and require each fund to implement an anti-dilution tool, but 
permit each fund to determine its own preferred approach? If so, which 
anti-dilution tool options should the rule provide? Should we, for 
example, allow a fund to adopt swing pricing, a liquidity fee (i.e., 
purchase and/or redemption fees), or dual pricing? \218\ Are there 
other options that would be appropriate under this approach? Would 
funds' use of different approaches benefit investors by increasing 
investor choice or, conversely, would these differences confuse 
investors or make it more difficult for them to compare funds with each 
other?
---------------------------------------------------------------------------

    \218\ See infra section II.D for a discussion of potential 
liquidity fee or dual pricing frameworks.
---------------------------------------------------------------------------

    97. The current rule requires a fund's board of directors to 
approve the fund's swing pricing policies and procedures and to 
designate the persons responsible for swing pricing. Should we require 
board involvement in the day-to-day administration of a fund's swing 
pricing program in addition to its compliance oversight role? How might 
funds maintain segregation between portfolio management and swing 
pricing administration? Should a fund's chief compliance officer have a 
designated role in overseeing how the fund applies the proposed swing 
pricing requirement?
    98. The current rule requires a fund's board to review, no less 
frequently than annually, a report prepared by the swing pricing 
administrator on the fund's use of swing pricing, including the 
effectiveness of the fund's policies and procedures and any material 
changes to them since the last report. Should we require board review 
of a swing pricing report more or less frequently than annually? Should 
we require less frequent board review over time (e.g., every quarter 
for the first year after implementation and then less frequently in 
following years as the fund gains experience implementing the swing 
pricing program under various market conditions)? Should we require the 
fund to disclose any material inaccuracies in the swing pricing 
calculation to the board (e.g., as they arise, no less frequently than 
quarterly, or at some other frequency)? Would this disclosure 
requirement be additive, or would fund boards already receive 
information about material inaccuracies in the swing pricing 
calculation in the course of existing board oversight? \219\
---------------------------------------------------------------------------

    \219\ See, e.g., 17 CFR 270.38a-1 (requiring the fund's chief 
compliance officer to provide a written report to the board 
addressing each material compliance matter occurring since the date 
of the chief compliance officer's last report to the board); 
Compliance Programs of Investment Companies and Investment Advisers, 
Investment Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 
74713 (Dec. 24, 2003)] (``Rule 38a-1 Adopting Release''), at n.84 
(``Serious compliance issues must, of course, always be brought to 
the board's attention promptly, and cannot be delayed until an 
annual report.'').
---------------------------------------------------------------------------

    99. In addition to the proposed requirement that funds would 
publicly

[[Page 77209]]

report their swing factor adjustments on Form N-PORT, should funds also 
be required to post that same information on their websites? If so, how 
promptly should website reporting be required (e.g., weekly, monthly, 
quarterly, annually)? Are there other ways to provide this information 
to investors?

C. Hard Close

    Currently if an investor submits an order to an intermediary to 
purchase or redeem fund shares, that order will be executed at the 
current day's price as long as the intermediary receives the order 
before the time the fund has established for determining the value of 
its holdings and calculating its NAV (typically 4 p.m. ET).\220\ The 
fund, however, might not receive information about that order until 
much later, sometimes as late as the next morning. We are proposing 
amendments to rule 22c-1 under the Act to require a hard close for 
those funds that are required to implement swing pricing.\221\ The 
proposed hard close requirement would provide that a direction to 
purchase or redeem a fund's shares is eligible to receive the price 
established at the current day's price solely if the fund, its 
designated transfer agent, or a registered securities clearing agency 
(collectively, ``designated parties'') receives an eligible order 
before the pricing time as of which the fund calculates its NAV.\222\ 
Orders received after the fund's established pricing time would receive 
the next day's price.\223\ In 2003, the Commission proposed a similar 
hard close requirement but did not adopt the proposed amendments.\224\ 
The proposed hard close amendments would serve multiple goals, such as 
facilitating mutual funds' ability to operationalize swing pricing by 
ensuring that funds receive timely flow information, modernizing and 
improving order processing, as well as helping to prevent late trading.
---------------------------------------------------------------------------

    \220\ Although not all funds calculate their NAVs as of 4 p.m. 
ET, throughout this release we use 4 p.m. ET as the time as of which 
a fund calculates its NAV unless otherwise noted.
    \221\ As discussed above in section II.B, swing pricing would be 
required for all registered open-end management investment companies 
other than money market funds and ETFs. The proposal would not 
affect the operation of current rule 22c-1 for money market funds or 
ETFs, as well as unit investment trusts (which are also subject to 
rule 22c-1).
    \222\ See proposed rule 22c-1(a)(3).
    \223\ Funds generally compute their NAVs once per day, although 
some funds compute their NAVs multiple times per day. For 
simplicity, this discussion assumes that a fund computes its NAV 
once per day.
    \224\ See Amendments to Rules Governing Pricing of Mutual Fund 
Shares, Investment Company Act Release No. 26288 (Dec. 11, 2003) [68 
FR 70388 (Dec. 17, 2003)] (``2003 Hard Close Proposing Release'').
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1. Purpose and Background
    We are proposing to require all registered open-end funds (other 
than money market funds and ETFs) to implement swing pricing in order 
to combat dilution. Our hard close proposal is designed to support the 
proposed swing pricing amendments by facilitating the more timely 
receipt of fund order flow information. To implement the proposed swing 
pricing requirement, mutual funds need sufficient net order flow 
information to determine whether to apply a swing factor, and the size 
of that swing factor, before they finalize that day's price. Based on 
staff outreach with foreign regulators and asset managers that operate 
in Europe, we understand that a hard close is common in other 
jurisdictions in which funds currently implement swing pricing, and use 
of a hard close in those jurisdictions facilitates the receipt of 
timely flow information to inform swing pricing decisions.\225\ The 
proposed hard close requirement would facilitate the more timely 
receipt of order flow information by requiring that the fund, its 
transfer agent, or a clearing agency receive all orders that are 
eligible to receive that day's price before the fund computes its NAV.
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    \225\ We understand that the hard close employed in these other 
jurisdictions is not necessarily the same as the hard close approach 
we are proposing. For example, we understand it is common in some 
other jurisdictions for the required time of receipt of orders by 
the fund to be several hours before the time as of which the fund 
values its holdings.
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    Beyond facilitating swing pricing, our proposed hard close 
amendments to rule 22c-1 also would help prevent late trading of fund 
shares. Because a financial intermediary currently can submit an order 
that it received before 4 p.m. ET to a designated party after 4 p.m. ET 
for execution at that day's NAV, there is a risk that an intermediary 
could unlawfully alter orders using after-hours information to benefit 
the intermediary or its clients. The Commission and others uncovered 
several instances of late trading in the early 2000s.\226\ While the 
Commission adopted rules to address concerns about late trading, we 
believe that the hard close proposal, when coupled with our current 
rules, would more effectively prevent late trading.\227\ For example, 
some fund intermediaries are not subject to examination by the 
Commission and staff, and we are unable to examine whether those 
intermediaries permit or engage in unlawful late trading. By proposing 
to require that all purchase and redemption orders be received by the 
fund, its transfer agent, or a registered clearing agency by 4 p.m. ET, 
the proposal would prevent intermediaries from altering orders after 4 
p.m. ET or unlawfully misrepresenting that an order was received before 
4 p.m. ET and entitled to that day's price. We believe that the 
proposed amendments would aid in the elimination of late trading 
through intermediaries by requiring certain SEC-regulated parties to 
receive orders before the NAV is computed to receive that day's price. 
The proposed hard close requirement would also modernize and improve 
order processing and reduce operational risks, as discussed below.
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    \226\ See, e.g., 2003 Hard Close Proposing Release, supra note 
224 (discussing investigations by Commission staff of suspected late 
trading, which suggested that, at the time, late trading of fund 
shares was not an isolated event). See, also, e.g., In the Matter of 
Steven B. Markovitz, Investment Company Act Release No. 26201 (Oct. 
2, 2003); In the Matter of Theodore Charles Sihpol, III, Investment 
Company Act Release No. 27113 (Oct. 12, 2005); In the Matter of Legg 
Mason Wood Walker, Inc., Investment Company Act Release No. 27071 
(Sept. 21, 2005); In the Matter of Canadian Imperial Holdings, Inc. 
and CIBC World Markets Corp., Investment Company Act Release No. 
26994 (July 20, 2005); In the Matter of Brean Murray & Co., Inc., 
Investment Company Act Release No. 26761 (Feb. 17, 2005).
    \227\ See, e.g., Rule 38a-1 Adopting Release, supra note 219 
(adopting rule 38a-1 under the Act, which requires written policies 
and procedures reasonably designed to prevent violation of the 
securities laws, oversight of compliance by the fund's service 
providers, and designation of a chief compliance officer).
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2. Pricing Requirements
    Under the proposed rule, an eligible order to purchase or redeem 
would receive the price for the next pricing time after a designated 
party receives the order.\228\ We propose to define the terms ``pricing 
time'' and ``eligible order'' for purposes of the rule.\229\ Eligible 
orders would receive a price based on the current NAV as of the next 
pricing time, which would include an adjustment to the NAV to include 
the swing factor, as applicable. Consistent with the current rule, the 
fund's board of directors would be required to establish a ``pricing 
time,'' which would be defined as the time or times of day as of which 
the fund calculates the current NAV of its redeemable shares pursuant 
to the rule (typically 4 p.m. ET). The price of a fund's shares would 
typically be finalized several hours after the pricing time, giving 
funds time to calculate the current NAV, apply any

[[Page 77210]]

swing factor, and finalize and publish the fund share price.
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    \228\ See proposed rule 22c-1(a)(3).
    \229\ See definitions of ``Eligible order'' and ``Pricing time'' 
in proposed rule 22c-1(d).
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    For purposes of the proposed hard close requirement, an eligible 
order to purchase or redeem fund shares would have to supply certain 
information about the size of an investor's intended trade. This 
approach is intended to facilitate swing pricing by providing mutual 
funds with information they can use to calculate investor flows. In 
addition, this approach requires that trading intentions are clear 
before 4 p.m., which would further help prevent late trading. 
Specifically, we propose to define the term ``eligible order'' to mean 
a direction to purchase or redeem a specific number or value of fund 
shares. For example, an eligible order would include the direction to 
purchase or sell either (1) a specific number of shares of a fund 
(e.g., 100 shares, or all the shares held in the account), or (2) an 
indeterminate number of shares of a specific value (e.g., $10,000 of 
shares of the fund).
    The proposed definition of eligible order also would include 
exchange orders. An exchange refers to the process in which an investor 
initiates an order to purchase shares of a fund using the proceeds from 
a contemporaneous order to redeem shares of another fund. When an 
exchange is initiated, two transactions are created--a redemption of 
securities and a purchase. We understand that exchanges are often 
between funds in the same fund complex, however, exchanges can occur 
between funds in different complexes. In either case, exchanges often 
are processed as a single transaction so that both the redemption and 
purchase components of the exchange receive same-day pricing. For 
exchanges involving a fixed number of shares on the redemption leg, the 
amount and number of shares of the second fund to be purchased will not 
be known until the NAV of the first fund is determined, which will be 
after the NAV is struck after 4 p.m. ET. For example, if an investor 
submits an order to redeem 100 shares of Fund A and invest the 
redemption proceeds in Fund B, the amount of the redemption proceeds 
from Fund A is not known until Fund A determines its price for that day 
and, likewise, the purchase amount for Fund B is not known until that 
time.\230\ Under our proposed rules, this exchange transaction would 
qualify as an eligible order so that these contemporaneous transactions 
may continue to occur.
---------------------------------------------------------------------------

    \230\ See supra section II.B.3 (discussing how a fund whose 
shares are purchased in an exchange transaction can estimate the 
size of the inflow for purposes of the proposed swing pricing 
requirement).
---------------------------------------------------------------------------

    To receive that day's price, a designated party must receive the 
eligible order before the pricing time.\231\ The fund's designated 
transfer agent is a registered transfer agent that is designated in the 
fund's registration statement filed with the Commission.\232\ 
Currently, NSCC is the only registered clearing agency for fund shares, 
which operates its Fund/SERV service for processing fund transactions. 
The proposed rule would specify that eligible orders are irrevocable as 
of the next pricing time after a designated party receives the order. 
The proposed requirement of irrevocability of an eligible order is 
designed to prevent the cancellation or modification of orders by 
investors or intermediaries after the pricing time applicable to the 
order.\233\ Preventing the cancellation or modifications of orders 
after the pricing time would help avoid continuing adjustments to the 
investor flow information that a fund uses to make swing pricing 
decisions. In addition, the alteration or cancellation of fund orders 
after the pricing time may be used as a means to facilitate late 
trading as fund investors may become aware of new market information 
after the order has been submitted and after the pricing time. We 
request comment on the proposed approach to implementing the hard close 
requirement, including:
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    \231\ Although orders would have to be received by Fund/SERV or 
the designated transfer agent by 4 p.m. ET to ensure same-day 
pricing, the clearing agency and designated transfer agent each may 
complete its processing after the pricing time.
    \232\ See proposed rule 22c-1(d). The term ``transfer agent'' 
has the same meaning as in section 3(a)(25) of the Exchange Act [15 
U.S.C. 78c(a)(25)] and does not include underlying or sub-transfer 
agents. A fund may designate more than one transfer agent in its 
registration statement.
    \233\ The irrevocability of an order does not prevent a fund 
from rejecting an order and does not affect the ability of a fund to 
maintain policies and procedures for correcting bona fide errors.
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    100. Should we make any changes to the definitions included in the 
proposed rule? Is the definition of ``eligible order'' clear and 
understandable? Is the definition of ``designated transfer agent'' 
clear and understandable? Is the definition of ``pricing time'' clear 
and understandable''? Are there other terms we should define?
    101. Should the proposed hard close requirement permit exchanges, 
as proposed? If not, what goals of the proposed hard close requirement 
would be supported by no longer permitting exchanges?
    102. Should the definition of ``eligible order'' require orders to 
be irrevocable as of the pricing time, as proposed? Should funds be 
permitted to correct bona fide errors under a hard close, as proposed? 
If not, how should errors be resolved? Are there other reasons why an 
eligible order should not be considered irrevocable as of the pricing 
time?
    103. Should the definition of ``eligible order'' include directions 
to purchase or redeem a specific percentage of fund shares in an 
account or a specific percentage of an account's value?
    104. To what extent do designated parties already time stamp orders 
based on the time of receipt? Should we include new requirements for 
each designated party to time stamp order information for purposes of 
the hard close requirement?
    105. Should we include funds, designated transfer agents, and 
registered clearing agencies as designated parties, as proposed? Would 
allowing registered clearing agencies to receive eligible orders for 
purposes of the hard close delay the ability of the fund's swing 
pricing administrator to assess investor flow information to make swing 
pricing decisions? If so, how long would this delay be?
    106. Beyond the proposed designated parties, are there other 
parties involved in processing order information that should be 
eligible to receive eligible orders before the pricing time so that 
orders may receive that day's NAV? For example, should a fund's 
principal underwriter qualify as a designated party and, if so, why? To 
what extent do direct investors or intermediaries today place orders 
with a fund's principal underwriter or directly with the fund's 
transfer agent?
    107. Should we limit the proposed hard close requirement to funds 
that must implement swing pricing under the amendments to rule 22c-1, 
as proposed?
    108. The proposed amendments to rule 22c-1 would establish 
different requirements for money market funds, transactions by 
authorized participants with ETFs, and unit investment trusts than for 
all other open-end funds, which would be required to implement a hard 
close. Would investors, funds, or intermediaries be confused by the 
different pricing requirements that would be created by the proposed 
amendments to rule 22c-1? If so, what confusion would be created? What 
party to a transaction would bear that confusion? Would additional 
burdens be created by having different pricing requirements under 
proposed rule 22c-1 for these different types of registered investment 
companies?

[[Page 77211]]

3. Effects on Order Processing, Intermediaries and Investors, and 
Certain Transaction Types
    The proposed hard close would require changes to current order 
processing practices. Although modernizing these practices is intended 
to reduce operational risk and enhance resilience, in addition to the 
benefits related to swing pricing and helping deter late trading, we 
recognize these changes would also involve costs.\234\
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    \234\ See infra section III.C.3 discussing the estimated costs 
of the hard close proposal on funds, designated parties, 
intermediaries, and investors.
---------------------------------------------------------------------------

a. Order Processing Improvements
    The system updates that would support the implementation of a hard 
close may provide additional benefits by requiring modernization of how 
orders are processed. Today, some intermediaries net their customers' 
purchase and redemption orders in a given fund against each other, 
meaning that an intermediary combines and offsets the value of purchase 
and redemption activity across multiple customer accounts. Instead of 
netting purchases and redemptions together, some other intermediaries 
maintain separation between purchase orders and redemption orders. 
After aggregating customers' orders, intermediaries then submit orders 
in one or more batches, with most orders submitted to the designated 
party after 4 p.m. ET. As a result of the proposed hard close 
requirement, some intermediaries may opt to discontinue infrequent or 
even once-a-day batch processes for submitting orders and instead adopt 
more frequent batch processing approaches that result in more frequent 
order submission throughout the business day. Some intermediaries may 
even elect to utilize message-based communications for order flow, in 
which orders are submitted on a near-real-time basis.\235\ We 
understand based on industry outreach that some intermediaries 
currently do not submit orders throughout the day to facilitate 
customers' ability to cancel or correct orders intra-day, before the 
orders are submitted to a designated party. If intermediaries continue 
to provide this capability to customers under a hard close, they would 
likely either: (1) need to develop a process with designated parties 
for cancelling and correcting orders submitted to a designated party 
before the pricing time (as eligible orders are irrevocable under the 
proposal as of the pricing time, but not before); or (2) submit orders 
to a designated party relatively close in time to the pricing time, 
instead of throughout the day.
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    \235\ Intermediaries that take advantage of netting likely would 
be unable to eliminate batch processing altogether since netting 
necessitates definition of a period over which trades are netted and 
a process that collects eligible customer orders and nets them 
together into a single order for submission to a fund. Message-based 
communication is less likely to be implemented when netting is 
utilized.
---------------------------------------------------------------------------

    If an intermediary submits orders more often or earlier in the day, 
it would be less vulnerable to an intra-day disruption within its own 
operational environment. Orders that have been submitted prior to a 
disruption are able to be accepted and acknowledged by a fund, even if 
the intermediary experiences delays in its own processing. This 
improves the intermediary's operational resilience, since some 
operational activities on which the intermediary is dependent will be 
able to continue. Similarly, earlier order submission should also 
result in earlier confirmations from the fund.\236\ As such, the 
chances increase for an intermediary to submit an order and receive a 
confirmation even if the fund's transfer agent has a disruption later 
in the day. This reduces an intermediary's vulnerability to disruptions 
in others' operational processing, further improving the intermediary's 
operational resilience. Collectively, as all intermediaries, funds, and 
fund transfer agents process orders more frequently, operational 
resilience across all market participants improves.\237\
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    \236\ The term ``confirmation,'' for the purposes of this 
release, unless otherwise indicated, refers to the process by which 
a fund accepts a purchase or redemption order. The confirmation 
process discussed in this section is different from the 
confirmations required by 17 CFR 240.10b-10 (Exchange Act rule 10b-
10). Confirmations under rule 10b-10 require broker-dealers to 
provide specific disclosures in writing to customers at or before 
the completion of a transaction. See rule 10b-10 under the Exchange 
Act.
    \237\ See infra section II.C.3.b for additional complexity and 
possible points of failure in current order processing practices.
---------------------------------------------------------------------------

    The proposed hard close would also eliminate cancellations and 
corrections that are submitted after the pricing time. As a result, an 
investor or intermediary would bear the cost, if any, of the errors 
leading to a cancel or correct order. We believe it would be unfair for 
a fund's shareholders to bear the cost of an error in this case, as the 
investor or intermediary was the cause of that error. For errors that 
were the intermediary's responsibility, the intermediary should be 
solely accountable for correcting the error and, if necessary, 
compensating the investor. We understand that currently some 
intermediaries and funds have complex processes for posting 
cancellations and corrections, including processes for funds to bill 
intermediaries for errors.
    In addition, the proposed hard close requirement would improve the 
confirmation process for funds. The confirmation process helps ensure 
the accuracy of the trade that will be settled. Until the fund provides 
a confirmation, an intermediary does not know whether the order will be 
accepted or rejected. Under current practice, we understand that 
because of the delay in intermediaries submitting orders, funds 
likewise issue order confirmations on a delayed basis. When an 
intermediary must submit all orders by a certain time under the hard 
close proposal, funds would be able to issue confirmations to 
intermediaries earlier. We believe that timelier confirmations by funds 
would support the reduction of operational risks and improve market 
resiliency by providing certainty to intermediaries and investors about 
whether orders are accepted or rejected at an earlier point in the 
process, meaning they have more time to work toward settlement of the 
trade or determine how to manage a rejected order.\238\ Further, 
intermediaries similarly may be able to issue trade confirmations 
required by rule 10b-10 of the Exchange Act to their customers on a 
timelier basis, although an intermediary will need to wait until the 
price is published before it can calculate the net money or number of 
shares to issue the trade confirmation to its customer. Requiring a 
hard close may also facilitate settlement modernization. Many funds 
settle purchases and redemptions on a T+1 basis, and the proposed hard 
close could help improve the settlement process by providing complete 
information about eligible orders on the trade date.
---------------------------------------------------------------------------

    \238\ An order may be rejected for a variety of reasons 
including, among others, the intermediary is not set up to transact 
with a particular fund, an order to sell is for more than the number 
of shares held, or an order to purchase is less than the fund's 
investment minimum.
---------------------------------------------------------------------------

    In addition, providing funds with more timely and accurate 
information about the fund's daily flows under the proposed hard close 
would allow funds to make portfolio and risk management decisions based 
on more complete and accurate flow information than is available under 
current practices. Currently, some funds may rely on projected flows 
when making investment decisions, though these projections may be 
unreliable because of orders that the fund does not receive until the 
next day, including cancellations and corrections. Other funds may 
instead rely on flow information posted at the custodian because of its 
accuracy, but this

[[Page 77212]]

information is delayed. For example, for a fund that settles on T+1, 
the custodian often will post the flow at the end of the day on T+1, 
which may not be visible to the portfolio manager until the morning of 
T+2. With a hard close, however, flow information should be available 
from the transfer agent on the night of the trade date. In addition, by 
eliminating the possibility that the fund could receive additional 
orders after the pricing time, including cancellations and corrections, 
the data available that night would be more reliable. Similarly, a fund 
managing its risk would be able to do so more effectively by having 
access to accurate flow data more quickly. Ultimately, the proposed 
hard close requirement is designed to further the Commission's mission 
to protect investors and reduce risk by improving the timeliness of 
order flow information communicated to the fund.
b. Effects on Intermediaries
    The proposed amendments would require changes in the ways funds and 
intermediaries process fund purchase and redemption orders. As 
discussed above, intermediaries generally submit aggregated and, in 
some cases netted, orders in one or more batches, often after 4 p.m. 
ET. Some intermediaries submit orders directly to the fund's transfer 
agent or to Fund/SERV, while some intermediaries rely on other 
intermediaries, such as clearing brokers or retirement platforms, to 
submit orders to the transfer agent or Fund/SERV. In addition, some 
intermediaries' systems do not initiate batch processing until a fund's 
final NAV is received or until final NAVs are received for all funds 
offered on their platforms.
    In response to the proposed hard close requirement, funds and 
intermediaries would need to make significant changes to their business 
practices, including updating their computer systems, altering their 
batch processes, or integrating new technologies that facilitate faster 
order submission. Intermediaries would need to reengineer their systems 
to ensure disseminated order information reaches the transfer agent or 
Fund/SERV before 4 p.m., unless they determine to process fund orders 
at the next day's price as a matter of practice.\239\ For 
intermediaries with reliance on ``downstream'' intermediaries, 
coordination in the timing of order communication will be essential to 
ensure orders reach the fund, transfer agent, or registered clearing 
agency prior to the deadline. In addition, Fund/SERV may need to run 
more batch cycles in the period leading up to 4 p.m. than it does 
today, as currently batch cycles run into the evening and overnight to 
receive and process orders from intermediaries.
---------------------------------------------------------------------------

    \239\ While the proposed hard close requirement would require 
intermediaries to transmit eligible orders before 4 p.m. ET, 
intermediaries would still be able to process orders after 4 p.m. 
for purposes of execution and settlement, as they currently do 
today. For example, after receiving the NAV the intermediary would 
then be able to determine the net money to be paid to the investor 
or to be collected.
---------------------------------------------------------------------------

    We understand that retirement plan recordkeepers may face 
particular challenges with adhering to the proposed hard close 
requirement.\240\ Retirement plan recordkeepers may employ a method of 
order processing that relies on receiving the current day's NAV before 
submitting orders. Funds do not typically receive the order flow 
information for transactions from retirement plan recordkeepers until 
well after the day's NAV has been calculated. These order flows are 
delayed, we understand, due to the calculations that the retirement 
plan recordkeepers complete under plan rules as well as to legacy 
systems that require the final NAV before finalizing the order. For 
retirement plan recordkeepers, we understand that current recordkeeping 
systems require that day's NAV before the participant's plan 
instructions may be applied to the participant's order. Once the order 
has been processed through the investment instructions specific to the 
participant's plan, it can be placed for execution. In addition, 
retirement plan recordkeepers may perform compliance and other checks 
on orders before finalizing the orders for submission post-NAV strike.
---------------------------------------------------------------------------

    \240\ See Comment Letter of The Principal Financial Group on 
2003 Hard Close Proposing Release, File No. S7-27-03 and Comment 
Letter of ASPA on 2003 Hard Close Proposing Release, File No. S7-27-
03. The comment file for the 2003 Hard Close Proposing Release, 
where these comment letters can be accessed, is available at https://www.sec.gov/rules/proposed/s72703.shtml.
---------------------------------------------------------------------------

    We understand that the time it currently takes between when some 
retirement plan recordkeepers begin to process their orders and when 
the order is finally submitted to the fund can take upward of six hours 
due to the limitations of their current processing systems and 
hardware. We believe that retirement plan recordkeepers would need to 
substantially update or alter their processes and systems to 
accommodate the proposed hard close requirement to submit orders more 
quickly. In the event compliance and other checks are required, plans 
may need to utilize the prior day's NAV to estimate the share or dollar 
size of an order for those orders to receive same day pricing.
c. Intermediary Cut-Off Times
    To help ensure that order flow information is provided to a 
designated party before the established pricing time, the proposed rule 
would likely cause some intermediaries to set their own internal cut-
off time for receiving orders to purchase or redeem fund shares that is 
earlier than the pricing time established by the fund. Intermediaries 
may use earlier cut-off times to provide time to transmit order flow 
information to a designated party so those orders receive that day's 
price. Investors, therefore, depending on the entity through which an 
investor is transacting (e.g., a broker-dealer, retirement plan 
recordkeeper, or the fund's transfer agent), may have different 
deadlines for the same fund for submission of orders to receive that 
day's price. For example, an investor submitting an order to a fund's 
transfer agent might have until 3:59 p.m. ET to submit its order, while 
an investor submitting an order to an introducing broker would likely 
have to submit its order earlier to provide enough time for the 
introducing broker to send the order to the clearing broker and for the 
clearing broker to send it to the transfer agent or to Fund/SERV.
    Investors transacting through intermediaries may lose some 
flexibility in when they may submit orders through an intermediary to 
receive that day's price as intermediaries may institute earlier cut-
off times. Because technology has advanced since the Commission last 
considered a hard close in 2003, we generally do not believe, however, 
that intermediaries would need to establish cut-off times significantly 
earlier than the pricing time set by the fund. We recognize, however, 
that layered cut-off times may occur when an intermediary uses one or 
more tiers of other intermediaries to submit orders, and that cut-off 
times generally would be earlier for investors submitting orders to 
lower-tier intermediaries. We also recognize that intermediaries that 
net order activity or rely on batch processing may require additional 
time to support such netting or batch activities, while those 
intermediaries that submit orders individually through message-based 
communications may have a higher volume of orders submitted, but a 
shorter time between order submission by an investor and order receipt 
by a fund, transfer agent, or registered clearing agency. While the 
proposed hard close requirement generally would cause intermediaries to 
establish earlier cut-off times, the proposed rule would not prevent an 
intermediary from

[[Page 77213]]

transmitting orders it received after its internal deadline but before 
4 p.m. ET on an individual basis to the fund's transfer agent or to 
Fund/SERV in order to receive that day's price.
d. Effects on Certain Transaction Types
    We recognize that the proposed hard close requirement could extend 
completion times for certain types of transactions, where the specific 
number or value of fund shares to be purchased or redeemed is unknown 
until that day's price is available. For example, under certain 
retirement plan rules, certain transactions, such as plan loans or 
withdrawals, currently remain incomplete until all fund positions in 
the investor's accounts are valued using that day's prices. 
Specifically, some plan provisions specify a hierarchy for drawing from 
different investments to accommodate participant loan or withdrawal 
requests. As an example, the plan may require the sale of shares in 
Fund A to pay the loan or withdrawal before the sale of shares in Fund 
B. In this case, until that day's final price for Fund A shares is 
available, the retirement plan recordkeeper may not know if the value 
of the participant's investment in Fund A is sufficient to pay the loan 
or withdrawal amount on its own, or if satisfying the loan or 
withdrawal request in full will also require redemptions from Fund B.
    Under the hard close proposal, although plans would not be required 
to change their rules governing these kinds of transactions, 
transaction requests that are subject to hierarchy rules may take one 
or more additional days to complete than they would currently. This is 
because the retirement plan recordkeeper would no longer be able to 
wait until final prices are available before calculating and submitting 
one or more redemption orders to satisfy the requested plan 
transaction. In the above example, this would mean that the 
recordkeeper would likely submit an order to redeem shares of Fund A on 
the first day and may submit an order to redeem shares of Fund B on a 
subsequent day if the loan or withdrawal is not fully funded. We 
understand that these transactions typically are a small percentage of 
overall retirement plan flows and that plan participants generally do 
not receive immediate execution of loan or withdrawal requests 
today.\241\ Thus, we believe the aggregate effect of the proposed hard 
close requirement on such transactions would not be significant.
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    \241\ For example, according to one source, in 2021, 4.1% of 
defined contribution plan participants took withdrawals, and at the 
end of Dec. 2021, 12.5% of participants of plan participants had 
loans outstanding. See ICI Research Report, Defined Contribution 
Plan Participants' Activities, 2021 (Apr. 2022), available at 
https://www.ici.org/system/files/2022-04/21_rpt_recsurveyq4.pdf.
---------------------------------------------------------------------------

    As another example, the proposed hard close requirement could 
extend the period of time for executing an investor's request to 
rebalance its holdings to a target asset allocation or model portfolio. 
We understand that currently these requests may be facilitated by first 
valuing the investor's existing positions, based on final prices for 
that day, and then submitting orders that would result in the desired 
allocation. The proposed rule would not permit these orders to receive 
same-day pricing if they are submitted after the pricing time, and 
therefore may require the intermediary to achieve the desired 
rebalancing through a series of orders over more than one day or to 
rebalance using prices from the prior day. In addition, the proposed 
hard close might affect current order processing for funds of funds. We 
understand that a lower-tier fund in a fund of funds structure may not 
receive purchase or redemption orders from upper-tier funds until well 
after 4 p.m. Under the proposed rule, the lower-tier fund (or another 
designated party) would have to receive an upper-tier fund's orders to 
purchase or redeem the lower-tier fund's shares before the lower-tier 
fund's pricing time to receive that day's price for the orders.
e. Effects on Investors
    The extent to which the hard close proposal would affect investors 
largely depends on the value investors place on their ability to obtain 
same-day pricing for orders initiated in the period immediately before 
4 p.m. ET or on the complex transaction types discussed above.\242\ 
Most fund shareholders are long-term investors, and thus we believe 
that most fund orders are not time sensitive. In addition, because of 
advances in technology, it seems likely that intermediaries would set 
cut-off times that are only incrementally earlier than current cut-off 
times. As a result, it seems likely that many investors would 
experience a significant change in when they must submit their orders 
to intermediaries. For those investors who place a premium on being 
able to place orders up until 3:59 p.m. ET, they generally could place 
orders with the fund's transfer agent to retain this option.\243\ While 
we understand that investors may experience a change in how late they 
may transact through intermediaries that set earlier cut-off times as a 
result of our proposed rule, overall the proposal is intended to better 
protect shareholders' interests by operationalizing swing pricing to 
combat shareholder dilution and enhancing fund resiliency. We request 
comment on the effects of the proposed hard close on order processing, 
intermediaries and investors, and on different transaction types:
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    \242\ Rule 22c-1 already affects investors differently based on 
the time zone in which the investor lives. Investors located in time 
zones other than the eastern time zone are subject to different cut-
off times today. For example, 4 p.m. ET is 10 a.m. Hawaii time, 
meaning that an investor in Hawaii has to submit its order before 10 
a.m. to receive that day's NAV if the fund's pricing time is 4 p.m. 
ET.
    \243\ See infra section III.C.3 discussing that some investors 
may be affected by the proposed hard close requirement if they 
desire to transact later in the day in response to market events and 
are limited in their ability to change intermediaries or place 
orders with the fund's transfer agent.
---------------------------------------------------------------------------

    109. Should we require funds to implement the proposed hard close 
requirement? Are there alternatives to the proposed hard close 
requirement that we should implement? Would the proposed hard close 
requirement help funds operationalize swing pricing? Would the proposed 
hard close requirement help prevent late trading? Are the Commission's 
efforts to modernize fund order processing supported by the proposed 
hard close requirement?
    110. What steps would intermediaries be required to take to 
operationalize the proposed hard close requirement? Are there 
operational impediments to funds implementing the proposed hard close 
requirement? Are there operational impediments for intermediaries, 
transfer agents, and/or registered clearing agencies in implementing 
the proposed hard close requirement? Are there other operational 
changes that would be helpful to operationalize swing pricing?
    111. Would retirement plan providers need to make changes to plan 
rules in order to accommodate compliance with a hard close? Are plan 
rules able to be altered for plans that are currently owned, or would 
alterations only be feasible on a going forward basis? If a change in 
plan rules would be necessary, how would plan rules need to be altered? 
How would plan participants be affected by changes to plan rules?
    112. Would the proposed rule affect intermediaries' ability to net 
order flow? Would intermediaries move to message-based communications, 
where orders are transmitted to the transfer agent or registered 
clearing agency as they are received, in response to the proposed hard 
close requirement?
    113. Would elimination of cancellations and corrections that 
designated parties currently may receive

[[Page 77214]]

after the pricing time streamline processing and reduce costs for funds 
and/or designated parties and, if so, by how much? Would costs for 
investors be affected by the elimination of these cancellations and 
corrections?
    114. Should there be any exceptions from the proposed hard close 
requirement for exigencies or types of parties? For example, should 
there be exceptions for certain scenarios (e.g., emergencies), fund 
types (e.g., funds of funds), or intermediaries (e.g., retirement plan 
recordkeepers)? If so, what should be the parameters of such 
exceptions? For example, should we permit investor orders to receive 
same-day pricing treatment as the result of an emergency, if the 
intermediary is unable to send orders or a designated transfer agent or 
clearing agency is unable to receive orders? Should an emergency 
exception be conditioned on the board or the chief executive officer of 
the intermediary, transfer agent, or clearing agency certifying to the 
nature and duration of the emergency and, in the case of an 
intermediary, that the intermediary received the orders before the 
applicable pricing time? Should we permit conduit funds, which invest 
all their assets in another fund and must calculate their NAV on the 
basis of the other fund's NAV, and which include master-feeder funds 
and insurance company separate accounts, to receive same-day pricing? 
Should we provide an exception to permit certain intermediaries, such 
as retirement plan recordkeepers, to receive same-day pricing for the 
orders they submit, even if not received by a designated party before 
the pricing time, as long as the relevant intermediary received the 
orders before the pricing time? Should there be other conditions 
associated with such an exception, such as a requirement to provide 
advance notice of certain flow information to the fund or another 
designated party?
    115. Should we provide an exception from the proposed hard close 
requirement for certain transaction types (e.g., retirement plan loans 
or withdrawals or certain rebalancing transactions)? Should we amend 
the definition of eligible order to include these or other transaction 
types? If so, what information should we require the intermediary to 
supply to a designated party before the pricing time to qualify for 
same-day pricing? Should retirement plan recordkeepers or other 
intermediaries be permitted to estimate order flow information for 
specific transaction types, like loans or withdrawals? Would the 
estimates be prepared using the prior day's price, or through some 
other method?
    116. If exceptions to the hard close were permitted, how would that 
affect the proposed swing pricing requirement?
    117. Would the proposed hard close requirement help retirement plan 
recordkeepers to reduce their batch processing cycles and, if so, how?
    118. Should the rule permit a fund or other designated party to 
impose a cut-off for orders received before that day's NAV computation? 
For example, if the time for an order to receive that day's NAV is 4 
p.m. ET, should the fund be permitted to impose an earlier time of day, 
say 2 p.m. ET, as an earlier cut-off time to receive orders? Would the 
ability to disconnect the cut-off time for receiving orders from the 
pricing time help facilitate swing pricing by providing additional time 
to calculate the swing factor?
    119. If different funds adopted different cut-off times for receipt 
of orders pursuant to rule 22c-1, would intermediaries and transaction 
processing systems be able to accommodate such differences on a fund 
specific basis? How would different cut-off times affect investors? 
Would it be confusing or challenging for investors if there were 
variation among funds' cut-off times?
    120. If most funds continue to calculate their NAVs as of 4 p.m. ET 
and, as proposed, funds are required to implement swing pricing and are 
subject to a hard close, would funds have sufficient time between 4 
p.m. ET and when they publish their prices to assess their flow 
information and apply the proposed swing pricing requirement, including 
determination of a swing factor, as applicable? If not, how might funds 
adjust their practices to provide more time to make swing pricing 
determinations? For example, would funds publish their prices later 
than they typically do, which is currently several hours after the 
pricing time? \244\ Are there any changes we could make to facilitate 
later publication of prices, if needed? As another example, would funds 
begin to calculate their NAVs as of an earlier time than 4 p.m. ET? 
What affect, if any, would such a change have on transaction processing 
and the valuation of the fund's investments?
---------------------------------------------------------------------------

    \244\ See infra section III.C.2.a (discussing the potential 
effects on intermediaries and other market participants if funds 
were to publish their prices later than they currently do).
---------------------------------------------------------------------------

    121. How would the proposed hard close requirement affect 
investors? For example, what percentage of investors place orders 
shortly before 4 p.m., and how important is it for those investors to 
receive that day's price as opposed to the next day's price? When 
intermediaries establish their own cut-off times by which customers 
must place orders to receive that day's price, would these cut-off 
times be close to 4 p.m. ET as a result of competition among 
intermediaries and customer demand? Are intermediaries able to 
accelerate the time between receiving an order and relaying that order 
to a designated party compared to current practice? Would it be 
confusing or challenging for investors if there were variation among 
intermediaries' cut-off times? Are there circumstances in which 
intermediaries would transmit orders received after their internal cut-
off times and before 4 p.m. ET to a fund's transfer agent or to Fund/
SERV individually to receive same-day pricing? Would this increase the 
risk of errors or otherwise be burdensome on funds or intermediaries?
    122. Should the rule initially require that funds receive order 
flow information by a time that is after the pricing time in order to 
``phase in'' the proposed hard close requirement? For example, instead 
of requiring a designated party to receive all of a fund's order flow 
information by 4 p.m. ET each day, should we initially require receipt 
of order flow information by the designated party one to two hours 
after the pricing time with the goal of eventually moving the time of 
receipt to before the pricing time? Would a delayed phase in of the 
proposed hard close requirement be compatible with the proposed swing 
pricing requirement? If so, how would a fund determine whether to swing 
its NAV if it does not have all of its order flow information until 
after the pricing time?
    123. We understand that intermediaries currently may adjust trade 
amounts to account for commissions or other fees. Would the proposed 
hard close requirement affect how these adjustments are made? If so, 
should we make any changes to the proposed approach to better 
accommodate such adjustments?
    124. Would earlier confirmations from a fund to an intermediary 
reduce an intermediary's vulnerability to disruptions? Would 
intermediaries process orders more frequently under a hard close? If 
so, would more frequent order processing increase the resiliency of 
funds and transfer agents? If not, why not?
    125. Would intermediaries need to set earlier cut-off times than is 
the current practice for investors in order to get orders to a 
designated party before the pricing time? If so, how early? How

[[Page 77215]]

much time do intermediaries need to process order flow information?
    126. Should the rule require that funds set a uniform cut-off time 
for orders to be received by intermediaries? If the rule requires a 
uniform cut-off time, should we also require that a fund disclose the 
cut-off time, such as in the fund's prospectus? Would funds, 
collectively, establish consistent cut-off times for these purposes, or 
would intermediaries need to manage different fund-specific cut-off 
times?
    127. Some intermediaries may establish earlier cut-off times in 
order to accommodate a hard close. Would investors that want to make an 
order up until 3:59 p.m. place orders with a fund's transfer agent 
instead of with an intermediary to preserve this flexibility? Are there 
limitations on certain investors' abilities to place orders with the 
transfer agent instead of through an intermediary?
    128. Would some intermediaries choose to no longer distribute open-
end funds that would be subject to the hard close requirement in order 
to avoid compliance costs? In addition, would retirement plan providers 
be more likely to replace mutual funds as plan investment options with 
ETFs or CITs? If so, how would this affect investors?
4. Other Proposed Amendments to Rule 22c-1
    The proposed amendments would retain the requirements of the 
current rule concerning the frequency and time of determining the NAV, 
but would reorganize and reword those provisions.\245\ The proposed 
amendment would use the phrase ``based on the current net asset value 
of such security established for the next pricing time,'' as opposed to 
``based on the current net asset value of such security which is next 
computed'' in the current rule. While its substance is already 
required, this amendment would codify in the rule text that orders 
received after the pricing time, but before calculation of the NAV is 
complete, do not receive same-day pricing.\246\ We also propose to 
reorganize certain other provisions of rule 22c-1, including the 
existing exceptions to the rule's forward pricing requirement.\247\ In 
addition, we propose to revise certain terminology in the rule.\248\
---------------------------------------------------------------------------

    \245\ See rule 22c-1(a), (b)(1), and (d); proposed rule 22c-
1(a).
    \246\ See 2003 Hard Close Proposing Release, supra note 224, at 
n.26.
    \247\ See rule 22c-1(a)(1), (a)(2), and (c); proposed rule 22c-
1.
    \248\ For example, we propose to replace references to 
``orders'' in the current rule with references to ``directions'' to 
purchase or redeem, which is intended to distinguish between the 
concept of eligible orders that we propose to add for purposes of 
the proposed hard close requirement and directions to purchase or 
redeem shares of other registered open-end investment companies that 
are not subject to the proposed hard close requirement. As another 
example, we propose to incorporate the term ``pricing time'' into 
provisions of the rule that are not specific to the hard close 
requirement for cohesion of the rule.
---------------------------------------------------------------------------

    We are also proposing to remove the provision from rule 22c-1 that 
would allow funds not to calculate their current NAV on days in which 
changes in the value of the fund's securities will not materially 
affect the current NAV. We believe this provision is no longer 
necessary because a fund generally would need to determine its current 
NAV in the first instance before it could conclude with certainty that 
changes in the value of the fund's securities would not materially 
affect the fund's current NAV.
    We request comment on the other proposed amendments to rule 22c-1, 
including:
    129. Are our proposed amendments to provide that orders received 
after the pricing time, but before calculation of the NAV is complete, 
do not receive same-day pricing sufficiently clear?
    130. Should we retain the current provision in rule 22c-1 that 
allows a fund not to calculate its NAV on days when the changes in the 
value of the fund's portfolio securities do not materially affect the 
current NAV? If so, how would this affect the ability of a fund to 
implement swing pricing? Do any funds rely on this provision today? If 
so, what are the scenarios in which a fund relies on this provision? 
How are changes in the value of the fund's securities determined if the 
fund is not valuing the underlying securities and computing the NAV on 
a daily basis?
5. Amendments to Form N-1A
    Open-end funds use Form N-1A to register under the Investment 
Company Act and to register offerings of their securities under the 
Securities Act. Item 11 of Form N-1A requires a fund to describe how it 
prices its shares. Item 11(a) specifically requires that funds state 
when they calculate the NAV and that the price at which a purchase or 
redemption is effected is based on the next NAV calculation after the 
order is placed. We are proposing to amend this disclosure to also 
require, if applicable, that funds disclose that if an investor places 
an order with a financial intermediary, the financial intermediary may 
require the investor to submit its order earlier than the fund's 
pricing time to receive the next calculated NAV. As discussed above, 
intermediaries may set different times by which investors must have 
their purchase or redemption orders in place to receive that day's 
price. We believe that this proposed disclosure is important so that 
investors may understand the potential variability in the time by which 
intermediaries may require an order to be placed to receive a 
particular day's price.
    We request comment on the proposed amendments to Form N-1A, 
including:
    131. Would the proposed requirement for funds to disclose in their 
prospectuses that orders placed with intermediaries may need to be 
submitted earlier to receive that day's price be helpful to investors?
    132. In addition to the proposed disclosure requirements, are there 
additional disclosures relating to the proposed hard close requirement 
that we should require? Should funds be required to disclose the cut-
off times of their intermediaries in their distribution network? If so, 
where should this disclosure be located (e.g., in the fund's 
registration statement or on its website)? What potential challenges, 
if any, would a fund encounter in providing an up-to-date list of 
intermediary cut-off times?

D. Alternatives to Swing Pricing and a Hard Close Requirement

1. Alternatives to Swing Pricing
    In lieu of the proposed swing pricing requirement, we have also 
considered whether there are alternative methods by which we could 
require funds to pass on costs stemming from shareholder purchase or 
redemption activity to the shareholders engaged in that activity. These 
alternatives could be used independently or in combination with each 
other. Some of these alternatives would be dependent on investor flow 
information, similar to the proposed swing pricing requirement. In 
those cases, an alternative could be paired with either a hard close 
requirement or one of the alternatives to the hard close that we 
discuss below.
a. Liquidity Fees
    One alternative we considered is a framework that would apply a 
charge in the form of a liquidity fee rather than an adjustment to the 
fund's price.\249\ A

[[Page 77216]]

liquidity fee would apply as a separate charge to a transacting 
investor and would not change the fund's price. A liquidity fee could 
be used to impose liquidity costs on purchasing or redeeming investors 
and address dilution, much like a swing pricing-related price 
adjustment. We recognize that a liquidity fee framework could have 
certain advantages over a swing pricing requirement. For example, 
liquidity fees provide greater transparency for redeeming or purchasing 
investors of the liquidity costs they are incurring. Liquidity fees 
also provide a mechanism for imposing liquidity costs directly on 
purchasing or redeeming investors, without adjusting the transaction 
price for investors who are trading in the other direction.\250\ In 
addition, some funds and their intermediaries are currently equipped to 
apply certain purchase and/or redemption fees.\251\
---------------------------------------------------------------------------

    \249\ Although certain U.S. funds may use liquidity fees for 
redemptions, they are rarely used to address dilution, other than in 
the case of short-term trading of fund shares. See rule 22c-2 under 
the Act. The use of redemption fees and anti-dilution levies in 
Europe varies to some extent by jurisdiction. For example, Irish-
domiciled funds are more likely to have adopted anti-dilution levies 
than Luxembourg-domiciled funds. Overall, however, we understand 
that swing pricing was more widely used by European fund complexes 
in Mar. 2020 than redemption fees or anti-dilution levies. See ICI, 
Experiences of European Markets, UCITS, and European ETFs During the 
COVID-19 Crisis (Dec. 2020), available at https://www.ici.org/doc-server/pdf%3A20_rpt_covid4.pdf.
    \250\ For instance, on a day the fund has net redemptions, swing 
pricing adjusts a fund's NAV downward, and investors who purchase 
the fund's shares that day buy at a discount. On a day when a fund 
has net purchases, swing pricing adjusts a fund's NAV upward, and 
investors who sell the fund's shares that day sell at a premium. 
Swing pricing must account for these discounts or premiums that 
other investors are receiving to fully address dilution.
    \251\ For example, some funds impose redemption fees under rule 
22c-2 under the Investment Company Act. See supra note 67 for a 
discussion of how many funds we estimate apply redemption fees.
---------------------------------------------------------------------------

    However, the proposed swing pricing requirement may have several 
advantages over liquidity fees for relevant open-end funds. With swing 
pricing, a fund can pass liquidity costs on to redeeming or purchasing 
investors in a fair and equal manner, without any reliance on 
intermediaries to achieve fair and equal application of costs. 
Liquidity fees may require more coordination with a fund's 
intermediaries than swing pricing because fees need to be imposed on a 
transaction-by-transaction basis by each intermediary involved--which 
may be difficult with respect to omnibus accounts that intermediaries 
may create to aggregate all customer activity and holdings in a 
fund.\252\ Funds and their transfer agents may contract with 
intermediaries to have them impose liquidity fees under these 
circumstances, which may include a review of contractual arrangements 
with fund intermediaries and service providers to determine whether any 
contractual modifications are necessary or advisable to ensure that 
liquidity fees are appropriately applied to beneficial owners of fund 
shares. While we could require intermediaries to submit purchase and 
redemption orders separately to transact in a fund's shares, which 
could allow funds and their transfer agents to apply fees directly, 
this type of requirement would also involve some operational costs. 
Requiring intermediaries to submit purchase and redemption orders 
separately would require operational changes for some intermediaries 
because they would no longer be able to net otherwise offsetting 
customer purchases and redemptions.\253\ In addition, the volume of 
transactions that transfer agents and Fund/SERV process would increase 
if netting were not permitted. Further, unlike swing pricing, the 
amount collected from a liquidity fee is not available to the fund for 
a period of time until the intermediary remits to the fund the amount 
charged.\254\ If the fund is under stress, the unavailability of the 
amount collected from fees might cause the fund to incur other costs it 
might not have otherwise incurred, such as costs associated with 
selling investments to pay redemptions when the fee amount, if 
remitted, would have helped the fund pay those redemptions.
---------------------------------------------------------------------------

    \252\ See infra section III.E.2 (noting certain omnibus 
accounting practices that may make a liquidity fee operationally 
difficult). Swing pricing, on the other hand, would require some 
funds and intermediaries to create new systems and operational 
procedures, but once those are in place, swing pricing would be 
incorporated in the process by which a fund strikes its NAV and sets 
the transaction price (including any swing of the NAV). 
Intermediaries would then effect customer transactions at the 
transaction price, as they do today, without further operational 
changes or coordination with the fund.
    \253\ See supra section II.C.3.a (discussing that some 
intermediaries currently net orders, while others separately submit 
purchase and redemption orders).
    \254\ While money collected from the fee would not be available 
to the fund until the intermediary remits payment, we understand 
that a fund would reflect the fee amount it is owed as an accrual 
until the fund receives the fee payment. The accrual would help 
prevent declines in the fund's NAV that would otherwise result from 
any delay in remittal. Proper booking of the accrual would, however, 
require the intermediary to inform the fund of the fee amount on an 
accurate and timely basis.
---------------------------------------------------------------------------

    There are many potential variations of a liquidity fee framework. 
The trigger for applying fees could be based on net flows, similar to 
swing pricing, or other indicators that a fund's trading costs are 
increasing (e.g., widening spreads or reduced liquidity of the fund's 
portfolio investments). Alternatively, a fee could apply to all trades 
of a given type (for example, all redemption orders). When a fee 
applies, the determination of the size of the liquidity fee could be 
either dynamic to reflect changing costs or simplified to remain 
relatively static. As for how the fee is processed, it could be applied 
to the purchase or sale or could be processed separately from the 
trade.
    As an example, similar to the proposed swing pricing requirement, a 
dynamic liquidity fee could be calculated to reflect certain costs 
(e.g., spread, other transaction costs, and market impact) a fund is 
likely to incur to meet redemptions or invest the proceeds from 
subscriptions based on the direction and magnitude of that day's flows. 
Dynamic liquidity fees that may change in size from one day to the next 
may involve greater operational complexity and cost than swing pricing, 
as intermediaries would have to identify and apply different fee 
amounts for each fund in which their clients transact each day. This 
approach also generally would necessitate timely flow information if 
the fee were processed as part of a transaction, similar to the 
proposed swing pricing requirement. If the fee were processed 
separately from the transaction and applied to an investor's account on 
a delayed basis, a fund would likely have more time to receive flow 
information than under the proposed swing pricing requirement, which 
could avoid the need for a hard close or related alternatives. Delayed 
application of the fee, however, may raise complications related to 
collecting fee amounts from investors, particularly when an investor 
has otherwise redeemed the full amount of its holdings. Follow-on fees 
also significantly increase the number of transactions to process, and 
may complicate reporting for custodians and advisers in situations 
where a transaction may occur in one reporting period but the fee 
related to the transaction is not applied until the next reporting 
period. In addition, an intermediary may face difficulties projecting 
upcoming cash balances in its client accounts if there are upcoming 
fees to be charged, but the amounts of those fees are unknown. The fund 
itself may also have challenges with projecting its own cash balance if 
it cannot predict when accrued fees will be received from each 
intermediary.
    Instead of a dynamic liquidity fee, we could require a simplified 
liquidity fee. A simplified liquidity fee, for example, could be a set 
percentage of the transaction amount, such as 1%. Or it could be a 
default fee, such as 1%, that a fund could adjust up (possibly up to a 
cap) or down as it determines is in the best interest of the fund. A 
simplified liquidity fee could apply to both purchases and redemptions, 
given that both purchases and redemptions can contribute to dilution. 
Under this type

[[Page 77217]]

of approach, fees could be equivalent for both transactions, or fees 
could be higher on one side and lower on the other (for example, a 
purchase fee of 0.25% and a redemption fee of 1%). Alternatively, we 
could require a one-sided simplified fee that applies to redemptions 
only or to purchases only, with the premise that a fee charged on 
redemptions could also help to offset dilution that may result from 
purchases (or vice versa). Because all shareholders purchase and redeem 
the fund's shares during the life of an investment, a one-sided fee 
would apply to all shareholders at some point and could help mitigate 
dilution that fund investors collectively contribute to through their 
purchase and redemption activity. A simplified liquidity fee would not 
necessarily require flow information. For instance, if a simplified fee 
applied only to redemptions, a set fee could apply to all redemptions 
or only to redemptions when the fund's trading costs are significantly 
increasing, such as in times of stress.\255\ If the dependency on flow 
information is removed, a simplified liquidity fee likely could be 
processed as part of a transaction, avoiding the need to process a fee 
as a separate follow-on transaction.
---------------------------------------------------------------------------

    \255\ We discuss an alternative in which a liquidity fee would 
apply when a fund's trading costs are significantly increasing in 
more detail in section II.D.3.b.
---------------------------------------------------------------------------

    The size of a simplified liquidity fee likely would be more 
predictable for investors and intermediaries than a dynamic fee or 
swing pricing. This would enhance transparency and would likely be 
easier to implement. While the size of the fee generally would be known 
in advance, it may or may not be easy to predict when a fee would 
apply. For example, if a fee applied to all redemptions, then investors 
and intermediaries would have certainty on when fees would apply. 
However, if fees applied only in certain circumstances, such as when 
trading costs are materially increasing or the fund has experienced net 
redemptions over multiple consecutive days, then application of a fee 
may be more difficult to predict, particularly if a fund's threshold 
for applying a fee is non-public or based on factors that are difficult 
for other market participants to observe or predict. An approach where 
it is difficult to predict when a fee would apply could help avoid 
preemptive redemptions in anticipation of fees applying in the near 
future, but it would also be less transparent. In addition, if 
liquidity fees are applied rarely, then application of a fee might be 
viewed as a sign that a fund is under stress, which could incentivize 
further redemptions, particularly if the fee amount is viewed as 
minimal.
    Between dynamic and simplified fees, a dynamic fee would better 
reflect the costs associated with fund purchases or redemptions on a 
given day. A simplified fee, however, would be less costly to implement 
because, among other things, it would not necessarily require a hard 
close or any alternatives to the hard close to provide actual or 
estimated flow information. While a simplified fee would be less 
sensitive to the fluctuating costs associated with fund purchases or 
redemptions, this fee would aid in the offset of costs stemming from 
purchase and redemption activity and could assist with the mitigation 
of investor dilution.
    On balance, we are proposing a swing pricing requirement because it 
may have operational advantages or be better tailored to mitigate 
dilution relative to liquidity fee options, but we request comment on 
using a liquidity fee framework to impose liquidity costs and whether a 
liquidity fee alternative may have fewer operational or other burdens 
than the proposed swing pricing requirement while still achieving the 
same overall goals of reducing shareholder dilution.
    133. How do the operational implications of swing pricing, as 
proposed, differ from the operational implications of a dynamic 
liquidity fee framework (e.g., one where liquidity fees vary in size 
and increase during periods of stress)? What are the operational 
implications of a requirement for mutual funds to impose a liquidity 
fee that can change in size and that may need to be applied with some 
frequency (up to daily)? Are fund intermediaries equipped to apply 
dynamic fees on a regular basis? Would funds have insight into whether 
and how intermediaries apply these fees to redeeming investors?
    134. If we adopt a liquidity fee framework instead of a swing 
pricing framework, should a fund be required to apply a liquidity fee 
under the same circumstances in which a fund would be required to 
adjust its net asset value under the proposed swing pricing 
requirement? Should a fund be required to use the same approach to 
calculating a liquidity fee as the proposed approach to calculating a 
swing factor? Should the same board oversight framework apply under 
this approach as the proposed swing pricing requirement (e.g., with the 
board approving the fund's liquidity fee policies and procedures and 
designating a liquidity fee administrator, and such administrator would 
report periodically to the board)?
    135. Should funds be required to apply liquidity fees to all 
redemption or purchase orders, or should liquidity fees apply only upon 
a trigger event? If so, under what circumstances should a fee apply? 
For example, should liquidity fees apply when trading costs are 
materially increasing? \256\ Should liquidity fees apply when a fund 
has had net outflows over multiple consecutive days? If so, should net 
outflows be of a certain size (e.g., 2%, 5%, or 10%) and over what 
period of time should net outflows trigger a fee (e.g., 2, 3, or 4 
consecutive days)? Would this approach help mitigate dilution, or would 
it contribute to first-mover advantages and potentially result in 
unfair application of fees?
---------------------------------------------------------------------------

    \256\ See infra section II.D.3.b. for additional discussion and 
requests for comment about such an approach.
---------------------------------------------------------------------------

    136. Should a liquidity fee apply to both purchasing and redeeming 
investors? Alternatively, should a liquidity fee apply to redeeming 
investors only or to purchasing investors only?
    137. Should funds be required to maintain records related to the 
application of liquidity fees? For example, should funds be required to 
maintain records of the dates on which the fund applied liquidity fees 
and in what amount? If application of liquidity fees is subject to fund 
or board discretion, should a fund be required to maintain records 
documenting why the fund did or did not apply liquidity fees under 
certain circumstances?
    138. Should liquidity fees apply to purchase or redemption orders 
of a specific size only? If so, what size? How operationally feasible 
would such an approach be? Would it create incentives for investors to 
modify their order amounts in an effort to avoid a fee, such as by 
holding smaller amounts of a fund's shares at multiple intermediaries 
or splitting up a purchase or sale order over multiple days? How should 
such an approach treat separate accounts managed by the same adviser, 
such as separate accounts managed through a wrap program?
    139. Should a liquidity fee framework have an exclusion for 
purchase or redemption orders of a de minimis amount? How should we 
identify an order for a de minimis amount? Should it be a set dollar 
figure (e.g., $2,500 or less), a set percentage of the fund's net 
assets, or a set amount that would be collected from application of a 
fee (e.g., $50 or less)? Should the amount of a de

[[Page 77218]]

minimis exclusion be adjusted for inflation over time?
    140. How should the amount of the liquidity fee be determined? 
Should the liquidity fee be dynamic but based only on that day's 
spreads? Should it include other transaction costs, including market 
impact? Instead of a dynamic fee amount that could change daily, should 
the fee amount be based on a fund's historical trading costs and 
evaluated periodically, such as annually, quarterly, or monthly? Should 
the fee be a flat percentage established by rule (such as 0.5%, 1%, or 
2%), or should the fee increase as net redemptions or net purchases, 
illiquidity, or other variables increase? Should the fee amount be 
based on reasonably expected transaction costs but, if a fund cannot 
reasonably estimate those costs, it can use a default fee amount set by 
rule? If so, what should that default fee amount be (e.g., 0.5%, 1%, 
2%, or 3%)? Should the rule include a default fee amount that funds can 
always choose to use, with the option to use a higher or lower amount 
if such amount is determined to be in the best interest of the fund? 
Should there be a minimum or maximum fee amount, such as a 0.25% 
minimum or a 2% maximum?
    141. If we adopt a liquidity fee framework instead of a swing 
pricing framework, are there any ways to simplify the application of 
fees to investors that invest through an intermediary, such as 
investors in an omnibus account, to facilitate funds or fund transfer 
agents applying fees directly to investor purchases or redemptions 
occurring through an omnibus account? For example, should fund 
intermediaries be required to separately submit purchase and redemption 
orders, rather than net them, in order to transact in a fund's shares? 
What would the operational consequences of such a requirement be for 
fund intermediaries and for investors? To what extent do intermediaries 
already submit purchase and redemption orders separately, and does this 
practice vary by type of intermediary (for example, are broker-dealers 
more likely to submit separate purchase and redemption orders than 
retirement plan recordkeepers)? Would there be consequences for fund 
transfer agents, Fund/SERV, or others associated with increased order 
volume or other changes that would result from a requirement to submit 
purchase and redemption orders separately? What changes, if any, would 
funds or fund transfer agents need to make to be equipped to apply 
liquidity fees directly? If submission of purchase and redemption 
orders separately is necessary to implement a liquidity fee framework, 
is it necessary for the Commission to mandate receipt of orders in this 
way to ensure compliance by all market participants? If purchase and 
redemption orders may be submitted on a net basis, as some 
intermediaries do currently, how would a fund accrue for liquidity fees 
in a timely manner? Should the Commission require fund transfer agents 
to apply liquidity fees directly and, if so, why or why not?
    142. If we adopt a dynamic liquidity fee framework, would it be as 
reliant on timely flow information as the proposed swing pricing 
requirement? For example, could funds and intermediaries apply a 
dynamic fee to a transacting investor after an order begins to be 
processed at that day's NAV but before the trade settles? Could dynamic 
fees be applied after settlement, or would that create challenges in 
collecting a fee from investors who redeemed the full amount of their 
holdings? If a fee applies on a delayed basis, how should investors be 
notified of the application of a fee? Would it be preferable to apply a 
simplified fee that may less accurately reflect the costs of investor 
transactions and may mitigate dilution with less precision, but that 
could be applied at the same time an order is processed? Are there any 
other factors to consider when deciding between dynamic and simplified 
liquidity fees?
    143. If we adopt a liquidity fee framework, should we require that 
the same liquidity fee amount apply to all share classes (for example, 
if a liquidity fee is 1% on a given day, the 1% fee must apply to all 
share classes)? Alternatively, should we permit the fee amount to 
differ among classes (for example, a 1% fee for one class and a 0.5% 
fee for another class) and, if so, why?
    144. Should a liquidity fee apply differently based on the type of 
fund or the type of intermediary through which an investor trades? If 
so, what would be the basis for the differences in how a liquidity fee 
applies?
    145. What investor flow information, if any, would be required to 
implement a liquidity fee alternative? To the extent that a liquidity 
fee alternative requires timely investor flow information, should the 
alternative be paired with the proposed hard close requirement? Are 
there different considerations or effects related to the proposed hard 
close requirement if we were to require funds to use a liquidity fee? 
Would it be effective to implement the liquidity fee alternative with 
an alternative to the hard close requirement discussed below, such as 
indicative flows, estimated flows, or delayed cut-off times for 
intermediaries?
    146. Should a liquidity fee requirement be implemented through 
amendments to rule 22c-2 or through a new rule? To what extent would 
information that financial intermediaries agree to provide under a 
shareholder information agreement be important for funds to receive 
under a liquidity fee framework? \257\ Is there other information funds 
would need to receive from financial intermediaries to determine that 
liquidity fees are appropriately applied? Should we amend the 
definition of shareholder information agreement to require that 
information, or are there other mechanisms for funds to receive that 
information (e.g., distribution agreements)? Are there other rules we 
should amend if we adopt a liquidity fee requirement, such as rule 11a-
3 under the Act, which permits application of certain fees in 
connection with an exchange offer notwithstanding section 11(a) of the 
Investment Company Act? If we amend rule 11a-3, should the rule treat a 
liquidity fee in the same way as a redemption fee, as defined in that 
rule? \258\
---------------------------------------------------------------------------

    \257\ See rule 22c-2(c)(5) (defining a shareholder information 
agreement as a written agreement under which a financial 
intermediary agrees, among other things, to provide certain 
information to a fund promptly upon request, including taxpayer 
identification number of all shareholders who have purchased, 
redeemed, transferred, or exchanged fund shares held through an 
account with the financial intermediary, and the amount and dates of 
such activity).
    \258\ Under rule 11a-3, an offering company may cause a security 
holder to be charged a redemption fee in connection with an exchange 
offer, subject to certain conditions. See rule 11a-3(b)(2); rule 
11a-3(a)(7) (defining a redemption fee as a fee that a fund imposes 
pursuant to rule 22c-2).
---------------------------------------------------------------------------

    147. How should funds be required to disclose liquidity fees to 
investors? Should liquidity fees be reflected in the prospectus fee 
table, as mutual fund (other than money market fund) redemption fees 
currently are? \259\ Or, similar to money market fund liquidity fees, 
should liquidity fees be excluded from the prospectus fee table? \260\ 
Should funds be required to disclose the circumstances in which they 
would impose liquidity fees in the prospectus? If a liquidity fee only 
applies on some days, should the fund be required to disclose on its 
website that it is applying a liquidity fee that day and the size of 
the fee? Should funds be required to report information about

[[Page 77219]]

liquidity fees that are imposed? For example, should a fund be required 
to report on Form N-PORT the dates the fund imposed liquidity fees (or 
the number of days on which fees were applied) and the amount of the 
fee applied on each occurrence? If a fund or its board has discretion 
on when to apply liquidity fees, should a fund be required to disclose 
why a liquidity fee was or was not imposed under certain circumstances? 
Should funds be required to report other information about liquidity 
fees or report information in other locations, such as in shareholder 
reports, on fund websites, or in Forms N-CEN or N-RN? Would any 
existing items on Form N-PORT, Form N-CEN, Form N-1A, Form N-RN, or 
other forms need to be modified if we were to adopt a liquidity fee 
framework instead of swing pricing?
---------------------------------------------------------------------------

    \259\ See Item 3 of Form N-1A.
    \260\ See Instruction 2(b) to Item 3 of Form N-1A (excluding 
money market fund liquidity fees imposed in accordance with rule 2a-
7 from the definition of ``redemption fee'').
---------------------------------------------------------------------------

    148. How quickly do intermediaries currently remit to funds the 
amounts collected from purchase or redemption fees applied to customer 
accounts? If remittal currently is delayed, what are the causes of 
delay? If we adopted a liquidity fee, would funds reflect any delayed 
liquidity fee payment as an accrual? Under a liquidity fee approach, 
should intermediaries be required to remit payments to funds within a 
certain amount of time after a purchase or redemption? If so, what is 
an appropriate amount of time for remittal (e.g., on the day of 
settlement or within one or two days after settlement)? For example, 
should we adopt a rule that would provide that a fund must prohibit an 
intermediary from purchasing the fund's shares in nominee name on 
behalf of others if the intermediary does not remit payment on a timely 
basis? Are there other appropriate consequences for an intermediary 
that has a pattern or practice of late payments, such as a requirement 
that orders from such an intermediary may not receive today's price and 
will be executed on a subsequent day at that day's price in order to 
otherwise limit the dilutive effects of purchase and sale orders 
received through that intermediary since fees are not paid in a timely 
manner? Should we require a fund to charge an additional surcharge to 
an intermediary that does not remit payment on a timely basis? Should 
funds be required to report the names of intermediaries who are delayed 
in remitting payment and the amount due? If so, where should funds 
provide this information (for example, Form N-PORT, Form N-CEN, fund 
websites, or registration statements)?
    149. Would a liquidity fee requirement have different effects on 
investor behavior than a swing pricing requirement? For example, 
because application of liquidity fees is more observable than 
application of swing pricing, would liquidity fees be more likely to 
affect investors' decisions of whether to purchase or redeem fund 
shares?
b. Dual Pricing
    We also considered the use of dual pricing as an anti-dilution 
measure. A fund that uses dual pricing would quote two prices--one for 
incoming shareholders (reflecting the cost of buying portfolio 
securities in the market), and one for outgoing shareholders 
(reflecting the proceeds the fund would receive from selling portfolio 
securities in the market).\261\ Dual pricing is permitted and used by 
some funds in certain foreign jurisdictions.\262\ In comparison to 
swing pricing and liquidity fees, we believe that dual pricing may 
impose additional operational burdens and complexity on fund 
intermediaries, service providers, and other third parties as they 
would need to handle two share prices on each trade date. We understand 
that mutual fund order processing systems currently are designed to 
accommodate only one price, which is applied both to trades and 
valuation, and a fund's share price feeds into many analyses that 
intermediaries, funds, or others would need to update if there were two 
share prices, such as rebalancing activity. In addition, as recognized 
above, there would be operational costs associated with intermediaries 
needing to submit purchase and redemption orders separately, rather 
than netting purchase and redemption orders.
---------------------------------------------------------------------------

    \261\ See Swing Pricing Adopting Release, supra note 11, at 
n.40. Swing pricing would permit a fund to continue to transact 
using one price, as they do today (instead of transacting using 
separate prices for purchasing and redeeming shareholders).
    \262\ For example, jurisdictions that permit dual pricing 
include the UK, Ireland, Australia, and Hong Kong. See Jin, et al, 
supra note 163, at n.6 and accompanying text.
---------------------------------------------------------------------------

    In addition, with a dual pricing framework, we would also address 
effects on a fund's financial statements and performance reporting, as 
the Commission has already done for swing pricing.\263\ If we were to 
adopt a dual pricing framework, we could use the same general framework 
as in swing pricing. Under this approach, a fund would use its ``GAAP'' 
NAV (i.e., the amount of net assets attributable to each share of 
capital stock outstanding at the close of the period) in its statement 
of assets and liabilities and in performance reporting, while it would 
use its two transaction prices in reporting the dollar amounts received 
for shares sold and paid for shares redeemed in its statement of 
changes in net assets and reflect the impact of dual pricing in the 
fund's financial highlights.
---------------------------------------------------------------------------

    \263\ See Swing Pricing Adopting Release, supra note 11, at 
section II.A.3.g.
---------------------------------------------------------------------------

    Similar to liquidity fees, dual pricing could be either dynamic 
(e.g., calculated to reflect spread, other transaction costs, and 
market impact a fund is likely to incur to meet redemptions or invest 
the proceeds from subscriptions and based on the magnitude of those 
flows) or simplified (e.g., a constant spread around a fund's NAV). 
Dynamic dual pricing generally would necessitate timely flow 
information, similar to the proposed swing pricing requirement. 
However, simplified dual pricing may not necessitate timely flow 
information. Between these two types of dual pricing, a dynamic 
approach would better reflect the costs associated with the magnitude 
of fund purchases or redemptions on a given day. Under a simplified 
dual pricing framework, there also is the potential for either 
redeeming or subscribing investors to be over-charged for transaction 
costs that their investing activity does not trigger, because the fund 
would adjust its NAV for both subscribing and redeeming investors daily 
without regard to whether the fund has net inflows or net outflows on a 
given day. A simplified approach, however, would be less costly to 
implement because, among other things, it would not require a hard 
close or any alternatives to the hard close to provide actual or 
estimated flow information.
    On balance, we are proposing a swing pricing requirement because it 
may have operational advantages over dual pricing. We request comment 
on using a dual pricing framework to impose liquidity costs on 
transacting shareholders and whether a dual pricing alternative may 
have fewer operational or other burdens than the proposed swing pricing 
requirement or a liquidity fee alternative while still achieving the 
same overall goals of reducing shareholder dilution.
    150. How do the operational implications of swing pricing, as 
proposed, differ from the operational implications of dual pricing? As 
dual pricing involves calculating and applying two prices on each trade 
date, would that approach involve operational burdens and complexity 
for fund intermediaries, service providers, and other third parties 
that would not exist with a single price under our proposed swing 
pricing framework?
    151. If we adopt a dual pricing framework instead of a swing 
pricing framework, how should the spread around the NAV be determined? 
For example, should the spread around the

[[Page 77220]]

NAV be constant or calculated daily or at some other frequency to 
reflect transaction costs? If the latter, which transaction costs 
(e.g., spread, other transaction costs, and market impact)? Under a 
dual pricing framework, would funds need the same investor flow 
information that is needed for swing pricing, or would implementation 
of dual pricing be less dependent on investor flow information?
    152. Should a dual pricing requirement apply differently based on 
the type of fund or the type of intermediary through which an investor 
trades? If so, what would be the basis for the differences in how dual 
pricing applies?
    153. If we adopt a dual pricing framework, should we address the 
effects of two transaction prices on a fund's financial statements and 
performance reporting in a manner similar to how the Commission has 
addressed the effects of swing pricing (i.e., by clarifying that the 
GAAP NAV must be used in some cases, while transaction prices are used 
in others)? Are there additional implications of two transaction prices 
that we would need to address and that would lead to a different result 
than our current swing pricing approach?
    154. Under a dual pricing framework, which value of the fund's 
shares would market participants use for analyses that currently are 
based on a fund's NAV, such as rebalancing a client's holdings of 
different funds to achieve a desired asset allocation or reflecting the 
value of an investor's holdings on an account statement? If we adopt 
dual pricing, should we provide guidance on which value to use for 
these or other purposes?
    155. Are there differences between liquidity fees and dual pricing 
that make one a better framework than the other to address dilution? If 
so, what are the differences and why is one better than the other 
(e.g., differences in tax treatment, if any)?
    156. What investor flow information, if any, would be required to 
implement a dual pricing alternative? To the extent that a dual pricing 
alternative requires timely investor flow information, should the 
alternative be paired with the proposed hard close requirement? Are 
there different considerations or effects related to the proposed hard 
close requirement if we were to require funds to use dual pricing? 
Would it be effective to implement the dual pricing alternative with an 
alternative to the hard close requirement discussed below, such as 
indicative flows, estimated flows, or delayed cut-off times for 
intermediaries?
    157. If we adopt a dual pricing framework, what other changes 
should be made to the proposal as a result? For example, what reporting 
should be required on Form N-PORT, Form N-CEN, Form N-1A, Form N-RN, or 
other forms used by funds that would be subject to the framework? Would 
any existing reporting items on these or other forms need to be 
modified if we were to adopt a dual pricing framework instead of swing 
pricing? Are there other rules (e.g., rule 11a-3 under the Act) that 
would require changes if we adopt an alternative framework?
    158. Would a dual pricing framework affect investor behavior 
differently than a swing pricing framework or a liquidity fee 
framework?
2. Alternatives to a Hard Close
    We are proposing to require a hard close for open-end funds that 
are subject to the proposed swing pricing requirement. Under this 
proposal an eligible order to purchase or redeem any redeemable 
security of such a fund would be executed at the current day's price 
only if the fund, its designated transfer agent, or a registered 
clearing agency receives the order before the fund calculates its NAV. 
This proposal is designed to facilitate the operation of swing pricing 
as well as to help prevent late trading and to modernize order 
processing.
    In connection with the swing pricing proposal, we have also 
considered whether there are alternative methods by which a fund would 
be able to generate sufficient investor flow information to determine 
whether to apply swing pricing on a given day. As discussed above, 
swing pricing requires that funds have significant information about 
their order flows to determine with accuracy if the fund should impose 
a swing factor and to determine what that swing factor should be. 
Instead of requiring that funds operationalize swing pricing based on 
actual order flow information received before the pricing time, we have 
also considered whether reasonable estimates, calculated by either the 
fund or the intermediary, would provide sufficiently accurate 
information for a swing pricing determination. We have also considered 
whether later cut-off times for flow information and the publication of 
the day's NAV would facilitate swing pricing. We discuss each 
alternative below. We also considered how these alternatives would work 
if, rather than require swing pricing, we were to require funds to 
adopt liquidity fees or dual pricing.\264\ Although the below 
discussion focuses on swing pricing, we believe similar considerations 
would apply in the case of liquidity fees or dual pricing (to the 
extent a liquidity fee or dual pricing regime, like swing pricing, was 
based on the amount of net flows), and these alternatives therefore 
also could be used in combination with a liquidity fee or dual pricing 
approach.\265\
---------------------------------------------------------------------------

    \264\ See supra section II.D.1.
    \265\ We provide additional illustrative examples of potential 
alternatives and pairings in section II.D.3.
---------------------------------------------------------------------------

a. Indicative Flows
    We considered whether, instead of requiring a hard close, we should 
require that funds receive indicative flow information from 
intermediaries by an established time. This approach would require that 
intermediaries (e.g., broker-dealers, banks, and retirement plan 
recordkeepers) calculate an estimate for what they anticipate the given 
flows for a particular day to be either before the fund's pricing time 
or a set time thereafter (e.g., by 4:30 p.m. ET or 5 p.m. ET). 
Consistent with current practices, intermediaries could submit final 
order flow information after the pricing time once the intermediary has 
received and calculated the final flows for the day. For example, we 
could consider orders to be eligible to receive that day's price if, in 
the case of orders submitted through an intermediary: (1) the 
intermediary receives the orders from investors before 4 p.m. ET; (2) 
the intermediary provides estimated order flow to the fund by the 
identified time; and (3) the intermediary provides final order 
information by the next morning. Under this approach, a fund would be 
permitted to use the indicative flow information provided by 
intermediaries to determine whether a swing factor should be applied to 
that day's NAV.
    In order to calculate the indicative flow information, 
intermediaries would need to generate an estimated flow based on, among 
other things, the actual flows that they have received before the 
pricing time and the prior day's price, as well as any indicative 
historical information that is available if the indicative flow 
information is provided to the fund before the pricing time. 
Alternatively, the intermediary could provide summary net flow 
information (for example, estimated net purchases of $3 million, 
estimated net redemptions of 250,000 shares, and the purchase of an 
unknown quantity of fund shares with proceeds from redeeming 100 shares 
from a different identified fund), and the fund could apply the prior 
day's NAV to arrive at an estimated net flow. Intermediaries would need 
to update

[[Page 77221]]

their systems and processes to calculate indicative flow information by 
or shortly after the pricing time while continuing to provide actual 
final flow information as it is available. We understand that different 
intermediaries may, based on their different characteristics, use 
different methods to calculate or provide their indicative flows. A 
broker-dealer and a retirement plan recordkeeper would not necessarily 
use the same method due to the differences in how they are able to 
generate and communicate flow information to funds. Retirement plan 
recordkeepers, for example, would need to generate indicative flow 
information that accounts for not only purchase and redemption activity 
that is a known number of shares or dollars as of the pricing time, but 
also estimated loan and withdrawal activity that is subject to 
hierarchy provisions under their specific plans. If an intermediary is 
unable to provide indicative flow information by the identified time, 
the orders would receive the next day's price.
    Unlike the proposed hard close requirement, the alternative of 
permitting funds to rely on indicative flows provided by intermediaries 
would provide intermediaries with more flexibility in providing final 
flow information. Thus, the broader changes that may be needed for 
intermediaries to comply with the proposed hard close requirement that 
are discussed above may not be needed under this alternative. This 
approach would not ultimately provide funds with the most accurate 
information about anticipated flows. If intermediaries are required to 
provide indicative flows before a fund's pricing time, the flow 
information may be less reliable, particularly during times of stress 
since intermediaries may not be able to account for or anticipate the 
effects of a stress event on order flow information. This limitation of 
indicative flow information may create down-stream effects on the 
accuracy and efficacy of swing pricing, particularly in times of 
stress. For swing pricing to serve the goal of mitigating dilution of 
shareholders' interests, funds need accurate order flow information, 
particularly in times of stress. In addition, an approach based on 
indicative flows would be less effective at preventing late trading and 
at reducing operational risk through improvements to order processing.
    We request comment on the indicative flow alternative, including:
    159. Should we allow funds to use indicative flow information to 
determine whether or not to apply swing pricing?
    160. If intermediaries are required to provide indicative flows to 
funds, should the rule establish this requirement by considering an 
order as eligible to receive a given day's price only if the 
intermediary provides indicative or final order flow information by an 
identified time and provides final order information by a later 
identified time? Should we instead provide that a fund must prohibit an 
intermediary from purchasing the fund's shares in nominee name on 
behalf of others if the intermediary does not provide timely indicative 
flow information? Should the rule require that funds enter into a 
contractual agreement with intermediaries to require the indicative 
flow information? If so, should this contract be required to specify 
how indicative flows are calculated by the intermediary? In either 
case, should we prohibit or restrict an intermediary from charging fees 
to funds for the costs associated with providing indicative flow 
information?
    161. Would intermediaries have sufficient incentives to provide 
timely and accurate indicative flow information? Are there other 
consequences we should impose for late or materially inaccurate 
indicative flow information? For example, if an intermediary has a 
pattern of providing late or inaccurate information, should we require 
a fund to prohibit the intermediary from purchasing the fund's shares 
in nominee name on behalf of others? As another alternative, should we 
prohibit orders received from that intermediary from receiving that 
day's price and instead require that the orders be executed and settled 
on a delayed basis at a future day's price, in order to limit the 
dilutive effects of orders that intermediary submits?
    162. When should intermediaries be required to provide indicative 
flows under this alternative? Are indicative flows needed before the 
pricing time, or could funds still make timely swing pricing decisions 
if intermediaries provided indicative flows after the pricing time? How 
long after the pricing time could funds receive the indicative flow 
information and still make timely swing pricing decisions? In 
connection with this approach, would funds publish their prices later 
than they do today to provide additional time to make swing pricing 
decisions?
    163. Should the intermediary or the fund apply the prior day's 
price to arrive at an indicative flow estimate? Is there value in the 
fund performing this calculation because it would have better 
information about potential changes to the prior day's price that it 
could take into account (e.g., the size of any swing factor adjustment 
made on the prior day, as well as potential changes to the value of its 
portfolio holdings)?
    164. Should intermediaries that have minimal holdings with the fund 
be permitted not to provide indicative flows under this approach? If 
so, how should we define intermediaries that have minimal holdings of 
fund shares? How would this approach work if an intermediary's 
customers began to transact in higher volumes of the fund's shares?
    165. Should we provide fund managers a safe harbor from liability 
under certain circumstances (e.g., absent knowing or reckless behavior) 
if the fund relies on indicative flows to determine whether to swing 
the fund's NAV and the size of the swing factor and those indicative 
flows do not align with the actual flows the fund ultimately receives? 
From what statutory provisions or rules should any safe harbor provide 
relief (for example, section 34(b) under the Investment Company Act, 
rule 22c-1, or other provisions and rules)?
    166. If we adopt an indicative flows approach, are there any 
changes we should make to the proposed swing pricing requirement? For 
example, instead of requiring use of ``reasonable, high confidence'' 
estimates of investor flow information, should we use a different 
standard (e.g., reasonable estimates based on available information)?
    167. Do commenters agree with the discussion of the potential 
benefits, costs, or drawbacks of this alternative? During times of 
stress, would intermediaries be able to generate accurate indicative 
flow information?
    168. Does this alternative raise different considerations if we 
were to require funds to use a liquidity fee framework or dual pricing, 
rather than swing pricing? Should an indicative flows approach operate 
or be structured differently if paired with a liquidity fee or dual 
pricing requirement and, if so, how?
    169. Is there information about the indicative flows alternative, 
if adopted, that would be important for investors to understand and 
that funds should be required to disclose in their registration 
statements or elsewhere?
b. Estimated Flows
    We also considered an approach that would allow funds to estimate 
their flows for the day for the purposes of determining whether to 
apply a swing factor to the day's NAV and the amount of the swing 
factor (e.g., whether the amount of net redemptions exceeds the market 
impact threshold). In order to

[[Page 77222]]

estimate flows for a given day, funds could generate models that 
incorporate the information available to them. For example, funds could 
use the flow information that they have already received by a pre-
established time as well as historical order flow information in order 
to estimate expected flows for the day.
    The ability of a fund to estimate flow information may differ based 
on the types and number of intermediaries from which the fund is 
ultimately receiving flow information. In order to estimate flows, 
funds may rely on factors that include the historical pattern of flows 
for a particular intermediary while accounting for any observed changes 
in the flows for a given fund. This estimate could be based on all of 
the information received by the fund by a set time, with additional 
adjustments to account for flows from intermediaries that do not submit 
orders by that time. For example the fund could base its estimate on 
all information that it has received by 5 p.m. ET. For some 
intermediaries, however, like retirement plan recordkeepers, funds 
would likely need to create models that are able to project estimated 
flow information based on historical order flow information as 
retirement plan recordkeepers may not have sufficient information 
available by the time established by the fund. In addition, to the 
extent funds do not already receive large trade notifications, funds 
may determine to negotiate arrangements with intermediaries for receipt 
of advance notice of certain large transactions that are known in 
advance by intermediaries, such as replacing a fund as an investment 
option in a retirement plan.
    The considerations for whether estimates generated by the fund 
provide sufficiently reliable information to implement swing pricing 
are similar to those discussed above for the alternative for indicative 
flows from intermediaries. Funds have a narrower view of anticipated 
flow activity than intermediaries, however, as intermediaries are 
closer to investor activity and likely have a more accurate estimate of 
their customers' flows for a particular fund. This benefit of 
indicative flows over estimated flows may be mitigated to the extent 
that intermediaries lack incentives or are otherwise unable to provide 
reasonably accurate indicative flows. During times of stress, funds may 
have a limited view of anticipated order flow information, which may 
impact their ability to effectively implement swing pricing. In 
addition, an approach based on estimated flows would be less effective 
at preventing late trading and at reducing operational risk through 
improvements to order processing than the proposed hard close 
requirement. On the other hand, estimated flows would be less costly 
than either a hard close or indicative flows.
    We request comment on the estimated flow alternative, including:
    170. How accurately can funds estimate flows from different 
intermediaries? For example, are retirement plan flows relatively 
stable and predictable, or do they vary over different periods? To what 
extent do retirement plans inform funds in advance of material flows 
that deviate from historical patterns, such as changes in funds the 
plan offers? Would funds receiving flows from specific intermediaries 
be better able to estimate their flows? For example, would it be easier 
for funds to estimate flows from broker-dealers because broker-dealers 
tend to be able to provide order flow earlier than some other 
intermediaries? Would it be easier for funds to estimate flows from 
retirement plan recordkeepers because those flows are more predictable? 
To the extent that certain events make flows less predictable, such as 
changes in the funds a retirement plan offers to its participants, 
could funds better estimate their flows if intermediaries were required 
to provide advance notice or other information about these events?
    171. Should we provide fund managers a safe harbor from liability 
under certain circumstances (e.g., absent knowing or reckless behavior) 
if the fund relies on estimated flows to determine whether to swing the 
fund's NAV and the size of the swing factor and those estimated flows 
do not align with the actual flows the fund ultimately receives? From 
what statutory provisions or rules should any safe harbor provide 
relief (for example, section 34(b) under the Investment Company Act, 
rule 22c-1, or other provisions and rules)?
    172. Should we require funds to conduct back-testing of estimated 
flows using final data to refine their estimation process over time and 
help ensure that estimates used for swing pricing are reasonable?
    173. Would funds be able to implement swing pricing based on 
estimated flow information? If we adopt an estimated flows approach, 
are there any changes we should make to the proposed swing pricing 
requirement? For example, instead of requiring use of ``reasonable, 
high confidence'' estimates of investor flow information, should we use 
a different standard (e.g., reasonable estimates based on available 
information)?
    174. Does this alternative raise different considerations if we 
were to require funds to use a liquidity fee framework or dual pricing, 
rather than swing pricing? Should an estimated flows approach operate 
or be structured differently if paired with a liquidity fee or dual 
pricing requirement and, if so, how?
    175. Is there information about the estimated flows alternative, if 
adopted, that would be important for investors to understand and that 
funds should be required to disclose in their registration statements 
or elsewhere?
    176. To what extent would the estimated flows alternative reduce 
costs on funds and intermediaries relative to the proposed hard close?
c. Later Cut-Off Times for Intermediaries
    We have considered whether establishing later cut-off times for 
intermediaries to submit order flow information would lessen the burden 
on intermediaries to comply with the proposed hard close requirement 
while continuing to give funds the necessary order flow information to 
implement swing pricing. Under this alternative, investors would 
continue to need to submit orders before the fund's pricing time to be 
eligible to receive that day's price, but intermediaries would have 
additional time to provide those orders to a designated party after the 
pricing time, such as by 6 or 7 p.m. ET for a fund with a 4 p.m. ET 
pricing time. To provide time to assess the flows and determine whether 
to apply swing pricing, a fund might push the time of publication of 
its price to a later time, such as 8 to 10 p.m. ET. Much like the 
proposed hard close, this alternative may have additional benefits 
beyond facilitating swing pricing. Ensuring that all order flow 
information is provided to a designated party earlier than it is 
currently may improve order processing. This alternative would be less 
effective, however, at preventing late trading.
    Allowing intermediaries more time to provide order flow information 
and delaying publication of the NAV would involve many of the systems 
costs discussed in connection with the hard close. For example, 
intermediaries would still need to transmit orders before the NAV is 
available. However, providing intermediaries and funds more time to 
compile order flow information and to calculate the price may lessen 
the overall burden of the proposed changes, and may reduce the need for 
intermediaries to establish cut-

[[Page 77223]]

off times prior to the fund's pricing time for receipt of investor 
orders.
    We request comment on the alternative of later cut-off times for 
intermediaries, including:
    177. What would an appropriate delayed cut-off time be (e.g., two 
or three hours after the fund's pricing time)? Would a delayed cut-off 
time, in combination with a delayed price publication, provide funds 
with sufficient time to make swing pricing decisions?
    178. If funds were to delay the publication of their price, what 
steps would funds need to take? Would they need to amend agreements 
with intermediaries? What effects would a delayed publication time have 
on intermediaries or other parties?
    179. Would a delayed cut-off time for intermediaries to submit 
orders to a designated party be less burdensome than the proposed hard 
close? Would a delayed price publication time be less burdensome than 
the proposed hard close?
    180. Would funds be able to implement swing pricing if we require 
later cut-off times for intermediaries instead of the proposed hard 
close? If we adopt a later cut-off time approach, are there any changes 
we should make to the proposed swing pricing requirement? For example, 
instead of requiring use of ``reasonable, high confidence'' estimates 
of investor flow information, should we use a different standard (e.g., 
reasonable estimates based on available information)?
    181. Does this alternative raise different considerations if we 
were to require funds to use a liquidity fee framework or dual pricing, 
rather than swing pricing? Should a later cut-off time approach operate 
or be structured differently if paired with a liquidity fee or dual 
pricing requirement and, if so, how?
    182. Is there information about the later cut-off times 
alternative, if adopted, that would be important for investors to 
understand and that funds should be required to disclose in their 
registration statements or elsewhere?
3. Additional Illustrative Examples
    While there are many potential combinations of swing pricing and 
hard close alternatives, several of which we have already discussed in 
this release, this section provides additional illustrative examples of 
alternatives to the proposed swing pricing and hard close requirements 
that are designed to reduce shareholder dilution. The alternatives 
discussed in this section are intended to have lower operational costs 
than the proposed requirements, although the reduction in costs 
involves other trade-offs, as discussed below.
a. Spread Cost Adjustment on Days With Estimated Net Outflows
    Spread costs can be a major component of a fund's swing factor. 
Instead of the proposed swing pricing and hard close requirements, we 
could require a simplified version of swing pricing in which funds 
adjust their current NAVs to reflect good faith estimates of spread 
costs on days the fund reasonably expects to have net redemptions based 
on estimated flows. Under this approach, if a fund determined its NAV 
based on the midpoint of each investment's bid-ask spread, on days of 
estimated net redemptions the fund would swing its transaction price 
down by an amount designed to reflect spread costs in the portfolio. 
The adjustment would be based on good faith estimates of spread costs, 
consistent with the proposed swing pricing requirement. As with the 
swing factor under the proposal, the estimated spread costs could be 
determined periodically, as long as significant market developments or 
other developments that affect the good faith estimate of spread costs 
prompt a quicker reevaluation.\266\ If the fund already uses bid prices 
for valuation purposes, it would not be required to adjust its current 
NAV to reflect spread costs.\267\
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    \266\ This approach would not require a fund to use bid prices 
to value each of its investments when determining its NAV. Instead, 
as appropriate, a fund could continue to value its investments using 
the midpoint to determine its NAV and, on days of estimated net 
outflows, the fund would be required to reduce the fund's 
transaction price based on good faith estimates of spread costs.
    \267\ See supra note 202 (discussing accounting standards that 
state that the price within the bid-ask spread that is most 
representative of fair value in the circumstances shall be used to 
measure fair value and that provide that use of bid prices is 
permitted for these purposes, as well as use of mid-market pricing 
as a practical expedient).
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    This approach would be designed to mitigate dilution from spread 
costs associated with selling investments to meet redemptions. The 
reflection of costs would be dynamic when a fund expects net outflows, 
with the adjustment to reduce a fund's transaction price increasing in 
size as spreads widen during times of stress. A fund would need to 
estimate the direction of flows (i.e., net redemptions or net 
purchases) based on available information before the fund publishes its 
price, but the fund would not need to estimate the size of net flows. A 
fund's reasonable expectation of the direction of fund flows may be 
based on different types of information, depending on the fund. For 
example, a fund could consider indicative flow information from 
intermediaries, trends in orders submitted that day, general market 
intelligence, or historical trends in flows.
    This approach would impose lower operational burdens and costs 
relative to the proposal, including by not necessitating a hard close 
and by simplifying the analysis of a swing factor. At the same time, 
the approach would address dilution less fully than the proposal. 
Unlike the proposed swing pricing requirement, this approach would not 
capture market impact or other costs of selling investments to meet 
redemptions. For one, a fund could not assess market impact without an 
estimate of the size of net flows and, without a hard close, estimating 
the size of net flows with accuracy would be subject to a greater risk 
of error than estimating only the direction of flows. In addition, as 
previously discussed, there may be operational challenges and 
complexities to estimating market impact costs more generally. Another 
difference from the proposed swing pricing requirement is that this 
approach would not address dilution from sizeable net purchases. 
Because smaller levels of net purchases are less likely to result in 
dilution than net redemptions (as funds have more time to invest the 
proceeds from net purchases than to sell investments to meet 
redemptions), it may not be appropriate to require a fund to adjust its 
current NAV to reflect spread costs on any day it estimates net 
purchases. For this reason, we have a net inflow swing threshold of 2% 
in the proposal and, as with the potential inclusion of market impact 
in this framework, estimating the size of net flows involves a greater 
risk of error than estimating only the direction of net flows.
    In addition to other requests for comment related to variations of 
swing pricing and estimation of flows, we request comment on requiring 
a fund to adjust its current NAV to reflect good faith estimates of 
spread costs on days the fund reasonably expects to have net 
redemptions, instead of requiring the proposed version of swing pricing 
and a hard close.
    183. Would this approach reduce operational burdens and costs 
relative to the proposed swing pricing and hard close requirements? 
Would this approach reduce operational burdens and costs relative to 
the liquidity fee alternative? Would this approach reduce operational 
burdens and costs relative to the dual pricing alternative? How 
effective would this approach be in addressing dilution? To what extent 
would this approach protect non-

[[Page 77224]]

transacting investors from dilution due to the bid-ask spread costs and 
ameliorate any first-mover advantage? Would the effectiveness of the 
tool vary between normal and stressed market conditions? Should this 
approach also reflect transaction costs in addition to spreads, for 
example, commissions, markups, and/or markdowns?
    184. How accurately can funds estimate the direction of daily net 
flows? Should the requirement apply on days the fund reasonably expects 
to have net redemptions (such that the fund uses this approach only if 
it affirmatively expects net redemptions) or on days the fund does not 
reasonably expect to have net purchases (such that the fund defaults to 
this approach unless it affirmatively expects net purchases)?
    185. To what extent do funds already value their portfolio 
investments using bid prices? What consequences, if any, would a 
requirement to reflect good faith estimates of spread costs when a fund 
reasonably expects to have net redemptions have on these funds?
    186. Would this approach incentivize funds to value their portfolio 
investments using bid prices without properly evaluating whether the 
bid price is most representative of fair value in the circumstances, in 
order to avoid the need to determine whether the fund reasonably 
expects net redemptions each day?
    187. If we adopt this approach, how should we amend disclosure and 
reporting requirements? For example, if we required funds to use this 
simplified version of swing pricing, should current prospectus and 
financial statement reporting requirements for swing pricing apply? 
Should we require funds to report the frequency and amount of 
adjustments made to their current NAVs under this approach? Should a 
fund be required to report both its current NAV and its adjusted price? 
Should a fund be required to report information about the accuracy of 
its estimates of flow information? Where should any such information be 
located (e.g., Form N-PORT, fund websites, annual and semi-annual 
reports)?
b. Liquidity Fee When Trading Costs Are Significant
    Another alternative we considered is a liquidity fee that would 
apply only on days when a fund anticipates significant trading costs. A 
rule could either define the trigger or require funds to establish 
policies and procedures that identify their own fund-specific triggers. 
In terms of establishing the trigger, one alternative would be a 
trading cost trigger that the fund sets in advance or that the 
Commission establishes by rule (for example, with a set size, a set 
increase, or a set standard deviation in trading costs based on 
criteria such as spreads or transaction volumes for the fund's 
portfolio, either in terms of dollars or as a percentage of the fund's 
portfolio). As another alternative, the trigger for applying a 
liquidity fee could include other factors that indicate an increase in 
trading costs, such as increasing net flows (e.g., based on the fund's 
flow history or estimated flows) or decreasing liquidity (e.g., based 
on declines in the percentage of the fund's investments classified as 
highly liquid, or increases in the percentage of investments classified 
as illiquid). A fund's trigger for applying liquidity fees could be 
required to be made public or kept non-public.
    As one example of a policies and procedures based approach, a fund 
could be required to establish written policies and procedures that 
would define the trigger event(s) that would cause a fund to apply a 
fee. The fund's policies and procedures would be required to be 
designed to mitigate dilution and recoup the costs the fund reasonably 
expects to incur as a result of shareholder redemptions on days when 
trading costs are higher. Funds would have discretion to define their 
own trigger events, but all funds would be required to consider certain 
identified factors, such as trading costs, liquidity of the fund's 
portfolio, market conditions, and reasonably estimated investor flows, 
in determining their trigger events.\268\
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    \268\ Consideration of expected investor flows would not require 
a fund to estimate the size of expected flows with accuracy. Rather, 
this consideration would be intended to recognize the potential 
relevance of flows, to the extent a fund has sufficient information 
to reasonably estimate them. Moreover, if a fund anticipates a 
significant increase in costs of selling its investments but does 
not expect to need to sell investments due to an anticipation of net 
inflows, this approach would not require a fund to impose a fee.
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    There are several alternatives for setting a fee amount. For 
instance, the fund could either base the fee amount on reasonable 
estimates of expected transaction costs, including market impact, or if 
the fund determined this estimation is not feasible, the fund could 
establish a set fee amount, or graduated fee levels, it would apply 
when a trigger event occurs. The rule could either allow a fund to 
determine that estimating transaction cost amounts is not feasible in 
advance, or the rule could require a fund to consider its ability to 
estimate transaction costs each time a liquidity fee applies. Under 
another possible approach, the rule could establish a default fee 
amount, such as 1%, that a fund could opt out of or adjust if 
determined to be in the best interest of the fund.
    With respect to board oversight, if fee triggers or amounts were 
determined based on written policies and procedures, we could require 
board approval of the policies and procedures defining a fund's trigger 
event or identifying how to determine a fee amount, as well as any 
material changes to those policies and procedures. As for determining 
when a trigger event occurs and the amount of the fee, similar to the 
proposed swing pricing requirement, we could allow a liquidity fee 
administrator approved by the board to make some or all of these 
determinations.
    If designed incorrectly, a fee that only applies when trading costs 
are significant could incentivize investors to redeem if investors can 
observe in advance that a fee is likely to apply in the near future. 
There are various mechanisms we could use to reduce these incentives. 
For one, if the rule identified specific trigger events that all funds 
would use, in that case, the potential for preemptive redemptions would 
be reduced if investors or other market participants could not observe 
with certainty if a fund is nearing a trigger event. Another approach 
would be to identify specific thresholds for triggering a fee in the 
rule and allow a fund to choose to use one or more of those thresholds 
to determine when to apply a fee. If funds determined their own fee 
triggers, the rule could provide that a fund's trigger event would be 
either public or nonpublic. Public disclosure of a fund's trigger for 
applying liquidity fees would increase transparency. The rule could 
require, however, that the fund's trigger event be kept nonpublic in 
order to reduce the potential for preemptive redemptions. Under this 
approach, a fund would not disclose its defined trigger event, and 
instead would be required to disclose in its prospectus that it applies 
a liquidity fee on days its trading costs increase, as well as how it 
determines the amount of the fee. A fund could be required to report 
information about how frequently it applied a liquidity fee and the 
amount of each fee on Form N-PORT.
    Unlike the proposed swing pricing requirement, this approach would 
not address smaller levels of dilution that may occur in the normal 
course. Instead, it would be designed to focus on periods where funds 
have heightened dilution risk, such as in stress events. In addition, 
this approach would not address dilution that may occur from net 
purchases.
    In addition to other requests for comment related to liquidity fee

[[Page 77225]]

alternatives, we request comment on whether we should require a fund to 
apply liquidity fees only on days when a fund anticipates significant 
trading costs, instead of requiring swing pricing and a hard close.
    188. Should a fund be required to apply a liquidity fee only when 
trading costs are significantly increasing, such as a period of stress? 
If so, should the rule identify a trigger when fees apply, or should 
funds establish their own trigger events?
    189. If the rule establishes a trigger, what should that trigger be 
based on? For example, should the rule require a fund to apply a 
liquidity fee when spreads are widening or transaction volumes for the 
portfolio increase? For instance, should fees be required when spreads 
widen beyond a 95% confidence level for key components of the fund's 
portfolio, where the mean and standard deviation of these key markets 
are measured for the trailing 252 business days (the average number of 
trading days in a year), and the trigger occurs if the current spread 
is greater than 1.65 standard deviations (i.e., the equivalent of a 95% 
confidence in a normal distribution) above the mean for that period? 
Should different confidence levels, standard deviations, or measurement 
periods be used? Should a liquidity fee trigger be based on an increase 
in the transaction volume of the fund's portfolio, such as a trigger 
when the dollar- or percentage-based transaction volume for that day 
exceeds the 95% confidence level compared to the average daily 
transaction volume for the trailing 252 business days? Should different 
confidence levels or measurement periods be used? Do funds already 
track information that would allow them to identify readily when a 
trigger based on widening spreads or increased dollar transaction 
volume is crossed, or would they need to collect or monitor additional 
information about spreads or transaction volumes? Should the rule use 
other or additional triggers? For example, should a trigger be based on 
or consider large net outflows or a reasonable expectation of large net 
outflows above a certain percentage, such as net redemptions above 1% 
or 2% of net assets or net redemptions that are higher than typical for 
the individual fund based on historical flows? If the rule included a 
numerical threshold for net redemptions, would funds have concerns 
about their ability to accurately estimate net flow amounts and 
therefore be less likely to apply fees? If so, would a safe harbor 
address these concerns? Should a trigger be based on or consider an 
identified change in the fund's liquidity classifications, such as an 
identified decrease in the percentage of highly liquid investments the 
fund holds or an identified increase in the percentage of illiquid 
investments the fund holds? Should identification of a trigger event 
account for indicators of market stress in the financial markets 
overall or in the specific markets in which the fund invests? If so, 
what indicators of market stress should the rule include? Should the 
rule identify multiple potential triggers and allow funds to choose 
whether to use one or more of those triggers to determine when to apply 
a fee?
    190. Instead of identifying specific trigger points by rule, should 
we require funds to establish and implement policies and procedures 
that describe when the fund will impose a fee? Would a policies and 
procedures approach allow funds to tailor the application of a fee to 
scenarios in which transacting investors are likely to cause dilution? 
Under a policies and procedures approach, should we identify the 
factors a fund must consider in defining its trigger events? If so, 
what factors should we require a fund to consider (e.g., trading costs, 
liquidity of the fund's portfolio, market conditions, and reasonably 
estimated investor flows)? Rather than require funds to consider these 
factors, should we require funds to define their trigger events with 
respect to these or other specific factors?
    191. Should we permit a fund not to apply a fee upon the occurrence 
of a defined trigger event? For example, should a fund be required to 
apply a fee when a trigger event occurs, unless the board determines 
that it is not in the interest of the fund to apply a fee in the 
specific circumstance?
    192. What risks are associated with requiring a fund to define its 
own trigger event, and how could we reduce these risks? Would funds 
define a trigger event such that a fund would be delayed in determining 
that a fee should apply relative to potentially fast-moving changes in 
market conditions? If so, would this delay increase the potential for 
preemptive redemptions and contribute to a first-mover advantage? Would 
funds define a trigger event in a way that makes it unlikely that a 
fund would ever apply a fee? Are there ways to ensure that funds' 
policies and procedures are sufficiently robust, such as requirements 
to report the policies and procedures to the Commission or to report 
when a fund applied a fee? For example, should funds be required to 
confidentially report their trigger events to the Commission and to 
report how frequently fees applied and in what amounts on Form N-PORT?
    193. Should liquidity fees apply only to redemptions if a trigger 
event occurs? Or should liquidity fees apply to both redemptions and 
purchases under this approach? Should a single trigger event result in 
fees applying to both redemptions and purchases, or should funds 
establish trigger events that differ between redemptions and purchases?
    194. How should the amount of a liquidity fee be determined under 
this approach? Should the rule set a specified fee amount that would 
occur upon any fund's trigger event, such as 0.5%, 1%, or 2%? Should 
any fee amount set by rule be a default amount, such that a fund could 
use a higher or lower fee amount if determined to be in the best 
interest of the fund? Should funds be required to calculate the amount 
of the fee based on reasonable estimates of expected transaction costs, 
including market impact? Should fund policies and procedures, or a 
rule, establish a set fee amount that would apply if a fund is unable 
to reasonably estimate expected transaction costs? Should funds be 
required to consider their ability to reasonably estimate transaction 
costs each time a trigger event applies, or should funds be able to 
determine in advance that estimation is not feasible and opt to use a 
set or graduated fee for all trigger events? Should fund policies and 
procedures, or a rule, establish graduated fee levels that would apply 
for different trigger events? Should we establish a limit on the size 
of a liquidity fee under this approach (e.g., 2%, 3%, or 5%)?
    195. After a fee is triggered, how should the rule permit or 
require a fund to determine when it should no longer apply a fee? For 
instance, should a fund reassess daily whether trading costs have 
decreased, or should a liquidity fee remain in place for a set number 
of days (e.g., 2 to 5 days) and then no longer apply unless the fund 
determines a fee continues to be in the best interest of the fund?
    196. What information should funds be required to disclose in their 
prospectuses under this approach? How much detail should funds be 
required to provide about when they will impose a liquidity fee? Should 
the prospectus state only that a fund will impose a fee when trading 
costs increase, or should the prospectus also discuss the factors a 
fund considers to make this determination? Should a fund be required to 
disclose its trigger events in its prospectus? Would that disclosure 
contribute to potential preemptive redemptions, or would trigger events 
be difficult to observe publicly in advance? Should funds be required 
to disclose fee

[[Page 77226]]

amounts in their prospectuses, or their methods for calculating fee 
amounts?
    197. Should the fund's board be required to approve the fund's 
written policies and procedures defining the trigger event(s) and how 
the fund will determine the amount of the fee? Should the board be 
required to approve any material changes to the policies and 
procedures? Should other board oversight be required? Should the board 
have to determine that a fee is appropriate every time a trigger event 
occurs before the fund can impose a fee? Or should the board be 
required to designate a liquidity fee administrator that would be 
responsible for determining when liquidity fees apply and the size of 
the fee? Should the definition of a liquidity fee administrator mirror 
the proposed definition of a swing pricing administrator? If not, what 
changes should be made? Similar to the proposed swing pricing 
requirement, should a liquidity fee administrator be required to 
provide periodic reports to the board (at least annually) that 
describe: (1) the administrator's review of the adequacy of the 
policies and procedures identifying the fund's trigger event and the 
effectiveness of their implementation, including the effectiveness in 
mitigating dilution; (2) any material changes to the liquidity fee 
policies and procedures since the date of the last report (if such 
material changes are not subject to board approval); and (3) the 
administrator's review and assessment of the fund's method for 
determining the size of the liquidity fee?
    198. What are the operational implications of this approach for 
funds and intermediaries? Would intermediaries be able to apply a 
liquidity fee on the same day the fund announces its imposition? What 
effects would this approach have on investors?
    199. If liquidity fees are only applied rarely under this approach, 
how would that affect fund and intermediary preparedness for imposing 
fees? Would it increase investor sensitivity to fees and increase the 
likelihood of preemptive redemptions?
    200. Should we pair a requirement to adjust a fund's current NAV to 
reflect spread costs on days the fund estimates it will have net 
redemptions with a requirement to apply a liquidity fee when trading 
costs increase? Would this combined framework address dilution from net 
redemptions in a manner similar to the proposed swing pricing 
requirement without the costs of a hard close?

E. Reporting Requirements

1. Amendments to Form N-PORT
    Registered management investment companies and ETFs organized as 
unit investment trusts are required to file periodic reports on Form N-
PORT about their portfolios and each of their portfolio holdings as of 
month-end.\269\ While the reports provide monthly information to the 
Commission, funds file these reports on a quarterly basis with a 60-day 
delay, and the public only has access to information for the third 
month of each quarter. We are proposing to require reports on Form N-
PORT to be filed within 30 days of month-end, which would be followed 
by public availability of much of the reported information 60 days 
after month-end. We are also proposing to require an open-end fund that 
is subject to classification requirements in the liquidity rule to 
provide information regarding the aggregate percentage of its portfolio 
represented in each of the three proposed liquidity categories, which 
would be publicly available. The reported aggregate percentages would 
include adjustments to give effect to other aspects of the proposal. 
Finally, we are proposing amendments relating to funds' use of swing 
pricing, conforming amendments to reflect the proposed amendments to 
rule 22e-4, and amendments to certain entity identifiers.
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    \269\ For purposes of this section, the term ``fund'' refers to 
registrants that currently are required to report on Form N-PORT, 
including open-end funds, registered closed-end funds, and ETFs 
registered as unit investment trusts, and excluding money market 
funds and small business investment companies.
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a. Filing Frequency
    We are proposing to amend rule 30b1-9 and Form N-PORT to require 
funds to file reports on Form N-PORT on a more timely basis, with 
changes to both the frequency with which a fund would file reports on 
Form N-PORT and when the reports are due.\270\ Specifically, rather 
than filing monthly reports with the Commission 60 days after the end 
of each fiscal quarter, we are proposing to require that funds file 
reports on a monthly basis.\271\ These monthly filings would be due 
within 30 days after the end of the month to which they relate and 
would be made public 60 days after the end of the month to which they 
relate.\272\ As an example, currently a fund files Form N-PORT reports 
for the first, second, and third months of each fiscal quarter with the 
Commission 60 days after the end of the third month of the quarter. 
Under the proposal, funds would separately file reports for the first, 
second, and third months of the quarter, with each month's report due 
within 30 days of month-end.
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    \270\ The proposal would also make a conforming edit to the 
filing instructions for Form N-PORT. See proposed 17 CFR 274.150(a).
    \271\ We would also make conforming changes to General 
Instruction A of Form N-PORT and rule 30b1-9 to remove references to 
the requirement for a fund to maintain in its records the 
information that is required to be included on Form N-PORT no later 
than 30 days after the end of each month; this would no longer be 
necessary because the information would be filed with the 
Commission. See Proposed General Instruction A of Form N-PORT; 
proposed rule 30b1-9.
    \272\ Id; proposed General Instruction F of Form N-PORT. As is 
the case currently, if the due date falls on a weekend or holiday, 
the filing deadline would be the next business day.
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    These changes are intended to provide more timely information 
regarding the fund's portfolio, including its liquidity profile. Both 
the current quarterly reporting cadence and the 60-day delay after the 
end of the quarter before reports are due make it difficult to use 
reported data to assess events that are developing quickly, or to 
identify early warning signs of potential distress. By the time the 
information is filed, it is at least two, and could be as many as four, 
months out of date.\273\
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    \273\ Because reports are due 60 days after the end of a fund's 
fiscal quarter, deadlines vary based on the fund's fiscal year. As 
an example, depending on a given fund's fiscal year, reports on Form 
N-PORT that included information for Mar. 2020 were due between June 
1, 2020, and July 30, 2020. For instance, for funds with fiscal 
years ending Dec. 31, Sept. 30, June 30, or Mar. 30--which is just 
under half of all funds--the due date of the filing was May 30, 
2020. Because this was a Saturday, the filing deadline was extended 
until the next business day on Monday, June 1. See General 
Instruction A to Form N-PORT.
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    As proposed in 2015 and adopted in 2016, Form N-PORT would have 
provided for monthly filings with the Commission, within 30 days after 
the end of each month.\274\ Only reports for every third month would 
have been available to the public.\275\ The Commission originally 
required monthly portfolio reporting because it would be useful for 
fund monitoring, particularly in times of market stress.\276\ The 
Commission originally required funds to file each monthly report within 
30 days of month end because more delayed data would reduce the utility 
of the information to the Commission and lag times of more than 30 days 
would

[[Page 77227]]

make monthly reporting impractical, as reports would overlap with 
preparation time.\277\
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    \274\ See Investment Company Reporting Modernization, Investment 
Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 
2016)] (``Reporting Modernization Adopting Release''), at section 
II.A; Investment Company Reporting Modernization, Investment Company 
Act Release No. 31610 (May 20, 2015) [80 FR 33589 (June 12, 2015)] 
(``Reporting Modernization Proposing Release'').
    \275\ See Reporting Modernization Adopting Release, supra note 
274, at section II.A.
    \276\ See id., at paragraph following n.453.
    \277\ See id., at nn.461-462 and accompanying text.
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    Before the date funds would have been required to comply with this 
requirement, the Commission experienced a cybersecurity incident that 
resulted in unauthorized access to certain nonpublic information on the 
EDGAR system.\278\ As part of the Commission's ongoing assessment of 
its internal cybersecurity risk profile, the Commission re-evaluated 
and modified the filing frequency for reports on Form N-PORT. The 
Commission required funds to file a report with the Commission for each 
month in the fund's fiscal quarter no later than 60 days after the end 
of each fiscal quarter and to maintain in their records the information 
that is required to be included on Form N-PORT not later than 30 days 
after the end of each month. In making this change, the Commission 
stated that it significantly reduced the sensitivity of the non-public 
data, but that the staff would continue to monitor and solicit feedback 
on the data received and the use made (or expected to be made) of such 
data in furtherance of the Commission's statutory mission, as well as 
cybersecurity considerations and other matters deemed relevant by the 
staff.\279\
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    \278\ See Statement on Cybersecurity (Sept. 20, 2017), available 
at https://www.sec.gov/news/public-statement/statement-clayton-2017-09-20; see also Testimony before the Financial Services and General 
Government Subcommittee of the Senate Committee on Appropriations 
(June 5, 2018), available at https://www.sec.gov/news/testimony/testimony-financial-services-and-general-government-subcommittee-senate-committee.
    \279\ See Amendments to the Timing Requirements for Filing 
Reports on Form N-PORT, Investment Company Act Release No. 33384 
(Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)] at nn.36-39 and 
accompanying text.
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    The Commission applies controls and systems for the use and 
handling of filing systems for confidential information and associated 
confidential data in a manner that reflects the sensitivity of the data 
and is consistent with the maintenance of its confidentiality. The 
Commission also has gained additional experience in receiving and 
maintaining sensitive portfolio data on the EDGAR system. This 
experience includes, for example, the existing non-public portions of 
Form N-PORT, which are subject to controls and systems designed to 
protect their confidentiality, as well as confidential treatment 
requests for reports on Form 13F.\280\
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    \280\ See Electronic Submission of Applications for Orders under 
the Advisers Act and the Investment Company Act, Confidential 
Treatment Requests for Filings on Form 13F, and Form ADV-NR; 
Amendments to Form 13F, Investment Company Act Release No. 34635 
(June 23, 2022) [87 FR 38943 (June 30, 2022)], at section II.C.
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    Market events have reinforced the need for timely data regarding 
funds' portfolios and the liquidity of those portfolios. For example, 
disruptions in the markets for Treasury securities and corporate bonds 
began near the end of the first quarter of 2020, but many funds' 
reports on Form N-PORT reflecting these events were not due until June 
1, 2020, or as late as the end of July 2020. This meant that Commission 
staff were not able to review monthly filings, for example, to assess 
and analyze how the events were affecting funds or identify issues for 
further inquiry. Similarly, the Russian invasion of Ukraine began in 
late February 2022, when many funds were just filing their reports for 
the final quarter of 2021. This meant that when Commission staff were 
reviewing data to assess funds' exposures to securities that could be 
affected by the invasion, the data was several months out of date.\281\ 
As a result, during major market events, the staleness of Form N-PORT 
data limits the Commission staff's ability to develop a comprehensive 
understanding of the market. The stale data also can impede our ability 
to contribute fully to interagency discussions of and responses to 
market events.
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    \281\ As evidence mounted that an invasion was likely to occur, 
funds may have adjusted their exposure to securities that could be 
affected, but Commission staff were unable to review this on a 
market-wide basis until months after the invasion due to the delay 
in receiving information.
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    Although funds are required to maintain the monthly data and 
produce it to Commission staff upon request, any such production would 
be done on an individual basis. In addition, making individual requests 
requires Commission staff to determine the appropriate funds from which 
to collect data, which can be particularly challenging when Commission 
staff is responding to market events but may not have the market data 
necessary to determine quickly which funds to prioritize in responding 
to the event.
    Requiring funds to file monthly reports on Form N-PORT within 30 
days of the end of each month, consistent with the filing frequency the 
Commission initially adopted for Form N-PORT, would enhance our ability 
to effectively oversee and monitor the activities of investment 
companies in order to better carry out our regulatory functions, 
consistent with the goals of Form N-PORT reporting.\282\
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    \282\ See, e.g., Reporting Modernization Proposing Release, 
supra note 274, at section IV.A. See also 2015 Proposing Release, 
supra note 31, at text accompanying n.562.
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    We request comment on the proposed changes to the timing and 
frequency with which fund would be required to file reports on Form N-
PORT, including:
    201. As proposed, should we require that funds file reports on Form 
N-PORT on a monthly, rather than quarterly, frequency? Because funds 
are currently required to maintain the information required to prepare 
their reports on Form N-PORT on a monthly basis, within 30 days after 
the end of the reporting period, would they have any increased burden 
due to filing such information monthly, within 30 days after the end of 
the reporting period, as proposed?
    202. As proposed, should we shorten the deadline for filing reports 
on Form N-PORT to 30 days after the end of the reporting period? Should 
we instead use a different deadline, such as 15, 45, or 60 days after 
the end of the reporting period?
    203. Should we, as proposed, revise General Instruction A of Form 
N-PORT and rule 30b1-9 to remove the requirement for a fund to maintain 
in its records the information that is required to be included on Form 
N-PORT no later than 30 days after the end of each month because this 
information would be filed with the Commission under the proposal?
b. Publication Frequency
    We are proposing to make funds' monthly reports on Form N-PORT 
public 60 days after the end of each monthly reporting period.\283\ 
Currently, only the report for the third month of every quarter is made 
public, meaning the proposal would triple the amount of data made 
available to investors on Form N-PORT in a given year. Thus, the 
proposal would enhance the ability of investors to review and monitor 
information about their funds' portfolios.\284\
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    \283\ See proposed General Instruction F of Form N-PORT.
    \284\ We also propose to include additional information about 
the aggregate liquidity profiles of fund portfolios. See infra 
section II.E.1.c.
---------------------------------------------------------------------------

    We continue to believe that publication of information collected on 
Form N-PORT can benefit investors by assisting them in making more 
informed investment decisions.\285\ The public availability of monthly 
information, rather than information only for the third month of each 
quarter, may enhance these benefits. For example, institutional 
investors could directly use

[[Page 77228]]

the monthly information reported on Form N-PORT to evaluate fund 
portfolios and assess the potential for returns and risks of a 
particular fund, and other investors may benefit from third-party 
analysis of the monthly data.
---------------------------------------------------------------------------

    \285\ See Reporting Modernization Adopting Release, supra note 
274, at section II.A.4.
---------------------------------------------------------------------------

    When the Commission first adopted Form N-PORT, it recognized 
potential negative effects from frequent publication of Form N-PORT 
data. For example, the Commission acknowledged the risk that frequent 
public disclosure could allow market participants to use funds' reports 
on Form N-PORT to engage in predatory trading such as front-
running.\286\ The Commission also recognized that more frequent public 
disclosure could permit free riding on a fund's research or trading 
expenditures by allowing other market participants to copy the fund's 
trades.\287\ In determining to maintain the status quo of quarterly 
public reporting based on the fund's fiscal quarters, the Commission 
stated that it was important to assess the impact of the data reported 
on Form N-PORT on the mix of information available to the public, and 
the extent to which these changes might affect the potential for 
predatory trading, before determining whether more frequent or more 
timely public disclosure would be beneficial to investors in 
funds.\288\
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    \286\ See Reporting Modernization Adopting Release, supra note 
274, at text accompanying n.488. See also Investment Company 
Reporting Modernization, Investment Company Act Release No. 32936 
(Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)] (noting same concerns).
    \287\ Id. But see Morningstar Comment Letter on Reporting 
Modernization Proposing Release, File No. S7-08-15, available at 
https://www.sec.gov/comments/s7-08-15/s70815-355.pdf (discussing 
data that funds providing more frequent disclosure do not appear to 
exhibit lower returns as a result of predatory behavior).
    \288\ Reporting Modernization Adopting Release, supra note 274, 
at text accompanying nn.494-499 and accompanying text.
---------------------------------------------------------------------------

    Since the adoption of Form N-PORT, funds' practices with respect to 
disclosure of information about their portfolios have continued to 
evolve. For example, many funds, including actively managed funds, 
voluntarily provide their complete portfolio holdings on their websites 
on a monthly basis, typically lagged 30 days. Further, ETFs, including 
actively managed ETFs, generally are required to provide transparency 
into their portfolio holdings on a daily basis.\289\ Many funds also 
provide monthly information about their portfolio holdings to third 
party data aggregators, generally with a lag of 30 to 90 days, which in 
turn make them available to investors for a fee. We believe this 
demonstrates that investor demand for monthly portfolio holdings 
already exists and that funds providing the information have determined 
the potential for predatory trading is justified by the benefit to 
investors. The proposal would simply allow all investors to receive 
similar data without paying a fee.\290\ Thus, we believe that many 
funds already provide public transparency of their portfolio holdings 
more frequently than the proposal would require, and that our proposal 
would level the playing field by standardizing the reporting timelines 
for all funds, putting the data in a single location that all investors 
can access without charge, and using a standardized format that enables 
investor analysis of reported data.\291\ In addition, under the 
proposal, the public information for each fund's monthly report on Form 
N-PORT would not be publicly available until 60 days after the end of 
the month, which is the same delay that currently exists for funds' 
reports for the third month of every quarter. This is designed to 
balance the benefits to investors of more frequent portfolio 
disclosure, while also retaining the existing 60-day delay, which we 
believe is appropriate in order to make the disclosed positions less 
timely and thus less likely to facilitate predatory trading 
practices.\292\ As a result, and given that the proposal would provide 
data for additional monthly periods but would not change the current 
60-day delay in making funds' reports on Form N-PORT public, the 
proposal is intended to mitigate opportunities for predatory trading or 
free riding of funds' trading strategies.\293\
---------------------------------------------------------------------------

    \289\ See 17 CFR 270.6c-11(c)(1)(i); Exchange-Traded Funds, 
Investment Company Act Release No. 33646 (Sep. 25, 2019) [84 FR 
57162 (Oct. 24, 2019)] (``ETF Release''), at section II.C.4 (stating 
that, although a few commenters raised concerns about front running 
or free riding if certain ETFs were required to provide full daily 
portfolio transparency, the Commission believed it was likely that 
all current ETFs that may rely on the rule already provide full 
portfolio transparency as a matter of market practice). In addition, 
a small number of ``nontransparent'' ETFs have received an exemptive 
order from the Commission permitting them not to disclose their 
portfolio holdings on a daily basis. As of Mar. 31, 2022, there were 
45 nontransparent ETFs. Several of these nontransparent ETFs 
voluntarily disclose their complete portfolios on a monthly basis 
with a one-month lag.
    \290\ For example, we understand that a majority of funds 
provide monthly information regarding their portfolios to a third-
party data aggregator. Individual investors are able to review the 
holdings reported by funds providing data to the aggregator using an 
analysis tool for which the aggregator charges a fee.
    \291\ In addition, because we propose to make funds' reports on 
Form N-PORT available for every month, investors could use Form N-
PORT to monitor how their funds respond to events regardless of when 
they occur. For example, investors in some funds have access to Form 
N-PORT filings for Mar. 2020, while investors in other funds do not. 
This is because Form N-PORT data is publicly available for the third 
month of each fund's fiscal quarter, but fiscal quarters vary among 
funds.
    \292\ Section 45(a) of the Investment Company Act requires 
information in reports filed with the Commission pursuant to the Act 
be made public unless we find that public disclosure is neither 
necessary nor appropriate in the public interest or for the 
protection of investors. For the reasons discussed above, we 
preliminarily believe that keeping the data for the first and second 
months of a fund's calendar quarter confidential until the 
expiration of the 60-day period provided by the proposal is 
necessary or appropriate in the public interest for the protection 
of investors.
    \293\ Form 13F is due 45 days after the end of each calendar 
quarter, meaning that every third month, a fund's disclosure on Form 
N-PORT would not be the first mandatory disclosure of its portfolio. 
Funds currently have the ability to designate certain holdings for 
the third month in every quarter as ``miscellaneous securities,'' 
which are not disclosed publicly on Form N-PORT. Because we propose 
that all filings would eventually become public, we are extending 
this to filings for each month. See text accompanying infra note 
319.
---------------------------------------------------------------------------

    Furthermore, the proposal is intended to benefit investors through 
increased transparency of Form N-PORT information, especially because 
it is provided in structured format and made in a single, centralized 
database. Giving investors access to this information in monthly 
reports on Form N-PORT may result in investors being better able to 
monitor the portfolios of their funds in a systematic fashion, and 
assist investors in choosing the investment products that most closely 
align with their desired levels of risk, asset exposures, and liquidity 
profiles.
    The proposed reporting requirement also takes into account the 
cybersecurity risk profile of the information we are collecting. Under 
the proposal, we would receive the monthly information 30 days after 
the end of each month. Because the monthly information reported on Form 
N-PORT would be made public 30 days after it is filed with the 
Commission, the Commission would retain less confidential information 
than under the final rules the Commission adopted in 2016. This is 
because, under the proposal, information for each month would become 
public shortly after filing instead of information in only the third 
month of each quarter being publicly disclosed.
    Currently, certain information reported on Form N-PORT is 
nonpublic, even in the report for the third month of the quarter that 
is otherwise publicly available. This aspect of the form is unchanged 
in this proposal, and that information--which includes liquidity 
classifications for individual portfolio investments--would remain 
nonpublic in individual reports. However, Commission staff may publish 
aggregate or other anonymized information about the nonpublic

[[Page 77229]]

elements of reports on Form N-PORT.\294\
---------------------------------------------------------------------------

    \294\ See General Instruction F of Form N-PORT.
---------------------------------------------------------------------------

    We request comment on the proposed changes to the frequency with 
which funds' reports on Form N-PORT would be made public, including:
    204. Should we, as proposed, make funds' reports on Form N-PORT 
public on a monthly basis, 60 days after the end of the month to which 
they relate? How would investors use the additional information? Are 
there other potential users of public portfolio disclosures, including 
third-party users that provide services to investors, who find the 
additional information useful, and through whom investors could benefit 
indirectly?
    205. Many funds already provide monthly information about their 
portfolio holdings on their websites. Would investors benefit from 
having centralized information on Form N-PORT that includes all funds, 
rather than having to look at each fund's website? Would investors 
benefit from having the information in a structured format rather than 
the format the fund uses on its website? Would the proposed requirement 
reduce costs for investors who currently use data aggregators to obtain 
holdings information regarding the funds in which they invest?
    206. Should the lag between filing and publication be extended, for 
example to 45 days after filing, or shortened, for example to 15 days 
after filing? Should reports be made public immediately upon filing?
    207. Previously, some have suggested that more frequent public 
disclosure could raise costs for investors due to predatory trading or 
copy-catting of fund strategies. Given that the proposal would provide 
data for additional monthly periods but would not change the current 
60-day delay in making funds' reports on Form N-PORT public, would the 
proposal raise costs for investors due to predatory trading or copy-
catting? What empirical data exists that supports these assertions?
    208. Would actively managed nontransparent ETFs, which generally do 
not disclose their complete portfolios on a daily basis, be affected by 
the proposed requirement to disclose their portfolio on a 60-day delay 
differently than other actively managed funds, and should we permit 
these funds to disclose their portfolios less frequently as a result?
    209. Do funds voluntarily publish data about their portfolios to 
compete for investors, notwithstanding potential effects on their 
performance?
    210. Are there certain items on Form N-PORT that we propose to make 
public on a monthly basis that should only be public on a quarterly 
basis? If so, why is monthly disclosure of the relevant item neither 
necessary nor appropriate in the public interest or for the protection 
of investors?
c. Public Reporting of Aggregate Liquidity Classifications
    We are proposing to require that funds' monthly reports on Form N-
PORT would include the percentage of a fund's assets that fall into 
each of the three liquidity categories.\295\ To give effect to the 
proposed adjustments to a fund's calculations of its level of highly 
liquid investments and illiquid investments in the liquidity rule, a 
fund would be required to make the same adjustments to its reported 
amount of highly liquid investments and illiquid investments, rather 
than simply report the percent of assets the fund has classified in 
each category. Specifically, a fund would reduce its reported amount of 
highly liquid assets by the amount of highly liquid assets that it 
posts as margin or collateral for derivatives transactions that are not 
highly liquid and by the amount of the fund's liabilities. A fund also 
would increase its reported amount of illiquid assets by the amount of 
collateral available upon exit of illiquid derivatives 
transactions.\296\ The fund's adjustments are intended to more 
accurately reflect the availability of assets to meet redemptions. We 
propose to require that a fund's reported aggregate liquidity 
classifications include these adjustments, rather than report the 
adjustments separately, to make it easier for investors to understand 
the information a fund reports about its liquidity.
---------------------------------------------------------------------------

    \295\ See proposed Item B.12.a of Form N-PORT.
    \296\ See proposed Items B.8 and B.12.b of Form N-PORT. In 
certain situations, the adjustments could result in the amounts of a 
fund's investments in all three categories not summing to 100% of 
assets. For example, the reduction in the reportable amount of 
highly liquid assets may be greater than the increase in the 
reportable amount of illiquid assets, resulting in the percentages 
of the fund's assets in each category summing to an amount below 
100%. Funds would be required to increase their reported amounts of 
moderately liquid investments if necessary to make the amounts the 
fund reports sum to 100%. See proposed Item B.12.b of Form N-PORT.
---------------------------------------------------------------------------

    The public disclosure framework we are proposing is similar to the 
framework the Commission adopted in 2016.\297\ At that time, the 
Commission determined to require a fund to publicly disclose the 
aggregate percentage of its portfolio assets representing each of the 
classification categories to balance some commenters' concerns about 
potential adverse effects that could arise from public reporting of 
detailed portfolio liquidity information with investors' need for 
improved information about funds' liquidity risk profiles.\298\
---------------------------------------------------------------------------

    \297\ See Liquidity Rule Adopting Release, supra note 8, at 
section III.C.6.c.
    \298\ See id., at text accompanying n.621.
---------------------------------------------------------------------------

    As funds began to implement the liquidity rule's classification 
requirements, and before funds were required to provide public 
disclosure of aggregate liquidity classifications, the Commission 
received additional information about the potential challenges and 
concerns of publicly disclosing a fund's aggregate liquidity profile at 
that time, namely the risk that the data would be subjective, that it 
was presented in isolation, and that it lacked the context of other 
disclosures about the fund.\299\ In response, the Commission replaced 
this disclosure with narrative liquidity disclosure in 2018.\300\ In 
removing the requirement to report aggregate liquidity classifications, 
the Commission stated that the subjectivity involved in the 
classification process raises concerns when applied to public 
disclosure. Specifically, the Commission expressed concern that the 
quantitative presentation of the aggregate liquidity information may 
imply precision and uniformity in a way that obscures its subjectivity, 
and that funds may face incentives to classify their investments as 
more liquid in order to make their funds appear more attractive to 
investors, while also potentially increasing the risk of herding if 
funds adjusted their portfolios in response to the disclosure 
requirement. In addition, the Commission believed that it would not be 
appropriate to adapt Form N-PORT to provide narrative context to help 
investors appreciate the fund's liquidity risk profile and the 
subjective nature of classification.
---------------------------------------------------------------------------

    \299\ See Investment Company Liquidity Disclosure, Investment 
Company Act Release No. 33046 (Mar. 14, 2018) [83 FR 11905 (Mar. 19, 
2018)] (``2018 Liquidity Disclosure Proposing Release'') at nn.9-13 
and accompanying text.
    \300\ See 2018 Liquidity Disclosure Adopting Release, supra note 
22. For discussion generally of the Commission's stated rationale 
for making this change, see generally id. and 2018 Liquidity 
Disclosure Proposing Release, supra note 299.
---------------------------------------------------------------------------

    The Commission judged at that time that effective disclosure of 
liquidity risks and their management would be better achieved through 
prospectus and shareholder report disclosure rather than Form N-PORT, 
and adopted a requirement to disclose in a narrative format a brief 
discussion of the operation and effectiveness of its liquidity risk 
management program in the fund's shareholder reports. The

[[Page 77230]]

intent of the narrative framework was to provide investors with a 
holistic view of the liquidity risks of the fund and how effectively 
the fund's liquidity risk management program managed those risks on an 
ongoing basis over the reporting period.\301\
---------------------------------------------------------------------------

    \301\ See, e.g., supra section II.A.1. To the extent a fund 
would be incentivized to manage its portfolio so as to report higher 
amounts of highly liquid investments, we believe this would be 
consistent with the focus in section 22 of the Act on preserving the 
redeemability of open-end funds.
---------------------------------------------------------------------------

    In practice, though, the narrative disclosure did not meaningfully 
augment other disclosure requirements.\302\ Instead, based on staff 
experience with several years of shareholder reports covering a range 
of market conditions, including a market crisis in March 2020 that 
included substantial liquidity concerns for certain securities, we 
found that the narrative disclosure often appeared as a lengthy, 
boilerplate recitation of the requirements of rule 22e-4 that was not 
tailored to a particular fund and did not change as conditions in the 
market changed. For example, many funds' liquidity disclosures did not 
change after the events of March 2020, even for funds that invested in 
assets that had experienced severe liquidity issues. This meant that 
investors had limited information about the liquidity of fund 
investments or how the fund managed that liquidity risk through these 
stressful events. We believe that this prevented investors from fully 
evaluating the liquidity risks associated with a particular fund for 
purposes of making more informed investment decisions.
---------------------------------------------------------------------------

    \302\ Tailored Shareholder Reports Adopting Release, supra note 
26, at text accompanying n.463.
---------------------------------------------------------------------------

    Investors and funds have made similar observations. In 2020, when 
the Commission proposed amendments designed to streamline fund 
shareholder reports, some commenters requested that we require funds to 
disclose their aggregate liquidity buckets.\303\ Other commenters 
stated that the narrative disclosure is not particularly relevant to 
investment decision making.\304\ Several other commenters also stated 
that they believed the narrative disclosure should be moved from 
shareholder reports.\305\ We recently adopted amendments that remove 
the requirement to disclose the narrative disclosure in the shareholder 
reports.\306\
---------------------------------------------------------------------------

    \303\ See, e.g., Comment Letter of Consumer Federation of 
America on 2020 Tailored Shareholder Reports Proposing Release, File 
No. S7-09-20 (``[S]trongly encourag[ing] the Commission to 
reconsider its decision'' to remove aggregate liquidity disclosure 
and characterizing narrative disclosure as ``boilerplate.''); see 
also Comment Letter of Tom and Mary on 2020 Tailored Shareholder 
Reports Proposing Release, File No. S7-09-20 (``We think funds 
should be required to disclose their aggregate liquidity bucketing 
in their annual report. We believe this information is important to 
investors and will help them appreciate any liquidity risk.''). The 
comment file for the 2020 Tailored Shareholder Reports Proposing 
Release, where these comment letters are available, is at https://www.sec.gov/comments/s7-09-20/s70920.htm.
    \304\ See, e.g., Comment Letter of Ubiquity on 2020 Tailored 
Shareholder Reports Proposing Release, File No. S7-09-20 
(``Disclosure [of liquidity information in narrative format] is 
currently worthless and even with'' the proposed changes which were 
designed to retain the narrative format, it ``will continue to be 
worthless.''); see also Comment Letter of Tom Williams on 2020 
Tailored Shareholder Reports Proposing Release; Feedback Flier of 
Olivia Brightly on 2020 Tailored Shareholder Reports Proposing 
Release.
    \305\ See, e.g., Comment Letters of Morningstar Trustees, ICI, 
SIFMA. Fidelity, Dechert, James Angel, Lisa Barker, and T. Rowe 
Price on 2020 Tailored Shareholder Reports Proposing Release.
    \306\ See Tailored Shareholder Reports Adopting Release, supra 
note 26.
---------------------------------------------------------------------------

    Our proposed amendments to the liquidity rule, along with the years 
of experience that funds have gained in complying with the current 
rule, also have made the concerns the Commission identified in 2018 
less relevant. Since 2018, the staff has conducted outreach with 
numerous market participants, including fund complexes, liquidity 
classification vendors, and others, and we are proposing several 
changes to rule 22e-4 that would prescribe additional parameters for 
many aspects of the classification process. These changes include 
introducing the concept of a 10% stressed trade size, establishing a 
minimum value impact standard, and removing asset class 
classifications, which would reduce subjectivity in classifications and 
reduce variation in funds' classification practices, even if incentives 
for a fund to mis-classify its investments remain.\307\ These changes 
are intended to reduce the risk of subjectivity impeding an investor's 
understanding.
---------------------------------------------------------------------------

    \307\ See, e.g., supra section II.A.1 and note 301.
---------------------------------------------------------------------------

    To the extent that subjectivity remains, investors reviewing this 
information on Form N-PORT also will have access to additional 
information in fund prospectuses and shareholder reports, which are 
delivered directly to investors. Prospectuses and shareholder reports 
would provide additional information about the fund and context for the 
liquidity disclosure in Form N-PORT, such as information about the 
factors affecting a fund's risks, returns, and performance.\308\ In 
addition, the fact that the aggregate liquidity information would be 
required to change as liquidity conditions in the market change, and 
that investors would be able to review these changes on a monthly basis 
and compare them against the fund's prior reports would provide 
additional context for investors who desire this information. Investors 
could also compare the fund's reports to reports of similar funds, 
which could aid their understanding by allowing them to focus on the 
differences. Finally, the proposed aggregate liquidity disclosure could 
improve the mix of information available to investors. Though reports 
on Form N-PORT do not provide information regarding a fund's investment 
strategy and risk factors, the information reported on Form N-PORT may 
complement the other information already available to investors in 
order to allow them to develop a fuller understanding of the fund and 
its risks.
---------------------------------------------------------------------------

    \308\ See Reporting Modernization Adopting Release, supra note 
274, at text following n.486 (``Form N-PORT is not primarily 
designed for disclosing information to individual investors . . 
.'').
---------------------------------------------------------------------------

    We request comment on the proposed public availability of the 
aggregate liquidity classifications funds would report on Form N-PORT, 
including:
    211. Should we, as proposed, require funds to report publicly 
information regarding the aggregate percentage of their portfolio in 
each of the three proposed liquidity classification categories? Should 
we, as proposed, require that this information be reported publicly on 
a monthly basis and, if not, what factors are unique to liquidity 
information that should result in it being publicized on a different 
frequency than other information on Form N-PORT? Instead of, or in 
addition to, the percentages of a fund's investments in each of the 
three proposed liquidity categories, should we require additional 
information to be reported? Is there any additional context, such as 
narrative disclosure, that would also be useful to investors? Should 
that narrative disclosure be located in Form N-PORT or somewhere else 
(e.g., a fund prospectus, shareholder report, or website)?
    212. Instead of, or in addition to, aggregate liquidity 
information, should we require position-level liquidity classifications 
to be reported publicly on Form N-PORT? Should we instead require 
position-level liquidity classifications to be reported publicly on a 
different form, such in a fund's annual and semi-annual reports? How 
frequently should this information be reported? Would position-level 
liquidity reporting improve funds' liquidity classifications by 
allowing the public to review and scrutinize liquidity classifications? 
Would position-level liquidity reporting improve consistency in 
classification practices across funds by allowing funds to see how 
other

[[Page 77231]]

similarly situated funds had classified the same or similar 
investments? Would position-level liquidity reporting improve investor 
access to or understanding of liquidity information, or would this 
information be difficult for investors to synthesize or understand? 
Would position-level liquidity reporting simplify the reporting 
framework for funds if this disclosure were in lieu of separate 
aggregate presentations? Would changes to the proposal, such as changes 
to how funds report the effect of the collateral they hold against 
derivatives that are not highly liquid, or the effect of liabilities, 
be necessary if we were to require position-level liquidity reporting? 
Would there be potential negative effects of position-level liquidity 
reporting? For example, would position-level liquidity reporting result 
in investors being able to infer information about a fund or company, 
such as being able to determine that a fund has material nonpublic 
information about an issuer because the fund categorizes the issuer's 
securities as illiquid? Would position-level liquidity reporting result 
in funds' counterparties engaging in predatory trading practices with 
funds, for example by adjusting the prices they bid for certain assets 
of a fund due to granular knowledge of how the fund categorizes the 
liquidity of its portfolio?
    213. Should we, as proposed, require adjustments to the percentages 
of funds' assets in the proposed liquidity categories to account for 
certain derivatives transactions? Should we instead require information 
about derivatives transactions to be reported separately? Should 
certain derivatives transactions be treated differently for these 
purposes, for example by making differing adjustments based on whether 
a derivative is exchange-traded, centrally cleared, made with certain 
categories of counterparty, or otherwise? Should we require differing 
adjustments for derivatives transactions depending on the purpose, for 
example whether they are intended to hedge currency or interest rate 
risks associated with one or more specific equity or fixed-income 
investments held by the fund as described in rule 18f-4(c)(4)(i)(B)? 
Are there any changes we should make to aid investor understanding of 
how funds' use of derivatives affects their liquidity?
    214. We propose to require that if the reported sum of a fund's 
investments in each of the three categories does not equal 100%, the 
fund must adjust the percentage of assets attributed to the moderately 
liquid investment category so that the sum of the fund's investments in 
each category equals 100%. Should we take a different approach, such as 
making the adjustment optional, or permitting a fund to report 
aggregate percentages that do not sum to 100%? Should we permit or 
require funds to provide additional information, such as an explanatory 
note that the totals have been adjusted and the amount of the 
adjustment? Are there other metrics for which we should permit or 
require funds to modify the reported amounts?
    215. Would fund prospectuses and shareholder reports delivered 
directly to investors provide sufficient context for the fund's 
aggregate liquidity information that would be disclosed on Form N-PORT 
under the proposal? Because Form N-PORT is not delivered to investors, 
would investors who have sought out Form N-PORT disclosure in the first 
instance be more likely to consider the information in the context of 
other publicly available information about the fund? If investors would 
not have sufficient context when reviewing Form N-PORT, should we 
address this by requiring that funds send their most recent report on 
Form N-PORT to investors when they send other communications, such as 
their periodic reports or prospectus updates?
    216. Instead of, or in addition to, including information regarding 
funds' aggregate liquidity profiles in Form N-PORT, as proposed, should 
we require that it be included in other documents, such as funds' 
annual and semi-annual shareholder reports? If so, should the 
disclosure included in funds' annual and semi-annual shareholder 
reports, or other documents, differ from what we propose to include in 
Form N-PORT? For example, should any disclosure in funds' annual and 
semi-annual shareholder reports, or other documents be in a different 
format, such as a pie chart, or also include narrative disclosure to 
allow funds to provide additional context?
d. Other Proposed Amendments to Form N-PORT
    In addition to our proposed amendments to require more timely 
reporting of information and to enhance public transparency of funds' 
portfolio holdings and liquidity classifications, we are proposing a 
few additional amendments to Form N-PORT. These additional amendments 
include a new reporting item related to swing pricing, amendments to 
certain existing items to account for the proposal to make monthly Form 
N-PORT information available to the public, other conforming amendments 
to reflect the proposed amendments to rule 22e-4, and amendments to 
certain entity identifiers.
    In connection with our proposed amendments to swing pricing, we are 
proposing to require enhanced transparency into the frequency and 
amount of a fund's swing pricing adjustments. Currently, if a fund were 
to engage in swing pricing, it would only be required to report on Form 
N-CEN if the fund engaged in swing pricing during a given year and, if 
so, the swing factor upper limit established by the fund.\309\ We are 
proposing to remove that reporting requirement on Form N-CEN and 
replace it with a new reporting requirement on Form N-PORT that would 
require information about the number of times the fund applied a swing 
factor during the month and the amount of each swing factor 
applied.\310\ To recognize that a swing factor adjustment could be 
positive (when the fund has net purchases) or negative (when the fund 
has net redemptions), we propose to specify that a fund must use a plus 
sign before a positive swing factor and a minus sign before a negative 
swing factor.\311\ More frequent and detailed information about a 
fund's use of swing pricing is intended to help the Commission assess 
the size of the price adjustments funds are making during normal and 
stressed market conditions, as well as how often funds apply swing 
factor adjustments. The public may also benefit from this information 
to help facilitate an understanding of the frequency and size of swing 
factor adjustments.
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    \309\ See Item C.21 of current Form N-CEN.
    \310\ See proposed Item B.11 of Form N-PORT. Funds would be 
instructed to respond with ``N/A'' when appropriate.
    \311\ We also propose to add a definition of ``swing factor'' to 
Form N-PORT, which would cross reference the definition of this term 
in proposed rule 22c-1(d). See General Instruction E of proposed 
Form N-PORT.
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    In addition, we are proposing to amend items that currently require 
funds to report certain return and flow information for each of the 
preceding three months.\312\ Rather than require information for the 
preceding three months, we are proposing to instead require a fund to 
report that information only for the month that the Form N-PORT report 
covers.\313\ The Commission currently requires return and flow 
information for the preceding three months in a single report to 
provide investors access to monthly data for a given quarter, given 
that investors currently only have access to Form N-PORT reports for 
the third month of

[[Page 77232]]

each quarter.\314\ Monthly data for the preceding three months was also 
intended to avoid a potential investor misperception that one month's 
returns or flows represented returns or flows for the full 
quarter.\315\ Because, under our proposal, investors would have access 
to monthly Form N-PORT reports, we propose to amend the period for 
which a fund must report return and flow information to align with 
monthly public reporting.
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    \312\ See Item B.5 and Item B.6 of current Form N-PORT.
    \313\ See Item B.5 and Item B.6 of proposed Form N-PORT.
    \314\ See Reporting Modernization Adopting Release, supra note 
274, at paragraphs accompanying nn.225, 232, and 250.
    \315\ See id., at paragraphs accompanying nn.225 and 250.
---------------------------------------------------------------------------

    For similar reasons, we are proposing to amend Part F of Form N-
PORT, which currently requires a fund to attach its complete portfolio 
holdings for the end of the first and third quarters of the fund's 
fiscal year, presented in accordance with Regulation S-X, within 60 
days after the end of the reporting period. We are proposing to require 
funds to file this disclosure within 60 days of the end of the 
reporting period for each month, with the exception of the last month 
of the fund's second and fourth fiscal quarters, because the latter 
portfolio holdings information is already available in funds' annual 
and semi-annual reports.\316\ That is, we propose that funds would be 
required to file the portfolio disclosure on Part F of Form N-PORT ten 
times per year, instead of the current requirement to file twice per 
year. When the Commission adopted Part F of Form N-PORT, it recognized 
that not all investors may prefer to receive portfolio holdings 
information in a structured XML format, and instead might prefer 
portfolio holdings schedules presented using the form and content 
specified by Regulation S-X.\317\ The Commission stated that requiring 
funds to attach these portfolio holdings schedules to reports on Form 
N-PORT would provide the Commission, investors, and other potential 
users with access to funds' current and historical portfolio holdings 
for those funds' first and third fiscal quarters, as well as 
consolidate these disclosures in a central location, together with 
other fund portfolio holdings disclosures in reports on Form N-CSR for 
funds' second and fourth fiscal quarters.\318\ In conformance with the 
proposed requirement for funds to file their structured portfolio 
schedules on a monthly basis, and to make the monthly disclosure more 
useable for investors, we propose to amend Part F of Form N-PORT so 
that investors would be able to access unstructured portfolio schedules 
presented in accordance with Regulation S-X on the same frequency.
---------------------------------------------------------------------------

    \316\ See Part F of proposed Form N-PORT. Currently, Part F of 
Form N-PORT does not require information for the second and fourth 
quarters of the fund's fiscal year for the same reason. See Item 6 
of Form N-CSR and Reporting Modernization Adopting Release, supra 
note 274, at section II.J.
    \317\ Id. at section II.A.2.j.
    \318\ Id.
---------------------------------------------------------------------------

    Similarly, we are proposing to amend Part D of Form N-PORT 
regarding miscellaneous securities to align with the proposal to make 
monthly Form N-PORT reports publicly available. Form N-PORT currently 
contemplates that detailed information about miscellaneous securities, 
which would remain nonpublic, would only be included in reports filed 
for the last month of each fiscal quarter.\319\ This is because today 
all information reported on Form N-PORT for the first and second months 
of each quarter is nonpublic, which means there is no need for funds to 
designate any of their investments for those reporting periods as 
miscellaneous securities.\320\ Although our proposed shift from 
quarterly to monthly public reporting is intended to improve public 
transparency of funds' portfolio holdings, we continue to believe that 
treating information related to miscellaneous securities as nonpublic 
may serve to guard against the premature release of those securities 
positions and thus deter front-running and other predatory trading 
practices, and that for this reason public disclosure of miscellaneous 
securities continues to be neither necessary nor appropriate in the 
public interest or for the protection of investors.\321\ At the same 
time, it is important for the Commission to receive more detailed 
information about miscellaneous securities holdings so the Commission 
has a complete record of the portfolio for monitoring, analysis, and 
checking for compliance with Regulation S-X.\322\ As a result, we are 
proposing to amend Part D of Form N-PORT to remove the language that 
limits reporting of nonpublic information about individual 
miscellaneous securities holdings to reports filed for the last month 
of each fiscal quarter. The proposed amendment would allow funds in 
their monthly Form N-PORT reports to report publicly the aggregate 
amount of miscellaneous securities held in Part C, while requiring 
funds to provide more detailed information in Part D about the 
individual holdings in the miscellaneous securities category to the 
Commission on a nonpublic basis.
---------------------------------------------------------------------------

    \319\ See Part D of current Form N-PORT. The form permits funds 
to report as ``miscellaneous securities'' an aggregate amount of 
portfolio investments that does not exceed 5% of the total value of 
the fund's portfolio investments, provided that the securities 
included in this category are not restricted, have been held for not 
more than one year prior to the date of the related balance sheet, 
and have not previously been reported by name to the shareholders, 
or set forth in any registration statement, application, or report 
to shareholders or otherwise made available to the public.
    \320\ See Reporting Modernization Adopting Release, supra note 
274, at text following n.424.
    \321\ See id. at n.421 and accompanying text.
    \322\ See Reporting Modernization Adopting Release, supra note 
274, at section II.A.2.h (requiring that information about 
miscellaneous securities be reported to the Commission on a 
nonpublic basis).
---------------------------------------------------------------------------

    We are also proposing amendments to Form N-PORT to reflect the 
proposed amendments to rule 22e-4. For example, because we are 
proposing to remove the concept of a reasonably anticipated trade size 
from rule 22e-4, we are proposing to replace references to this concept 
in an instruction related to classifying portions of a single holding 
in multiple liquidity categories with references to the stressed trade 
size concept.\323\ We are also proposing to revise the liquidity 
classifications a fund will report to reflect the revisions to the 
liquidity categories in rule 22e-4.\324\ Because we are proposing 
improvements to the way that a fund treats collateral for certain 
derivatives transactions when calculating whether it holds sufficient 
assets to meet its highly liquid investment minimum or holds an amount 
of illiquid assets that exceeds the 15% limit, we also are proposing to 
revise the information open-end funds must report about the collateral 
posted as margin or collateral in connection with certain derivatives 
transactions.\325\ We are similarly proposing to revise the information 
a fund would report about the fund's highly liquid investments to 
reflect that not all highly liquid investments will count toward the 
fund's highly liquid investment minimum.\326\ In addition to reflecting 
changes to rule 22e-4, these changes are also designed to provide 
additional information to Commission staff regarding a fund's level of 
highly liquid assets and illiquid assets and the

[[Page 77233]]

effect of derivatives transactions on that amount.
---------------------------------------------------------------------------

    \323\ See Instructions to Item C.7 in proposed Form N-PORT.
    \324\ See Item B.8 in proposed Form N-PORT; General Instruction 
E (Definitions) in proposed Form N-PORT.
    \325\ See Item B.8 in proposed Form N-PORT. The proposed 
revisions would require a fund to report the value of its highly 
liquid investments that are assets that are posted as margin or 
collateral in connection with moderately liquid or illiquid 
investments, and would require a fund to report the value of any 
margin or collateral posted in connection with an illiquid 
derivatives transaction, where the fund would receive the value of 
the margin or collateral if it exited the derivatives transaction.
    \326\ See Item B.7.b in proposed Form N-PORT.
---------------------------------------------------------------------------

    In addition, we propose to amend certain items and definitions 
related to entity identifiers in the form. Specifically, we propose to 
amend the definition of LEI in the form to remove language providing 
that, in the case of a financial institution that does not have an 
assigned LEI, a fund should instead disclose the RSSD ID assigned by 
the National Information Center of the Board of Governors of the 
Federal Reserve System, if any.\327\ Instead of classifying an RSSD ID 
as an LEI for these purposes, we propose to provide separate line items 
where a fund would report an RSSD ID, if available, in the event that 
an LEI is not available for an entity.\328\ This change is designed to 
improve consistency and comparability of information funds report about 
the instruments they hold, including issuers of those instruments and 
counterparties to certain transactions.
---------------------------------------------------------------------------

    \327\ See General Instruction E of proposed Form N-PORT.
    \328\ See Items B.4, C.1, C.10, and C.11 of proposed Form N-
PORT.
---------------------------------------------------------------------------

    217. Should we require funds to report the number of times the fund 
applied a swing factor and each swing factor applied, as proposed? 
Should we require the median, highest, and lowest (non-zero) swing 
factor applied for each reporting period on Form N-PORT, rather than 
require disclosure of each swing factor applied?
    218. Should we require funds to provide additional information 
about swing pricing in Form N-PORT reports, such as the swing pricing 
administrator's determination to use a lower market impact threshold or 
lower inflow swing threshold, if applicable? Should we separately 
require funds to disclose information about market impact factors, such 
as how many times a market impact factor was included in the swing 
factor each month and the size of those market impact factors (e.g., 
either the size of any market impact factor applied, or the median, 
highest, and lowest (non-zero) amount)? Should we require funds to 
provide information about their imposition of redemption fees under 
rule 22c-2, which funds can use to recoup some of the direct and 
indirect costs incurred as a result of short-term trading strategies, 
such as market timing? If so, should we require funds to disclose in 
reports on Form N-PORT the number of times they imposed redemption fees 
during the period and the amount of the fees? Should funds be required 
to itemize each fee charged, disclose the total amount charged during 
the period and the average fee charged, or some other presentation?
    219. Instead of, or in addition to, requiring information about 
swing pricing on Form N-PORT, should we require funds to provide 
information about their use of swing pricing in other locations? For 
example, would investors find this information more accessible if it 
were on fund websites, in registration statements, or in shareholder 
reports?
    220. Should we require funds to provide return and flow information 
only for a single month, as proposed, or should we continue to require 
funds to provide return and flow information for the preceding three 
months? Even though investors would have access to monthly reports on 
Form N-PORT, is it helpful to have return or flow information for 
previous months in a single report to have a readily available point of 
comparison?
    221. Should we amend Form N-PORT to continue to maintain the 
confidentiality of information about a fund's miscellaneous securities 
for each reporting period, as proposed? Are there other conforming 
amendments we should make to align Form N-PORT reporting requirements 
with the proposed changes to the frequency funds must file these 
reports and the timeline for filing and public availability?
    222. Should we amend Form N-PORT to require a fund to attach its 
complete portfolio holdings presented in accordance with Regulation S-X 
within 60 days after the end of each month except for the last month of 
the fund's second and fourth fiscal quarters, as proposed? Should we 
instead require a fund to file this information on a different 
frequency, such as every month, without exception? Should we maintain 
the current filing schedule? Should we require funds to attach this 
information within a different timeframe, such as no later than 45 days 
or 75 days after the end of the reporting period? If we make changes to 
other aspects of the proposal, such as changes to the frequency funds 
file reports on Form N-PORT, the delay between the end of the reporting 
period and filing, or the time at which filings are made public, should 
we also make conforming changes to Part F?
    223. Are our proposed amendments to remove references to the 
concept of a reasonably anticipated trade size in Form N-PORT and 
replace them with references to the stressed trade size effective? Are 
there other conforming amendments we should make to align Form N-PORT 
with the liquidity rule amendments?
    224. Should we, as proposed, amend Form N-PORT to require funds to 
identify the value of margin or collateral the fund has posted as 
margin or collateral in connection with an illiquid derivatives 
transaction in order to provide a complete picture of the amount of 
illiquid investments for purposes of the liquidity rule's 15% limit?
    225. As proposed, should we amend the definition of LEI in the form 
and provide a separate item for providing an RSSD ID as an identifier, 
as applicable?
2. Amendments to Form N-CEN
    We are proposing amendments to Form N-CEN to identify and provide 
certain information about service providers a fund uses to fulfill the 
requirements of rule 22e-4. The amendments would require a fund to: (1) 
name each liquidity service provider; (2) provide identifying 
information, including the legal entity identifier and location, for 
each liquidity service provider; (3) identify if the liquidity service 
provider is affiliated with the fund or its investment adviser; (4) 
identify the asset classes for which that liquidity service provider 
provided classifications; and (5) indicate whether the service provider 
was hired or terminated during the reporting period. This information 
would allow the Commission and other participants to track certain 
liquidity risk management practices.\329\ As liquidity classification 
services have become more widely used, the proposal would require 
information about whether and which liquidity service providers are 
used, for what purpose, and for what period. Among other things, this 
information would help us better understand potential trends or 
outliers in funds' liquidity classifications reported on Form N-PORT; 
for example, by analyzing classifications trends of specific vendors, 
we might distinguish patterns in how classifications might differ due 
to vendor models or data.
---------------------------------------------------------------------------

    \329\ See Liquidity Rule Adopting Release, supra note 8, at 
n.973.
---------------------------------------------------------------------------

    As described above, we also propose to remove the current 
disclosure in Item C.21 of Form N-CEN and replace it with a new 
reporting requirement on Form N-PORT to provide enhanced transparency 
into the frequency and amount of a fund's swing pricing 
adjustments.\330\ In addition, consistent with our proposed amendments 
to the definition of LEI in Form N-PORT, we are proposing to make the 
same changes

[[Page 77234]]

in Form N-CEN to separate the concepts of LEIs and RSSD IDs.\331\
---------------------------------------------------------------------------

    \330\ Item C.21 of Form N-CEN is proposed to be revised to 
require disclosure on liquidity classification services, as 
described above.
    \331\ See Items B.16, B.17, C.5, C.6, C.9, C.10, C.11, C.12, 
C.13, C.14, C.15, C.16, C.17, D.12, D.13, D.14, E.2, F.1, F.2, F.4, 
and Instructions to Item G.1 of proposed Form N-CEN.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to Form N-CEN:
    226. Would the proposed reporting on liquidity classification 
service providers assist investors and funds in better understanding 
how liquidity risk is managed at a fund? Should any other information 
be provided about the liquidity classification service provider?
    227. Should we require any information about a fund's use of swing 
pricing on Form N-CEN? How would this information relate to the 
information we propose to require on Form N-PORT?
    228. As proposed, should we amend Form N-CEN to separate the 
concepts of LEI and RSSD ID? As proposed, should funds be required to 
provide an RSSD ID, if available, when an LEI is not available?

F. Technical and Conforming Amendments

    In September 2019, the Commission adopted new rule 6c-11 to allow 
ETFs that satisfy certain conditions to operate without obtaining an 
exemptive order from the Commission.\332\ We are proposing to make a 
technical amendment to the definition of ETF in rules 22e-4 and 22c-1, 
as well as in Forms N-CEN and N-PORT, as a result of this rulemaking. 
Specifically, the proposed amendments would replace language in each 
definition that refers to ``an exemptive rule adopted by the 
Commission'' with a direct reference to rule 6c-11.\333\
---------------------------------------------------------------------------

    \332\ See ETF Release, supra note 289.
    \333\ See proposed rule 22e-4(a) and proposed rule 22c-1(d); 
General Instruction E of proposed Form N-CEN and General Instruction 
E of proposed Form N-PORT.
---------------------------------------------------------------------------

    We are also proposing to make a conforming amendment to rule 31a-2. 
Specifically, this proposed amendment to the recordkeeping rule would 
replace the reference to the current swing pricing provisions in rule 
22c-1(a)(3) with a reference to the proposed swing pricing provisions 
in rule 22c-1(b).\334\
---------------------------------------------------------------------------

    \334\ See proposed rule 31a-2(a)(2).
---------------------------------------------------------------------------

G. Exemptive Order Rescission and Withdrawal of Commission Staff 
Statements

    In light of the scope of our proposed amendments to the liquidity 
rule, and pursuant to our authority under the Act to amend or rescind 
our orders when necessary or appropriate to the exercise of the powers 
conferred elsewhere in the Investment Company Act, we are proposing to 
rescind an exemptive order that relates to rule 22e-4.\335\ As this 
order's representations and conditions, and the relief provided, are 
predicated on rule 22e-4 in its current form, the proposed amendments, 
if adopted, would render the order moot, superseded, and inconsistent 
with the final rule amendments. In addition, staff in the Division of 
Investment Management is reviewing its no-action letters and other 
statements addressing compliance with rules 22e-4 and 22c-1 to 
determine which letters and other staff statements, or portions 
thereof, should be withdrawn in connection with any adoption of this 
proposal. Upon the adoption of any final rule amendments, some of these 
letters and other staff statements, or portions thereof, would be moot, 
superseded, or otherwise inconsistent with the final rule amendments 
and, therefore, would be withdrawn. The staff review would include, but 
would not necessarily be limited to, the staff no-action letters and 
other staff statements listed below:
---------------------------------------------------------------------------

    \335\ See J.P. Morgan Investment Management Inc., et al., 
Investment Company Act Release No. 34180 (Jan. 21, 2021). See also 
section 38(a) of the Act, 15 U.S.C. 80a-37(a).
---------------------------------------------------------------------------

     Investment Company Liquidity Risk Management Programs 
Frequently Asked Questions (April 10, 2019);
     Reflow, SEC Staff No-Action Letter (July 15, 2002);
     Charles Schwab & Co., Inc., SEC Staff No-Action Letter 
(July 7, 1997);
     Investment Company Institute, SEC Staff No-Action Letter 
(Feb. 9, 1973);
     United Benefit, SEC Staff No-Action Letter (July 13, 
1971);
     Investment Company Institute, SEC Staff No-Action Letter 
(Mar. 24, 1970); and
     Investment Companies: Share Pricing: SEC Staff Views, 
Investment Company Act Release No. 5569 [34 FR 383 (Dec. 27, 1968)].
    Additionally, the staff statements, or portions thereof, may be 
withdrawn following the relevant underlying transition period discussed 
in section II.H below, if adopted, as determined appropriate in 
connection with the staff's review of those staff statements.
    We request comment on the proposed rescission or withdraw of past 
Commission or staff statements, and specifically on the following 
items:
    229. Are there additional letters or other statements, or portions 
thereof, that should be withdrawn or rescinded? If so, commenters 
should identify the letter or statements, state why it is relevant to 
the proposed rule, how it or any specific portion thereof should be 
treated, and the reason.
    230. If the amendments to the liquidity rule are adopted, are there 
any questions and responses in the staff FAQs that would still be 
relevant and helpful to retain?\336\
---------------------------------------------------------------------------

    \336\ See Liquidity FAQs, supra note 79.
---------------------------------------------------------------------------

H. Transition Periods

    We propose to provide a transition period after the effective date 
of the proposed amendments to give affected funds sufficient time to 
comply with any of the proposed changes and associated disclosure and 
reporting requirements, if adopted, as described below. Based on our 
experience, we believe the proposed compliance dates would provide an 
appropriate amount of time for funds to comply with the proposed rules, 
if adopted.
     Twenty-Four-Month Compliance Date. We propose that 24 
months after the effective date of the amendments, all registered open-
end management investment companies, except for money market funds and 
exchange-traded funds, must comply with the proposed swing pricing 
requirement in rule 22c-1, as well as the swing pricing disclosures 
applicable to these funds in the proposed amendments to Forms N-PORT 
and N-1A.\337\ We also propose that 24 months after the effective date 
of the amendments, funds, transfer agents, registered clearing 
agencies, and intermediaries must comply with the proposed ``hard 
close'' requirement in rule 22c-1, and funds must comply with related 
disclosure requirements we propose to require in Form N-1A.\338\
---------------------------------------------------------------------------

    \337\ See proposed rule 22c-1(b); Item B.11 of proposed Form N-
PORT; and Item 6(d) of proposed Form N-1A.
    \338\ See proposed rule 22c-1(a); Item 11(a) of proposed Form N-
1A.
---------------------------------------------------------------------------

     Twelve-Month Compliance Date. The proposed compliance 
period for all other aspects of the proposal is 12 months after the 
effective date of the amendments, if adopted, and includes the 
following:
    [cir] The proposed amendments to rule 22e-4, which include: (1) 
amending the rule's liquidity categories, including reducing the number 
of liquidity categories from four to three; (2) providing specific and 
consistent standards that funds would use to classify investments, 
including by setting a stressed trade size and defining when a sale or 
disposition would significantly change the market value of an 
investment; and (3) requiring daily classifications; \339\ and
---------------------------------------------------------------------------

    \339\ See proposed rule 22e-4.
---------------------------------------------------------------------------

    [cir] The proposed amendments to Forms N-PORT and N-CEN, except the 
swing pricing-related disclosure on Form N-PORT.

[[Page 77235]]

    We request comment on the proposed transition dates, and 
specifically on the following items:
    231. Are the proposed compliance dates appropriate? If not, why 
not? Is a longer or shorter period necessary to allow affected funds to 
comply with one or more of these particular amendments, if adopted? If 
so, what would be a recommended compliance date? Should we provide a 
longer compliance date for smaller funds, and if so what should this be 
(for example, 36 months for compliance with the swing pricing 
requirements, and 18 months for the other aspects of the proposal)? How 
should we define a ``smaller fund'' for this purpose? For example, 
should a smaller fund be a fund that, together with other investment 
companies in the same group of related investment companies, has net 
assets of less than $1 billion as of the end of its most recent fiscal 
year?
    232. In particular, is a longer period necessary for funds to 
comply with the proposed removal of the less liquid investment category 
and the amendment to the scope of illiquid investments? How long might 
it take for funds and other parties to reduce the settlement times for 
bank loans and other investments that funds currently classify as less 
liquid investments? Is a longer period necessary for retirement plan 
recordkeepers or other intermediaries to make necessary changes to 
their systems?
    233. Should the compliance dates be staggered for certain 
provisions? For example, should the compliance date for the hard close 
occur prior to the compliance date for swing pricing?

III. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the 
benefits and costs, of the proposed amendments. Section 2(c) of the 
Act, Section 202(c) of the Advisers Act, and Section 3(f) of the 
Exchange Act direct the Commission, when engaging in rulemaking where 
it is required to consider or determine whether an action is necessary 
or appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. In addition, Section 23(a)(2) of 
the Exchange Act, requires the Commission, when making rules under the 
Exchange Act, to consider among other matters the impact that the rules 
would have on competition, and prohibits the Commission from adopting 
any rule that would impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. The 
analysis below addresses the likely economic effects of the proposed 
amendments, including the anticipated benefits and costs of the 
amendments and their likely effects on efficiency, competition, and 
capital formation. The Commission also discusses the potential economic 
effects of certain alternatives to the approaches taken in this 
proposal.
    Open-end funds serve as intermediaries between investors seeking to 
allocate capital and issuers seeking to raise capital by pooling a 
portfolio of investments and selling the shares of this portfolio to 
investors. A prominent feature of open-end funds is the mismatch 
between the immediate liquidity funds provide to their shareholders 
\340\ and the potential illiquidity of fund portfolio investments 
(``liquidity mismatch''). In order to pay net redemptions or invest 
proceeds from net subscriptions, a fund generally incurs trading costs, 
which can, among other things, take the form of bid-ask spreads, 
commissions, markups, markdowns, or market impact (the tendency of 
large trades to shift prices in the market). Therefore, the liquidity 
mismatch can lead to non-negligible trading costs associated with 
selling the fund's less liquid portfolio investments in order to meet 
investor redemptions or buying portfolio investments in order to 
accommodate investor subscriptions.\341\
---------------------------------------------------------------------------

    \340\ Section 22(e) of the Act establishes a shareholder right 
of prompt redemption in open-end funds by requiring such funds to 
make payments on shareholder redemption requests within seven days 
of receiving the request.
    \341\ Unless otherwise specified, we use the term ``less 
liquid'' in this section to refer to investments that are on the 
lower end of the liquidity spectrum, and not solely investments that 
are classified as ``less liquid investments'' under the current rule 
22e-4.
---------------------------------------------------------------------------

    As such, the liquidity mismatch and associated trading costs in the 
open-end fund sector present several potential problems, including: (1) 
funds may not be able to meet the statutory obligation to satisfy 
investor redemptions within seven days without incurring significant 
trading costs; (2) fund investors are subject to the risk of dilution; 
(3) fund investors' anticipation that they may be diluted may create a 
first-mover advantage that incentivizes them to redeem their shares 
before other investors do; and (4) fire sales that can be provoked by 
an increased pressure to meet redemptions could further disrupt already 
stressed markets.\342\
---------------------------------------------------------------------------

    \342\ See infra section III.B.3 for additional discussion of 
these issues.
---------------------------------------------------------------------------

    Market stress events, such as the one that occurred during March 
2020, may exacerbate these issues.\343\ For example, during stress 
events investors may rebalance away from some investments into others 
for many reasons, including but not limited to, their general risk 
tolerance, legal or investment policy restrictions, or short-term cash 
needs. To the extent that such rebalancing activity is correlated 
across investors of the same fund or is correlated with deterioration 
in the liquidity of the fund's underlying assets, trading costs for the 
funds' underlying investments may increase and non-transacting fund 
shareholders may become exposed to increased dilution risk, which may 
lower future fund returns. In addition, the risk of investor dilution 
associated with the illiquidity of funds' underlying investments may 
create a first-mover advantage that could lead to increased mutual fund 
redemptions.\344\
---------------------------------------------------------------------------

    \343\ See supra section I.B for a detailed discussion of the 
Mar. 2020 market events.
    \344\ See infra section III.B.3 for additional discussion.
---------------------------------------------------------------------------

    Fund managers may not fully incorporate potential future fund 
shareholder dilution into their investment decisions for several 
reasons. First, potentially misaligned incentives between fund 
shareholders and fund managers may cause some fund managers to hold 
portfolios with liquidity levels that could be insufficient to meet 
redemptions without imposing significant dilution costs on non-
transacting fund investors, especially during periods of market stress. 
Second, fund investors may not have granular and timely enough 
information to adequately assess the extent of the liquidity risk they 
are taking on and, therefore, cannot discipline the extent to which a 
fund manager exposes the fund's shareholders to dilution risk. Finally, 
to the extent that first-mover advantage can lead to anticipatory 
mutual fund redemptions that could impose costs on other market 
participants,\345\ fund managers do not necessarily have an incentive 
to factor such costs into their investment decisions.
---------------------------------------------------------------------------

    \345\ See e.g., Bing Zhu & Ren[eacute]-Ojas Woltering, Is Fund 
Performance Driven by Flows into Connected Funds? Spillover Effects 
in the Mutual Fund Industry, 45 J. Econ. & Fin. 544, no. 9 (2021). 
See infra section III.B.3 for additional discussion.
---------------------------------------------------------------------------

    In light of these issues and our associated regulatory experience, 
\346\ the proposal seeks to further address liquidity externalities in 
the open-end fund sector. In particular, we expect the proposal to: (1) 
enhance open-end funds' liquidity; (2) improve funds' anti-dilution and 
resilience mechanisms for

[[Page 77236]]

any given level of liquidity; and (3) increase the transparency of 
open-end funds' liquidity management practices. Together, the proposed 
amendments may mitigate liquidity externalities in the open-end fund 
sector by improving the ability of funds to meet redemptions without 
imposing significant trading costs on investors. This, in turn, may 
reduce the first-mover advantage associated with the dilution from 
trading costs and curtail run risk in open-end funds,\347\ which is 
consistent with recent analyses discussing how more robust liquidity 
management may mitigate this risk.\348\ The proposed amendments may 
also reduce the likelihood or the extent of future government 
interventions.\349\
---------------------------------------------------------------------------

    \346\ See supra sections I and II for the discussion of 
regulatory experience.
    \347\ We recognize that factors other than dilution related to 
trading costs--such as dilution from falling asset prices (market 
risk) and from potential differences between prices of underlying 
investments used for a fund's net asset value calculation and 
execution prices for these investments--may also contribute to the 
first-mover advantage in redemptions and potential runs in open-end 
funds. These and other considerations are discussed in greater 
detail in section III.B.3 below.
    \348\ See Nicolas Valderrama, Can the Liquidity Rule Keep Mutual 
Funds Afloat? Contextualizing the Collapse of Third Avenue 
Management Focused Credit Fund, 70 Cath. U. L. Rev. 317 (2021). See 
also Landon Thomas Jr., A New Focus on Liquidity After a Fund's 
Collapse, N.Y. Times, Jan. 11, 2016, available at https://www.nytimes.com/2016/01/12/business/dealbook/a-new-focus-on-liquidity-after-a-funds-collapse.html.
    \349\ See e.g., Antonio Falato et. al., Financial Fragility in 
the COVID-19 Crisis: The Case of Investment Funds in Corporate Bond 
Markets, 123 J. Monetary Econ. 35 (2021). The authors discuss how 
the Federal Reserve bond purchase program helped to reverse mutual 
funds' outflows during the Mar. 2020 period.
---------------------------------------------------------------------------

    The proposed amendments to the liquidity risk management (``LRM'') 
program \350\ are designed to support funds' ability to meet 
redemptions without significant trading costs, such as larger haircuts 
associated with less liquid investments that open-end funds may hold in 
their portfolios. Although less liquid investments generally offer a 
higher return, the trading costs associated with selling these assets 
during periods of increased redemptions may offset this risk premium, 
potentially resulting in a lower overall return for fund 
investors.\351\ Therefore, a more robust liquidity management program 
that requires funds to hold more highly liquid investments may benefit 
fund investors in the longer term. In addition, requiring funds to hold 
a greater share of highly liquid investments may help limit the price 
impact that funds impose on underlying markets when they sell less 
liquid assets to meet investor redemptions, especially during periods 
of market stress.\352\
---------------------------------------------------------------------------

    \350\ See supra section II.A.
    \351\ See e.g., Mikhail Simutin, Cash Holdings and Mutual Fund 
Performance, 18 Rev. Fin. 1425, no. 4 (2014), See also Aleksandra 
R[zacute]eznik, Skilled Active Liquidity Management: Evidence from 
Shocks to Fund Flows, (Jul. 29, 2021), available at SSRN: https://ssrn.com/abstract=4106412 (retrieved from SSRN Elsevier database).
    \352\ See e.g., Sergey Chernenko & Adi Sunderam, Liquidity 
Transformation in Asset Management: Evidence From the Cash Holdings 
of Mutual Funds (National Bureau of Economic Research (NBER) working 
paper no. w22391, Jul. 11, 2016), available at https://ssrn.com/abstract=2807702.
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    The goal of the proposed swing pricing and hard close requirements 
is to reduce the dilution of non-transacting fund shareholders by 
charging redeeming and subscribing investors the trading costs they 
impose on a fund,\353\ which may mitigate the first-mover advantage 
associated with the dilution from trading costs. Although swing pricing 
has not yet been implemented by any fund in the U.S., usage of swing 
pricing in other jurisdictions has been shown in certain cases to 
mitigate redemption pressure during periods of elevated market 
volatility.\354\ We recognize that swing pricing may not always fully 
reduce the potential first-mover advantage associated with increasing 
trading costs and discourage associated investor redemptions.\355\ 
However, even in these cases, we believe that investors would 
nevertheless benefit from the proposed requirement because it would 
reduce the dilution of non-transacting fund shareholders, regardless of 
the amount of trading activity by redeeming or subscribing investors.
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    \353\ See supra sections II.B and II.C.
    \354\ See e.g., CSSF Paper, supra note 61; Dunghong Jin et. al., 
Swing Pricing and Fragility in Open-End Mutual Funds 35 Rev. Fin. 
Stud. (2022); Benjamin King & James Semark, Reducing Liquidity 
Mismatch in Open-Ended Funds: A Cost-Benefit Analysis (Bank of 
England working paper no. 975, Apr. 22, 2022), available at https://ssrn.com/abstract=4106646.
    \355\ See CSSF Paper, supra note 61; Claessens & Lewrick, supra 
note 61; ESMA, Recommendation of the European Systemic Risk Board 
(ESRB) on Liquidity Risk in Investment Funds (Nov. 12, 2020), 
available at https://www.esma.europa.eu/document/recommendation-european-systemic-risk-board-esrb-liquidity-risk-in-investment-funds.
---------------------------------------------------------------------------

    Coupled with the proposed amendments to the LRM program and the 
proposed swing pricing and hard close requirements, the proposed 
reporting and public disclosure requirements are aimed at promoting 
transparency and facilitating investors' understanding of liquidity 
risk in the open-end fund sector, as well as promoting transparency 
regarding funds' application of liquidity management tools.\356\ As a 
result, the proposed public disclosure requirements may aid investors 
in making more efficient portfolio allocation decisions.
---------------------------------------------------------------------------

    \356\ See supra section II.E.
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    Many of the benefits and costs discussed below are difficult to 
quantify. For example, we lack data that would help us predict how 
funds may adjust the liquidity of their portfolios in response to the 
proposed liquidity rule amendments; the extent to which investors may 
reduce their holdings in open-end funds as a result of the proposed 
swing pricing requirement and other amendments; the extent to which 
investors may move capital from mutual funds to other investment 
vehicles, such as closed-end funds, ETFs, or CITs; and the reduction in 
dilution costs to investors in open-end funds as a result of the 
proposed amendments (which would depend on investor subscription and 
redemption activity and the liquidity risk of underlying fund 
investments). Form N-PORT data is not sufficiently granular to allow 
such quantification, and many of these effects will depend on how 
affected funds and investors would react to the proposed amendments. 
While we have attempted to quantify economic effects where possible, 
much of the discussion of economic effects is qualitative in nature. We 
seek comment on all aspects of the economic analysis, especially any 
data or information that would enable a quantification of the 
proposal's economic effects.

B. Baseline

1. Regulatory Baseline
a. Liquidity Risk Management Program
    Under the current rule,\357\ open-end funds classify each portfolio 
investment into one of the four defined liquidity categories, based on 
the number of days within which a fund reasonably expects the 
investment to be convertible to cash or sold or disposed of, without 
significantly changing the investment's market value. The four 
categories are: (1) ``highly liquid investments,'' which are cash and 
investments convertible into cash in current market conditions in three 
business days or less; (2) ``moderately liquid investments,'' which are 
convertible into cash in current market conditions in more than three 
calendar days but in seven calendar days or less; (3) ``less liquid 
investments,'' which are those the fund reasonably expects to be able 
to sell or dispose of in current market conditions in seven calendar 
days or less, but where the sale or disposition is reasonably expected 
to settle in more than seven calendar days; and (4)

[[Page 77237]]

``illiquid investments,'' which cannot be sold or disposed of in 
current market conditions in seven calendar days or less.
---------------------------------------------------------------------------

    \357\ See Liquidity Rule Adopting Release, supra note 8.
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    A fund may generally classify and review its investments by asset 
class unless the fund or adviser has information about any market, 
trading, and investment-specific considerations that it reasonably 
expects to affect significantly the liquidity characteristics of an 
investment compared to the fund's other portfolio holdings within that 
asset class.\358\ Among other requirements, open-end funds generally 
are required to determine a minimum amount of highly liquid investments 
they should maintain. In addition, all open-end funds are prohibited 
from acquiring any illiquid investment if, immediately after the 
acquisition, the funds would have invested more than 15% of their net 
assets in illiquid assets; however, an investment in a liability 
position, such as a derivative, is not subject to this limitation. 
Under the current rule, a fund is required to identify the percentage 
of the fund's highly liquid investments that it has posted as margin or 
collateral in connection with derivatives transactions that the fund 
has classified as less than highly liquid.\359\
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    \358\ See rule 22e-4(b)(1)(ii)(A).
    \359\ See rule 22e-4(b)(1)(ii)(C). In addition, funds currently 
are also required to exclude highly liquid assets that are posted as 
margin or collateral in connection with non-highly liquid 
derivatives transactions when determining whether the fund primarily 
holds highly liquid assets. See rule 22e-4(b)(1)(iii)(B).
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    In classifying its investments under the current rule, a fund 
analyzes how quickly it can sell an investment without the sale 
``significantly'' changing the investment's market value. Funds are 
required to determine two key inputs for this analysis. The first is 
the fund's reasonably anticipated trade size.\360\ Reasonably 
anticipated trade size interacts with a fund's assessment of future 
redemption/subscription activity: for example, if the fund would 
anticipate selling a large position relative to trading volume, the 
sale may depress the price. The second is the determination of what 
constitutes a ``significant'' change in value. In both cases, the rule 
allows funds to make their own reasonable assumptions.
---------------------------------------------------------------------------

    \360\ Funds' current practices in classifying the liquidity of 
their investments and otherwise complying with rule 22e-4 may take 
consideration of the staff's Liquidity FAQs. See, e.g., supra note 
79.
---------------------------------------------------------------------------

    Rule 22e-4 currently requires that funds review their liquidity 
classifications at least monthly in connection with reporting on Form 
N-PORT, and more frequently if changes in relevant market, trading, and 
investment-specific considerations are reasonably expected to 
materially affect one or more of their investments' 
classifications.\361\ The current rule also requires a fund to monitor 
and take timely actions related to the liquidity of its investments, 
including changes to its liquidity profile. Specifically, the rule 
prohibits a fund from acquiring any illiquid investment, if immediately 
after the acquisition, the fund would have invested more than 15% of 
its net assets in illiquid investments that are assets.\362\ In 
addition, the rule requires a fund to provide timely notice to its 
board, and to the Commission on Form N-RN, if the fund exceeds the 15% 
limit on illiquid investments, or if there is a shortfall of the fund's 
highly liquid investments below its highly liquid investment minimum 
for seven consecutive calendar days.\363\
---------------------------------------------------------------------------

    \361\ See rule 22e-4(b)(1)(ii).
    \362\ See rule 22e-4(b)(1)(iv).
    \363\ See rule 22e-4(b)(1)(iv)(A) and rule 22e-
4(b)(1)(iii)(A)(3); Form N-RN Parts B through D.
---------------------------------------------------------------------------

    Rule 22e-4 currently requires a fund to determine a highly liquid 
investment minimum if it does not primarily hold investments that are 
highly liquid. Funds that are subject to the highly liquid investment 
minimum requirement must determine a highly liquid investment minimum 
considering several factors, review this minimum at least annually, and 
adopt policies and procedures to respond to a shortfall of the fund's 
highly liquid investments below the minimum.\364\ The current exclusion 
for funds that invest primarily in highly liquid investments provides 
some discretion to determine the level of highly liquid investments 
that constitutes primarily.
---------------------------------------------------------------------------

    \364\ See rule 22e-4(b)(1)(iii).
---------------------------------------------------------------------------

b. Swing Pricing
    Currently, the rule allows open-end funds that are not excluded 
funds to use swing pricing. The required swing pricing policies and 
procedures provide that funds must adjust their NAV per share by a 
single swing factor or multiple factors that may vary based on the 
swing threshold(s) crossed once the level of net purchases into or net 
redemptions from such fund has exceeded the applicable swing threshold 
for the fund. The current rule permits a fund to determine its own 
swing threshold for net purchases and net redemptions, based on a 
consideration of certain factors the rule identifies.\365\ The fund's 
swing factor is permitted to take into account only the near-term costs 
expected to be incurred by the fund as a result of net purchases or net 
redemptions on that day and may not exceed an upper limit of 2% of the 
day's NAV per share.
---------------------------------------------------------------------------

    \365\ See supra note 176.
---------------------------------------------------------------------------

    The determination of whether the fund's level of net purchases or 
net redemptions has exceeded the applicable swing threshold is 
permitted to be made based on receipt of sufficient information about 
the fund investors' daily purchase and redemption activity to allow the 
fund to reasonably estimate whether it has crossed the swing threshold 
with high confidence. This investor flow information may consist of 
individual, aggregated, or netted orders, and may include reasonable 
estimates where necessary.
    In addition, rule 2a-4 requires, when determining the NAV, that 
funds reflect changes in holdings of portfolio securities and changes 
in the number of outstanding shares resulting from distributions, 
redemptions, and repurchases no later than the first business day 
following the trade date. This calculation method provides funds with 
additional time and flexibility to incorporate last-minute portfolio 
transactions into their NAV calculations on the business day following 
the trade date, rather than on the trade date.\366\
---------------------------------------------------------------------------

    \366\ See Adoption of rule 2a-4 Defining the Term ``Current Net 
Asset Value'' in Reference to Redeemable Securities Issued by a 
Registered Investment Company, Investment Company Act Release No. 
4105 (Dec. 22, 1964) [29 FR 19100 (Dec. 30, 1964)].
---------------------------------------------------------------------------

c. Reporting Requirements
    Registered management investment companies and ETFs organized as 
unit investment trusts are required to file periodic reports on Form N-
PORT about their portfolios and each of their portfolio holdings as of 
month-end.\367\ Funds file these reports on a quarterly basis, with 
each report due 60 days after the end of a fund's fiscal quarter. Only 
information about the fund's holdings for the third month of each 
fiscal quarter is available to the public. In addition to the publicly 
available information on Form N-PORT, investors also have access to 
information about the holdings of ETFs, including actively managed 
ETFs, which generally are required to provide transparency into their 
portfolio holdings on a daily basis.\368\ Many funds also provide 
monthly information about their portfolio holdings to third

[[Page 77238]]

party data aggregators, generally with a lag of 30 to 90 days, which in 
turn make them available to the public for a fee.
---------------------------------------------------------------------------

    \367\ For purposes of discussions of filing requirements on Form 
N-PORT, the term ``fund'' refers to registrants that currently are 
required to report on Form N-PORT, including open-end funds, 
registered closed-end funds, and ETFs registered as unit investment 
trusts, and excluding money market funds and small business 
investment companies.
    \368\ See supra note 289.
---------------------------------------------------------------------------

    Registered investment companies other than face amount certificate 
companies also report census-type information to the Commission 
annually on Form N-CEN, including information related to fund service 
providers and whether a fund engaged in swing pricing during the fiscal 
year and if so, what was the upper limit for the swing factor. The 
current definition of LEI in Forms N-PORT and N-CEN provides that, in 
the case where a financial institution does not have an assigned LEI, a 
fund should instead disclose the RSSD ID assigned by the National 
Information Center of the Board of Governors of the Federal Reserve 
System, if any.\369\
---------------------------------------------------------------------------

    \369\ See General Instruction E of proposed Form N-PORT and 
Instructions to Item G.1 of the Form N-CEN.
---------------------------------------------------------------------------

    Item 6 of Form N-1A also requires disclosure of a fund's use of 
swing pricing if the fund chooses to use swing pricing. Specifically, 
these provisions require that a fund that uses swing pricing explains 
the fund's use of swing pricing, including its meaning, the 
circumstances under which the fund will use it, and the effects of 
swing pricing on the fund and investors, as well as the upper limit the 
fund has set on the swing factor. Open-end funds are also required to 
file Form N-RN with the Commission if more than 15% of the registrant's 
net assets are, or become, illiquid investments as defined in rule 22e-
4 and if a registrant's holdings in assets that are highly liquid 
investments fall below its highly liquid investment minimum for more 
than 7 consecutive calendar days. The form is required to be filed 
within one business day of the occurrence of these events.
2. Overview of Certain Industry Order Management Practices
    Mutual fund orders can be submitted to funds directly or via an 
intermediary. An order will be executed at a given day's NAV if an 
intermediary--rather than solely the fund, its designated transfer 
agent, or a registered securities clearing agency--receives the order 
by the fund's pricing time, typically 4 p.m. ET, unless an intermediary 
specifically established an earlier cut-off time for investor orders. 
In particular, a financial intermediary currently can submit an order 
that it received before 4 p.m. ET to a designated party after 4 p.m. ET 
for execution at that day's NAV.\370\ A fund discloses in its 
prospectus its pricing time and that a purchase or redemption is 
effected at a price that is based on the next NAV calculation after the 
order is placed.\371\ After a fund finalizes its NAV calculation for a 
day, it disseminates the NAV to pricing vendors, media, and 
intermediaries, typically between 6 p.m. ET and 8 p.m. ET. We 
understand that certain intermediaries use order-processing systems 
that require knowledge of a fund's NAV. In addition, certain investor 
orders may also require knowledge of a fund's NAV before the order is 
sent to the fund.\372\ As a result, a fund does not receive certain 
orders until after the fund distributed its NAV. For example, most 
retirement plan recordkeepers currently do not process orders from 
investors until they receive a fund's NAV and funds typically receive 
orders from these intermediaries the next morning.
---------------------------------------------------------------------------

    \370\ We note that this practice differs from other 
jurisdictions. See supra note 225.
    \371\ See Item 11(a) of Form N-1A.
    \372\ See supra section II.C.3.d.
---------------------------------------------------------------------------

    We understand that for orders submitted to funds by an 
intermediary, an intermediary may net orders to varying degrees before 
their submission to a fund, a practice known as omnibus accounting. In 
addition, intermediaries may submit one or more netted orders at a 
single time, or may submit netted orders in batches at different times. 
For example, if an intermediary does not submit orders until after it 
has received the fund's final price, it may submit a single order to 
the fund that reflects the net dollar amount or the number of fund 
shares to be purchased or redeemed across all investors that submitted 
orders through that intermediary. If an intermediary does not wait 
until the fund's final price is received, it may submit two orders: one 
order expressed in the net number of shares purchased or sold and one 
order expressed in the net amount of dollars purchased or sold. Other 
intermediaries may aggregate orders at finer levels, providing 
aggregate purchase and sale figures separately. While netting practices 
vary, they may generally save intermediaries money, to the extent that 
intermediaries incur per transaction costs when submitting orders to a 
fund.
    Intermediaries may track investor orders to various degrees before 
they send the finalized orders to funds. As such, the processing time 
of investor order may vary depending on the tracking and netting 
process of an intermediary. For example, retirement accounts track 
holdings and trades at the level of individual participants. Each 
participant account typically has multiple sub accounts that are 
organized by contribution type or source (pretax, after-tax, employer 
match, profit sharing, and other). We understand that, at least 
according to some plan rules, compliance restrictions require plans to 
track an account according to contribution type or source. For example, 
we understand that in at least some 401(k) plans, the third party 
administrator or retirement plan recordkeeper receives participant 
trades at the participant account level, after which, trades must be 
pro-rated (usually done based on today's market value) and posted to 
each contribution type or source. The administrator or recordkeeper 
then aggregates all participant trades for a particular plan and sends 
them to the trustee/custodian. The trustee then posts the aggregated 
plan trades on a trust/custody system (i.e., for mandatory plan 
reporting purposes). Most trust companies then aggregate all of their 
client trades at the asset level, generally to minimize trading or NSCC 
costs.
    A significant portion of mutual fund orders is processed through 
NSCC's Fund/SERV platform. Within this platform, there exists a 
separate system that processes orders from defined contribution plans 
called Defined Contribution Clearance & Settlement (``DCC&S''). Fund/
SERV for non-retirement clients allows firms to submit orders in 
currency, shares, or exchanges before knowing the NAV.\373\ DCC&S, on 
the other hand, as a matter of practice does not initiate order 
processing until the recordkeeper/third party administrator receives 
NAVs, as well as daily and periodic distribution (dividend and capital 
gain) rates.\374\
---------------------------------------------------------------------------

    \373\ See https://www.dtcc.com/wealth-management-services/mutual-fund-services/fund-serv.
    \374\ Id.
---------------------------------------------------------------------------

    We recognize that the current industry practices related to 
intermediaries' order submissions prevent funds from knowing their 
final net flows until later hours, which may be one reason why no funds 
in the U.S. have implemented the optional swing pricing. We also 
recognize that swing pricing has been employed in Europe, including by 
U.S.-based fund managers that also operate funds in Europe.\375\ There 
can be various reasons why swing pricing has been successfully 
implemented in certain jurisdictions. For example, we understand that 
intermediary order submission practices in Europe differ from those in 
the U.S.,\376\ allowing funds to have more complete flow information 
before funds' pricing time. Another factor that may contribute to 
successful implementation of swing pricing in Europe is that the
---------------------------------------------------------------------------

    \375\ See supra section I.B for a more detailed discussion about 
use of swing pricing in Europe.
    \376\ See supra note 225.

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[[Page 77239]]

European mutual fund sector does not depend as much as the U.S. mutual 
fund sector on defined contribution retirement plans. According to 
ECB's investment fund statistics, as of Q2 2022, pension funds held 
approximately EUR 1.4 trillion (10%) in investment fund shares \377\ 
out of 14.8 trillion in aggregate value of European investment fund 
shares issued.\378\ This is in contrast to U.S. where 54% of all mutual 
fund assets were held in retirement accounts as of Q1 2022.\379\ 
Further, according to one estimate, defined contribution retirement 
plans which, at least in the U.S., have certain transactions that 
require knowledge of NAV in order to be processed by an intermediary 
represent only 17% of Europe's total pension assets.\380\
---------------------------------------------------------------------------

    \377\ See Aggregated Balance Sheet of the Euro Area Pension Fund 
Sector, Section 1.1.1, European Central Bank Statistical Data 
Warehouse, available athttps://sdw.ecb.europa.eu/
reports.do?node=1000006465.
    \378\ See Aggregated Balance Sheet of Euro Area Investment 
Funds, Section 1.1.2, European Central Bank, Statistical Data 
Warehouse, available at https://sdw.ecb.europa.eu/reports.do?node=1000003516.
    \379\ See infra section III.B.4.ii.
    \380\ See Press Release, Cerulli Associates, Europe's Defined 
Contribution Market Is Set to Keep Growing, (Mar. 3, 2022), 
available at https://www.cerulli.com/press-releases/europes-defined-contribution-market-is-set-to-keep-growing.
---------------------------------------------------------------------------

3. Liquidity Externalities in the Mutual Fund Sector
    As discussed above, the liquidity mismatch can lead to non-
negligible trading costs (e.g., spread or market impact costs) 
associated with selling the fund's less liquid portfolio investments in 
order to meet investor redemptions or buying portfolio investments in 
order to accommodate investor subscriptions. The magnitude of these 
costs can vary depending on market conditions, the liquidity of the 
underlying investments held in a fund's portfolio, and the size of 
funds' transactions in the market. Consequently, if investors transact 
at a NAV that does not account for ex-post trading costs, investors 
remaining in the fund have to bear these trading costs because they are 
ultimately reflected in the fund's future NAV.\381\ Therefore, the 
value of shares held by non-transacting investors can be diluted due to 
the trading costs associated with the past trading activity of 
transacting fund investors, lowering the future returns of non-
transacting fund shareholders.
---------------------------------------------------------------------------

    \381\ For example, suppose a fund is fully invested in an 
underlying asset which can be bought at $1.01 and sold at $0.99. If 
the NAV is struck at the ``mid,'' the fund's share price is $1, and 
that is what redeeming investors receive for each fund share 
redeemed. However, after paying the spread costs, the fund receives 
only $0.99 for each unit of the underlying asset that is sold to 
meet redemptions. The fund therefore needs to sell more of its 
underlying asset position relative to the size of the redemptions it 
experiences, reducing the assets held by non-transacting 
shareholders and the fund's subsequent NAV. For example, if 10% of 
the fund's investors redeem their shares at the NAV of $1, the fund 
needs to sell 10% / $0.99 = 10.1% of its underlying asset position 
to meet redemptions and pay the spread costs. This leaves the 
remaining 90% of fund shares held by non-transacting fund investors 
with 100%-10.1% = 89.9% of the fund's prior asset position. Valued 
at the mid-price of $1, this reduces the fund's NAV to 89.9% / 90% = 
$0.999.
---------------------------------------------------------------------------

    We recognize that factors other than trading costs may contribute 
to dilution. For example, some funds may hold investments that do not 
have an active and robust secondary market (e.g., high-yield bonds or 
municipal securities), making them opaque and difficult to accurately 
price in a timely manner, especially during times of market stress when 
some of these assets may stop trading. In such events, the last 
reported prices for these assets may be prices realized during pre-
stress market conditions. As a result, the risk that the fund's NAV may 
be based on ``stale'' information if contemporaneous information about 
an asset's current value is unavailable or less reliable may increase. 
If a fund's NAV on a given date is based on such stale information, net 
redemptions at that NAV can dilute non-transacting fund shareholders 
when assets are eventually sold at prices that reflect their true, 
lower value.\382\ Prior to the compliance date with the recent rule 2a-
5,\383\ which aims to improve fund valuation practices, the stale 
pricing phenomenon has been documented in fixed income funds, and has 
been found to contribute to strategic redemptions.\384\ However, we 
recognize that while trading costs are strictly dilutive, pricing based 
on stale information can also result in accretion for non-transacting 
fund investors if realized sale prices are higher than prices that were 
based on stale information and used for the NAV calculation.
---------------------------------------------------------------------------

    \382\ We recognize that fund investors can also be diluted due 
to factors other than trading costs or stale pricing, such as market 
risk. Market risk can also result in accretion for non-transacting 
fund investors. For example, if a fund redeems shareholders at an 
NAV of $100 based on market prices at the time NAV is struck, but is 
then able to liquidate assets at a higher valuation on subsequent 
days due to changes in market prices, the value of shares held by 
non-transacting shareholders will increase beyond the increase due 
solely to the change in the value of the underlying investments held 
by the fund. While the value of the fund's holdings can go both up 
and down, such market risk amplifies the risk fund shareholders 
would otherwise experience. However, since market prices may be very 
difficult to forecast, the degree to which such dilution contributes 
to the first-mover advantage is unclear.
    \383\ The Commission adopted rule 2a-5 in Dec. 2020, and the 
compliance date for funds was Sept. 8, 2022. See Valuation Adopting 
Release, supra note 110.
    \384\ See, e.g., Jaewon Choi et. al., Sitting Bucks: Stale 
Pricing in Fixed Income Funds, 145 J. Fin. Econ. 296, no. 2, Part A, 
(Aug. 2022).
---------------------------------------------------------------------------

    The stylized example illustrated in Figure 4 below shows how 
trading costs can dilute a fund that experiences net redemptions under 
two scenarios.\385\ Under the first scenario (the dotted line), the 
fund is able to sell investments to accommodate redemptions prior to 
striking its NAV for the day and to reflect these trades as well as 
trading costs in the calculated NAV for that day.\386\ This scenario is 
a theoretical benchmark that shows the minimum amount of dilution that 
must occur in order to accommodate redemptions. Under the second 
scenario (the solid line), the fund trades to accommodate redemptions 
after striking its NAV for the day. This scenario is generally the way 
U.S. funds currently accommodate investor redemptions, possibly because 
funds do not have complete order flow information before the end of the 
trading day.\387\
---------------------------------------------------------------------------

    \385\ The examples in the figure assume that a fund holds a 
portfolio of assets whose value is constant and that liquidating any 
portion of the portfolio to meet redemptions incurs a haircut of 
10%. By assuming that the value of the asset does not change, the 
examples isolate the effect of trading costs on dilution from the 
effects of other sources of dilution such as market risk or stale 
NAVs. See supra note 384. The haircut assumption in these stylized 
examples is used purely for illustrative purposes; haircuts on most 
assets held by open-end funds generally tend to be smaller.
    \386\ We recognize that under the current rule 2a-4 under the 
Investment Company Act, funds are permitted to reflect changes in 
their portfolio holdings in the first NAV calculation following the 
trade date and, thus, are not required to include today's trades in 
the calculation of today's NAV.
    \387\ We recognize that there may be other operational 
considerations that result in this common practice. Therefore, even 
if a fund has complete order flow information before the trading day 
is over, it may choose to trade at a later date to accommodate 
today's redemptions.

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[[Page 77240]]

[GRAPHIC] [TIFF OMITTED] TP16DE22.004

    While these two scenarios result in similar dilution for lower 
levels of redemptions, larger levels of redemptions can contribute 
nonlinearly to higher fund dilution under the second scenario.\388\ 
This occurs because increasing redemptions result in increasing trading 
costs for the fund. These trading costs are borne solely by 
shareholders remaining in the fund, the number of which decreases as 
more investors redeem. Under this hypothetical scenario, the fund 
eventually runs out of assets to sell and is unable to meet further 
redemptions. In contrast, under the theoretical benchmark, the trading 
costs are borne by both redeeming investors and investors remaining in 
the fund; therefore, the shareholder base absorbing the trading costs 
remains constant regardless of the extent of redemptions. Accordingly, 
dilution increases proportionally to the amount of redemptions and the 
corresponding increase in trading costs.
---------------------------------------------------------------------------

    \388\ To the degree that funds determine their NAV using 
holdings as of the prior trading day, such practices may also 
contribute to dilution.
---------------------------------------------------------------------------

    Figure 5 removes the theoretical benchmark scenario illustrated in 
Figure 4 and focuses on how dilution affects both redemptions and 
subscriptions when trading to accommodate investor transactions occurs 
after the fund's NAV has been struck.\389\
---------------------------------------------------------------------------

    \389\ To model the effect of net subscriptions, the example 
assumes that any new cash received by the fund is invested in the 
same underlying portfolio of investments, and that doing so incurs 
the same 10% spread cost. Redemptions are represented as negative 
net flows to the left of 0 on the x-axis and subscriptions are 
represented as positive net flows to the right of 0 on the x-axis. 
We recognize that dilution due to subscriptions does not occur until 
a fund incurs costs investing the subscription proceeds. Therefore, 
a fund that holds its subscription proceeds in cash indefinitely 
will not experience dilution.

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[[Page 77241]]

[GRAPHIC] [TIFF OMITTED] TP16DE22.005

    The theoretical example in Figure 5 illustrates that the dilutive 
effect of trading costs is asymmetric for redemptions and 
subscriptions: while redemptions and subscriptions are similarly 
dilutive for small levels of net flows, their effects are different for 
more extreme levels of net flows. This occurs because a fund is not 
able to redeem 100% of its shares due to the non-linear impact of 
trading costs related to meeting redemptions being absorbed solely by 
investors remaining in the fund, as described above. In contrast, the 
trading costs related to subscriptions are shared by both new 
subscribers and existing fund shareholders, which limits the maximum 
amount of dilution that can occur due to subscriptions.
    The simplified examples above illustrate that non-transacting fund 
investors are exposed to the dilution risk that arises from 
accommodating redemptions and subscriptions of transacting fund 
investors. Incentives of mutual fund managers may not be sufficient to 
alleviate this risk for various reasons. For example, it is possible 
that investors do not have enough information to fully understand the 
nature of the risk they are exposed to by investing in funds that hold 
less liquid investments. In addition, investors in a fund may have 
varying preferences for risk and return, with some investors preferring 
investments with higher expected returns. Although investments that 
face increased liquidity risk may deliver such higher returns, the 
returns of funds that hold these investments may also be subject to 
greater amounts of volatility.\390\ A fund manager may choose to hold 
investments that are less liquid because of their potentially higher 
returns, or because they offer exposure to a different set of risks 
(e.g., some investments may be less correlated with the market) than 
other investments in the fund's portfolio. Because higher returns tend 
to be associated with future inflows, it is possible that a fund 
manager's incentives are tilted towards earning higher returns relative 
to the risk they are taking on (though the opposite is also 
possible).\391\ In particular, to the extent that holding less liquid 
investments may increase a fund's return (e.g., during normal market 
conditions) and consequently its AUM, which determine the amount of 
management fees a fund manager collects, the fund manager may choose to 
over-invest in such assets,\392\ not accounting for potential future 
trading costs these investments may impose on a fund if the market 
conditions change, which would result in a higher dilution risk for the 
fund's investors. Investors may currently lack sufficiently granular 
information to monitor for this possibility and to discipline the 
extent to which a fund manager exposes the fund's shareholders to 
dilution risk.
---------------------------------------------------------------------------

    \390\ See, e.g., Kuan-Hui Lee, The World Price of Liquidity 
Risk, 99 J. Fin. Econ. 136 (2011). See also Viral V. Acharya & Lasse 
H. Pedersen, Asset Pricing with Liquidity Risk, 77 J. Fin. Econ. 375 
(2005). See also Lubos Pastor & Robert Stambaugh, Liquidity Risk and 
Expected Stock Returns, 111 J. Pol. Econ. 642 (2003).
    \391\ In an open-end fund context, fund inflows are sensitive to 
fund returns, which can incentivize fund managers to take on more 
risk. See, e.g., Jaewon Choi & Mathias Kronlund, Reaching for Yield 
in Corporate Bond Mutual Funds, 31 Rev. Fin. Stud. 1930 (2018); Jon 
A. Fulkerson et. al., Return Chasing in Bond Funds, 22 J. Fixed 
Income, 90 (2013); Ferreira, Miguel A., et al., The Flow-Performance 
Relationship around the World, 36 J. Banking & Fin. 1759, no. 6 
(2012).
    \392\ See, e.g., Linlin Ma et. al., Portfolio Manager 
Compensation in the U.S. Mutual Fund Industry, 74(2) J. Fin. 587 
(2019). See also Abhishek Bhardwaj et. al., Incentives of Fund 
Managers and Precautionary Fire Sales (Oct. 29, 2021), available at 
https://ssrn.com/abstract=3952358.
---------------------------------------------------------------------------

    Investor dilution associated with illiquidity of funds' underlying 
investments may create a first-mover advantage that may lead to 
increased mutual fund redemptions similar to bank runs.\393\ Such 
redemptions have been observed prior to the adoption of the current 
liquidity rule.\394\ More specifically, fund investors may have an 
incentive to redeem their shares quickly if they believe that other 
investors will also redeem their shares and, by doing so, these other 
investors will dilute the fund's non-transacting shareholders. This 
first-mover advantage effect in mutual funds has been documented \395\

[[Page 77242]]

and studied as a mechanism for runs on mutual funds in the academic 
literature.\396\ In addition, it has been shown that the effect of the 
first-mover advantage may be larger for funds that hold less liquid 
investments.\397\ While the academic literature on mutual fund runs 
generally relies on an exogenous mechanism to generate initial 
redemptions from a fund or relies on frictions such as an inability of 
a fund to raise capital and exogenous shocks such as negative fund 
returns, the results may extend to trading costs to the degree that 
dilution due to trading costs may reduce subsequent fund returns, which 
would trigger runs in these models. At the same time, we recognize that 
while dilution risk arising from trading costs can create incentives 
for early redemptions, redemptions may also occur for reasons 
unconnected to the pooled vehicle nature of the fund. For example, a 
recent working paper \398\ concludes that the behavior of mutual fund 
investors is similar to that of direct investors with overlapping 
holdings, and suggests that systemic implications of mutual fund 
investors' activities are not necessarily due to the liquidity 
transformation feature of the mutual fund structure, but rather to the 
fact that mutual funds' investors compete for finite asset market 
liquidity when they decide to sell assets.
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    \393\ Liquidity mismatch between assets and liabilities is a 
mechanism that creates bank run dynamics that is well-accepted in 
the academic literature. See, e.g., Douglas Diamond & Philip Dybvig, 
Bank Runs, Deposit Insurance, and Liquidity, 91 J. Pol. Econ., 401 
(1983).
    \394\ See Third Avenue Trust and Third Avenue Management LLC; 
Notice of Application and Temporary Order, Investment Company Act 
Release No. 31943 (Dec. 16, 2015). See also note 348.
    \395\ See Qi Chen et. al., Payoff Complementarities and 
Financial Frailty: Evidence From Mutual Fund Outflows, 97 J. Fin. 
Econ. 239 (2010). See also Itay Goldstein et. al., Investor Flows 
and Fragility in Corporate Bond Funds, 126 J. Fin. Econ. 592 (2017); 
Yiming Ma et. al., Bank Debt Versus Mutual Fund Equity in Liquidity 
Provision (working paper, May 29, 2020), available at https://ssrn.com/abstract=3489673; Luis Molestina et. al., Burned by 
Leverage? Flows and Fragility in Bond Mutual Funds (European Central 
Bank (ECB) working paper no. 20202413, May 19, 2020) available at 
https://ssrn.com/abstract=3605159 (retrieved from SSRN Elsevier 
database); Michael Feroli et. al., Market Tantrums and Monetary 
Policy (Chicago Booth Research Paper no. 14-09, Mar. 15, 2014), 
available at https://ssrn.com/abstract=2409092 (retrieved from SSRN 
Elsevier database).
    \396\ See e.g., Yao Zeng, A Dynamic Theory of Mutual Fund Runs 
and Liquidity (working paper no. 42, Apr. 2017), available at 
https://ssrn.com/abstract=2907718 (retrieved from SSRN Elsevier 
database). See also Stephen Morris et. al., Redemption Risk and Cash 
Hoarding by Asset Managers, 89 J. Monetary Econ. 71 (2017); Yiming 
Ma et. al., Mutual Fund Liquidity Management, Transformation and 
Reverse Flight to Liquidity (working paper, Jul. 29, 2020), 
available at https://ssrn.com/abstract=3640861(retrievedfromSSRNElsevierdatabase); and Philipp 
K[ouml]nig & David Pothier, Safe but Fragile: Information 
Acquisition, Liquidity Support and Redemption Runs, J. Fin. 
Intermediation (in press, corrected proof Dec. 15, 2020).
    \397\ For example, one paper argues that fund investors' 
behavior is affected by the expected behavior of other investors in 
the fund and finds that funds with less liquid assets (where this 
investor effect is stronger) exhibit stronger sensitivity of 
outflows to bad past performance than funds with more liquid assets. 
See Qi Chen et. al., Payoff Complementarities and Financial Frailty: 
Evidence From Mutual Fund Outflows, 97 J. Fin. Econ. 239 (2010). 
Also see Meijun Qian and Ba[scedil]ak Tanyeri, Litigation and 
Mutual-Fund Runs, 31 J Fin. Stability 119, (2017); and Sirio 
Aramonte et. al., Measuring the Liquidity Profile of Mutual Funds 
(FEDS working paper no. 2019-55, Oct. 22, 2019), available at 
https://ssrn.com/abstract=3473039 (retrieved from SSRN Elsevier 
database).
    \398\ See Christof W. Stahel, Strategic Complementarity Among 
Investors with Overlapping Portfolios (working paper, May 1, 2022), 
available at https://ssrn.com/abstract=3952125 (retrieved from SSRN 
Elsevier database).
---------------------------------------------------------------------------

    Mutual fund shareholders' transactions may also affect markets for 
funds' underlying portfolio holdings. Academic research suggests that 
redemption-induced sales of securities by mutual funds can create price 
pressure in underlying markets which may result in a fire-sale for 
these securities.\399\ Two studies have constructed measures of mutual 
fund outflow-induced price pressure on various securities that are 
widely-used in the academic literature.\400\ Subsequent studies use 
these price impact measures and claim that fire sales induced by 
investor redemptions hurt peer funds' performance and flows, leading to 
further asset sales that have a negative price impact.\401\ Another 
paper suggests that redemptions from mutual fund that hold less liquid 
investments may contribute further to already existing poor market 
conditions by putting further downward pressure on prices of illiquid 
stocks.\402\ In addition, one paper suggests that the exposure of 
stocks to fire-sale risk is bigger when mutual funds represent a larger 
share of the stock's owners.\403\ Moreover, academic research also 
documents the potential effect of mutual fund flows on market-wide 
return volatility,\404\ on a wide array of corporate decisions,\405\ on 
the choices of ETF security baskets,\406\ and on sell-side analysts' 
recommendations on stocks subject to mutual-fund flow-driven stock 
mispricings.\407\ However, several recent studies argue that the 
aforementioned price impact measures are biased and that with the 
removal of this bias many established in the prior literature results 
above no longer hold.\408\ Notwithstanding, while we recognize that 
there is an ongoing debate in the academic literature as to the size of 
these effects, the literature does point to a potential link between 
mutual fund flows and prices in the underlying markets.
---------------------------------------------------------------------------

    \399\ See e.g., Shiyang Huang et. al., Does Liquidity Management 
Induce Fragility in Treasury Prices: Evidence From Bond Mutual Funds 
(Dec. 30, 2021), available at https://ssrn.com/abstract=3689674 
(retrieved from SSRN Elsevier database). See also Hao Jiang et. al., 
Does Mutual Fund Illiquidity Introduce Fragility Into Asset Prices? 
Evidence From the Corporate Bond Market, 143 J. Fin. Econ. 277 
(2021); Joshua D. Coval & Erik Stafford, Asset Fire Sales (and 
Purchases) in Equity Markets, 86 J. Fin. Econ. 479, no. 2 (2007); 
Donald J. Berndt et. al., Using Agent-Based Modeling to Assess 
Liquidity Mismatch in Open-End Bond Funds, Summer Sim '17: 
Proceedings of the Summer Simulation Multi-Conference (Society for 
Computer Simulation International, San Diego, CA) (Jul. 2017); 
Valentin Haddad et. al., When Selling Becomes Viral: Disruptions in 
Debt Markets in the COVID-19 Crisis and the Fed's Response, 34 Rev. 
Fin. Stud. 5309, no.11 (2021).
    \400\ See Coval & Stafford, supra. Also see Alex Edmans et. al., 
The Real Effects of Financial Markets: The Impact of Prices on 
Takeovers, 67 J. Fin. 933 (2012).The constructed measures exploit 
the idea that large investor redemptions place pressure on mutual 
funds to sell portfolio holdings, and if these sales are 
sufficiently large, the funds' liquidity needs may put downward 
pressure on prices that is unrelated to the fundamental value of the 
underlying stocks.
    \401\ See e.g., Pekka Honkanen & Daniel Schmidt, Learning From 
Noise? Price and Liquidity Spillovers Around Mutual Fund Fire Sales, 
12(2) Rev. Asset Pricing Stud. 593 (Jun. 2022); Antonio Falato et. 
al., Fire-Sale Spillovers in Debt Markets, 76 J Fin. 3055 no. 6 
(2021).
    \402\ See Azi Ben-Rephael, Flight-to-Liquidity, Market 
Uncertainty, and the Actions of Mutual Fund Investors, 31 J. Fin. 
Intermediation 30 (2017).
    \403\ See George O. Aragon & Min S. Kim, Fire Sale Risk and 
Expected Stock Returns (Mar. 11, 2022), available at https://ssrn.com/abstract=3663567 (retrieved from SSRN Elsevier database).
    \404\ See e.g., Charles Cao et. al., An Empirical Analysis of 
the Dynamic Relationship Between Mutual Fund Flow and Market Return 
Volatility, 32 J. Banking & Fin. 2111, no. 10 (2008).
    \405\ See e.g., Alex Edmans, supra. The authors find that mutual 
fund investor flows lead to pressure on the price of underlying 
securities, which may in turn affect the probability of takeover of 
the firm issuing the security. Also see Derrien, Fran[ccedil]ois et. 
al., Investor Horizons and Corporate Policies, 48 J. Fin. & 
Quantitative Analysis 1755 no. 6 (2013). Also see Norli, 
[Oslash]yvind et. al., Liquidity and Shareholder Activism, 28 Rev. 
Fin. Stud. 486 (2015). Also see B. Espen Eckbo et. al., Are Stock-
Financed Takeovers Opportunistic? 128 J. Fin. Econ. 443 (2018).
    \406\ See Han Xiao, The Economics of ETF Redemptions (Apr. 10, 
2022), available at https://ssrn.com/abstract=4096222 (retrieved 
from SSRN Elsevier database).
    \407\ See Johan Sulaeman & Kelsey D. Wei, Sell-Side Analysts and 
Stock Mispricing: Evidence From Mutual Fund Flow-Driven Trading 
Pressure, 65 Mgmt. Sci. 5427 no. 11 (2019).
    \408\ See Elizabeth Berger, Selection Bias in Mutual Fund Fire 
Sales (Apr. 18, 2021), available at https://ssrn.com/abstract=3011027 (retrieved from SSRN Elsevier database). See also 
Malcolm Wardlaw, Measuring Mutual Fund Flow Pressure as Shock to 
Stock Returns, 75(6) J. Fin. 3221 (2020). See also Aleksandra and 
R[uuml]diger Weber, Money in the Right Hands: The Price Effects of 
Specialized Demand (Jan. 27, 2022), available at https://ssrn.com/abstract=4022634 (retrieved from SSRN Elsevier database). Also see 
Simon Schmickler, Identifying the Price Impact of Fire Sales Using 
High-Frequency Surprise Mutual Fund Flows (Jul. 8, 2020) available 
at https://ssrn.com/abstract=3488791 (retrieved from SSRN Elsevier 
database).
---------------------------------------------------------------------------

    We recognize that the proposed rules may not address all of the 
mechanisms that amplify dilution in the mutual fund sector, such as 
system-wide market stress, misaligned incentives of fund managers and 
investors, or stale information used for pricing of funds' portfolio 
holdings. However, even if these dilution-amplification

[[Page 77243]]

mechanisms were not present, several factors may inhibit mutual fund 
managers' ability to allocate trading costs to transacting investors by 
using currently available swing pricing. First, as discussed above, 
funds generally do not have complete information regarding their order 
flows at the time the NAV is struck, which may restrict the ability to 
operationalize swing pricing. These U.S.-market specific operational 
impediments cannot be mitigated by any single fund, which presents a 
collective action problem. Second, even if funds were currently able to 
obtain complete flow data prior to striking their NAVs, funds may be 
hesitant to implement swing pricing to the extent that some investors 
are averse to bearing the full costs of their transactions via swing 
pricing, even if it is in the best interest of fund shareholders 
overall, or because investors in U.S. funds are unfamiliar with swing 
pricing.\409\ In addition, there may be a stigma attached to being the 
first fund to implement swing pricing. To the extent that such a stigma 
effect is present in relation to swing pricing, it may deter investors 
from choosing funds that could implement swing pricing under the 
optional approach, and that could be a reason why no fund currently 
chooses to implement swing pricing. Finally, even where fund managers 
are willing and able to employ liquidity risk management tools, they 
may not be able to forecast accurately the extent to which episodes of 
market stress can create challenges for mitigating dilution and meeting 
shareholder redemptions.\410\
---------------------------------------------------------------------------

    \409\ We recognize, however, that open-end funds in other 
jurisdictions have successfully implemented swing pricing, as 
discussed in section I.B and accompanying notes 59-63.
    \410\ See supra section I.B for a discussion of how market 
stress events in Mar. 2020 caused some funds to explore the 
potential of various emergency relief actions due to the combination 
of abnormally large redemptions and deteriorating liquidity in 
markets for underlying fund investments.
---------------------------------------------------------------------------

4. Affected Entities
a. Registered Investment Companies
    The proposed amendments would mainly affect open-end funds 
registered with the Commission that are ETFs and mutual funds, 
excluding money-market funds (hereafter ``mutual funds''). Based on 
Form N-CEN filing data as of December 2021, we estimate that there are 
11,488 of such funds that hold approximately $26 trillion in net 
assets.\411\ Among these, there are 9,043 mutual funds that hold 
approximately $21 trillion in net assets and 2,445 ETFs that hold 
approximately $5.1 trillion in net assets.\412\ In addition, there are 
1,650 mutual funds of funds that hold approximately $3.1 trillion in 
net assets,\413\ as well as 150 feeder funds structured as ETFs that 
hold $0.6 trillion in net assets.\414\
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    \411\ We use information reported on Form N-CEN to the 
Commission for each fund as of Dec. 2021, incorporating filings and 
amendments to filings received through May 15, 2022. Net assets are 
monthly average net assets during the reporting period identified on 
part C.19.a of Form N-CEN, and validated with Bloomberg (for ETFs). 
Current values are based on the most recent filings and amendments, 
which are based on fiscal years and are therefore not synchronous. 
We exclude money market funds identified in Item C.3.g of the Form 
N-CEN from the count of the affected open-end funds. These 
exclusions were also applied to the estimates that follow.
     We note that the submission on the Form N-CEN is required on a 
yearly basis. Therefore, these estimates do not include newly 
established funds that have not completed their first fiscal year 
and, therefore, have not filed the Form N-CEN yet, as well as they 
do not account for the funds that have been terminated since the 
last Form N-CEN was filed. Therefore, the estimates for the number 
of funds and their net assets may be over- or under-estimated.
    \412\ See id. ETFs are identified on Form N-CEN, Item C.3.a.i 
and include 781 in-kind ETFs with average total net assets of $1.2 
trillion. UIT ETFs and exchange-traded managed funds are excluded 
from ETF totals. Mutual funds are identified as those funds that are 
not identified as ETFs or money market funds.
    \413\ Funds of funds are identified in Item C.3.e. A fund of 
funds means a fund that acquires securities issued by any other 
investment company in excess of the amounts permitted under 
paragraph (A) of section 12(d)(1) of the Act (15 U.S.C. 80a-
12(d)(1)(A)), but does not include a fund that acquires securities 
issued by another investment company solely in reliance on rule 
12d1-1 under the Act (CFR 270.12d1-1). We note that at most 29 
closed-end funds of funds with net assets of $10 billion may be 
affected by the proposal indirectly, to the extent that they hold 
shares of open-end funds.
    \414\ See note 411. Master-feeder fund means a two-tiered 
arrangement in which one or more funds (each a feeder fund) holds 
shares of a single fund (the master fund) in accordance with section 
12(d)(1)(E) of the Act (15 U.S.C. 80a-12(d)(1)(E)) or pursuant to 
exemptive relief granted by the Commission. See Instruction 4 to 
Item C.3 of Form N-CEN. Feeder funds are identified on Form N-CEN, 
Item C.3.f.ii.
---------------------------------------------------------------------------

    Different parts of the proposal would affect these two subsets of 
open-end funds differently. In particular, the proposed amendments to 
the liquidity management program and certain reporting requirements 
would affect both mutual funds and ETFs and the proposed hard close and 
swing pricing requirements and related reporting requirements would 
affect only mutual funds that are not feeder funds.
    We estimate that there are 12,153 funds currently required to file 
reports on Form N-PORT \415\ and there are 2,754 registrants required 
to file reports on Form N-CEN that would be affected by the proposed 
reporting requirements.\416\ Among these, we estimate that the proposed 
changes to the reporting requirements on Form N-PORT would also affect 
660 closed-end funds and 5 ETFs registered as unit investment trusts 
with assets of $0.4 trillion and $0.7 trillion, respectively.\417\
---------------------------------------------------------------------------

    \415\ See infra note 540 and accompanying text.
    \416\ See infra note 547 and accompanying text.
    \417\ Closed-end investment companies are identified on Form N-
CEN, Item B.6.b. Unit investment trust (UIT) ETFs are funds of Form 
N-8B-2 registrants identified in Item B.6.g. which are also reported 
in Item E.
---------------------------------------------------------------------------

i. Open-End Fund Characteristics
    Table 2 below shows the number and total assets of open-end funds 
by fund type.\418\ The largest share (by assets) of funds 
(approximately 63.5% of assets held by all open-end funds) that would 
be affected by the proposal are equity funds, including U.S. and 
international equity funds. The second largest type of funds affected 
by the proposal is taxable bond funds, which on aggregate holds 
approximately 19.6% of all open-end fund assets.
---------------------------------------------------------------------------

    \418\ We note that these statistics are estimated with the 
Morningstar data; therefore, there is a discrepancy in the number of 
funds estimated based on the Form N-CEN and the number of funds 
estimated based on the Morningstar data. This discrepancy exists for 
two reasons. First, Morningstar data may not include all open-end 
funds due to its voluntary submission nature; as such, the number of 
funds based on the Morningstar data may be under-estimated. Second, 
funds may submit their data to Morningstar on a monthly data, while 
the submission on the Form N-CEN is required on a yearly basis. 
Therefore, the number of funds estimated based on the Form N-CEN may 
be under-estimated because it may not include new funds that haven't 
filed the Form yet.
    \419\ Morningstar data, excluding funds of funds, feeder funds, 
and money market funds. 5 UIT ETFs, with assets of approximately 
$0.7 trillion are included in the Morningstar ETF totals.

                                         Table 2--Number of Affected Funds by Fund Type, as of December 2021 419
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     ETFs 1                  Other open-end (not including MMFs)                   Total
                                    --------------------------------------------------------------------------------------------------------------------
              Category                             Assets, $    % of Total                Assets, $    % of Total                Assets, $    % of Total
                                      # of funds      trln        assets     # of funds      trln        Assets     # of funds      trln        assets
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation.........................           90        $0.03         0.37          377        $1.58         7.59          467        $1.61         5.72
Alternative........................          193         0.01         0.21          167         0.13         0.64          360         0.15         0.53

[[Page 77244]]

 
Bank Loan..........................            7         0.02         0.26           53         0.10         0.47           60         0.12         0.42
Commodities........................          116         0.14         1.88           28         0.03         0.16          144         0.17         0.60
Intern. Equity.....................          507         1.10        15.20        1,108         3.18        15.30        1,615         4.29        15.27
Miscellaneous......................          246         0.14         1.86           90         0.01         0.03          336         0.14         0.51
Municipal Bond.....................           68         0.08         1.13          546         0.98         4.71          614         1.06         3.79
Nontrad. Equity....................           33         0.02         0.23           92         0.03         0.13          125         0.04         0.15
Sector Equity......................          481         0.84        11.62          398         0.63         3.02          879         1.47         5.24
Taxable Bond 2.....................          426         1.17        16.06        1,268         4.32        20.77        1,694         5.49        19.55
US Equity..........................          684         3.72        51.18        1,952         9.82        47.18        2,636        13.54        48.22
                                    --------------------------------------------------------------------------------------------------------------------
    Total..........................        2,851         7.26          100        6,079        20.82          100        8,930        28.08          100
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Includes ETFs that are UITs.
2. Excludes bank loan funds.

    The proposal would disproportionally affect open-end funds that 
hold less liquid investments. Among the investments classified by open-
end funds in December 2021, $27.3 trillion of all investments were 
reported as highly liquid, $441 billion of all investments were 
reported as moderately liquid, $276 billion of all investments were 
reported as less liquid, and $198 billion of all investments were 
reported as illiquid. Among the investments reported as less liquid, 
71% ($194 billion) are bank loan interests, 10% ($26 billion) are debt 
securities, 9% ($25 billion) are equities, and 6% ($17 billion) are 
mortgage-backed securities.\420\ Therefore, we believe that the 
proposal to remove the less liquid category would primarily affect 
open-end funds that hold bank loan interests. As of December 2021, 
there are 746 open-end funds that classified approximately $204 billion 
in bank loan interests, which represents approximately 0.7% of all 
open-end fund investments classified,\421\ and makes up approximately 
15% of the bank loan market.\422\ Among these bank loan interests, 95% 
were reported as less liquid. We recognize that some open-end funds 
have large concentrations in bank loan interests and are typically 
referred to as ``bank loan'' funds. As shown in Table 2 above, as of 
December 2021, there are 53 bank loan funds that hold approximately 
0.5% of total open-end fund assets.
---------------------------------------------------------------------------

    \420\ In addition to these, a smaller number of other categories 
are classified as less liquid investments.
    \421\ Source: Form N-PORT. Loan investments are identified via 
Form N-PORT, Item C.4.a and liquidity classifications are from Form 
N-PORT, Item C.7.
    \422\ See Leveraged Loan Primer, supra note 99 (stating that the 
S&P/LSTA Loan Index, which is used as a proxy for market size in the 
U.S., totaled approximately $1.375 trillion as of Feb. 2022).
---------------------------------------------------------------------------

    The proposal would also disproportionally affect open-end funds 
that hold investments whose fair value is measured using an 
unobservable input that is significant to the overall measurement.\423\ 
We estimate that, as of December 2021, 2,006 open-end funds reported 
$76.5 billion in investments that were valued using unobservable inputs 
that are significant to the overall measurement, which is approximately 
0.27% of all open-end fund assets.\424\ Among these, $16.9 billion were 
classified as highly liquid investments and $2.1 billion as moderately 
liquid investments by 541 funds.\425\ In addition, $7.8 billion were 
classified into less liquid category and $49.8 billion were classified 
into the illiquid category.
---------------------------------------------------------------------------

    \423\ See supra note 111.
    \424\ Source: Form N-PORT. The fair value hierarchy for an 
investment are identified on Form N-PORT, Item C.8., and liquidity 
classifications are identified on Form N-PORT, Item C.7. We observed 
that the investments classified as highly liquid that were Level 3 
investments primarily were mortgage-backed securities.
    \425\ Id.
---------------------------------------------------------------------------

ii. Open-End Fund Flows
    To inform our understanding of historical redemption and 
subscription patterns, we analyzed daily fund flow data during the 
period between January 2009 and December 2021.\426\ Table 3 below shows 
net fund flow percentiles pooled across time and funds. Figure 6 below 
shows the time series of daily fund flow percentiles for equity and 
fixed income funds, showing 1st, 5th, 50th, 95th, and 99th percentiles 
of fund flows for each day. Similarly, Figure 7 shows the time series 
of weekly fund flow percentiles for equity and fixed income funds, 
showing the 1st, 5th, 50th, and 95th, and 99th percentiles of fund 
flows for each week.
---------------------------------------------------------------------------

    \426\ Data source: Morningstar Fund Flow Data. We restrict our 
analysis to funds that have a ``Global Broad Category Group'' of 
Equity or Fixed Income because we believe the data for other types 
of funds (e.g., Alternative and Commodity funds) contain more 
extreme values that may be spurious. We restrict our analysis to 
include fund flow data starting 2009. While some Morningstar data is 
available for 2008, we have not included that data in our historical 
flow analyses because of gaps in the 2008 data (e.g., the 2008 
dataset covers a more limited set of funds). We trim outliers from 
the dataset by restricting outflows from a fund to be no more than 
100% of AUM and inflows to be no more than 300% of AUM on a given 
day or 1000% of AUM for a given week when analyzing weekly flows. 
For daily flows, we determine the flow percentage by dividing dollar 
flows on date T by total net assets on date T. This assume that 
total net assets on a given day do not account for that day's flows. 
Similarly, for weekly flows, we aggregate by business week, summing 
dollar flows over the course of the week and dividing by the first 
available day's net assets in that week. Making the opposite 
assumption, that total net assets on a given day do incorporate that 
day's flows, does not significantly alter our results.
---------------------------------------------------------------------------

    Table 3 shows, for example, that weekly outflows exceed roughly 7% 
in one out of one hundred fund-week observations and that weekly 
outflows exceed 1.3% in five out of one hundred observations.\427\ To 
help put these figures in context statistically, we see that the fund 
flow distribution exhibits heavy left (and right) tails relative to the 
normal distribution. That is, events such as outflows of 6.6% should 
occur far fewer than one out of one hundred times if fund flows were 
normally distributed. Similarly, events such as inflows of 8.3% should 
occur far fewer than one out of one hundred times if fund flows are 
normally distributed.
---------------------------------------------------------------------------

    \427\ See supra note 426 for a description of how the data set 
was constructed.
---------------------------------------------------------------------------

    Whereas Table 3 looks at percentages across all funds and days or 
weeks, Figure 6 shows the cross-section of daily fund flows at each 
point in time and breaks up the fund universe into fixed income and 
equity funds. Figure 6 shows that the dispersion of flows exhibits 
significant variation; there are times when percentiles widen out 
considerably, even during non-stressed market conditions.\428\ Times of

[[Page 77245]]

substantial flows into bond funds do not necessarily correspond to 
flows into equity funds. What this implies is that looking at the 
distributions separately may reveal greater dispersion, as flows across 
the sectors diversify each other. For equities, a number of time 
periods exhibit cross-sections in which the lowest percentile of funds 
have daily outflows in excess of 10%. For bond funds, flows of this 
magnitude are rarer. However, such episodes do occur for bond funds and 
correspond with times of broader stress in fixed income markets. 
Similarly, Figure 7, which shows weekly flows, also shows that outflows 
in the lowest percentile of funds of below 10% are not uncommon, both 
in bonds and in equities.\429\ For fixed income funds, both the daily 
and weekly flow plots in Figures 6 and 7 show that during March 2020, 
some funds experienced significant outflows, consistent with the 
aggregate monthly outflows discussed in section I.B.
---------------------------------------------------------------------------

    \428\ See id. Daily flows for equity funds have notable seasonal 
spikes that tend to occur during the month of Dec., independent of 
market stress events. These flow spikes may be attributable to any 
year-end rebalancing of investors from, e.g., underperforming funds 
into outperforming funds; to year-end distributions that are 
characterized as flows by Morningstar and subsequently re-invested; 
or to spurious or errant data points. We believe that latter is less 
likely because these seasonal spikes are still evident when the data 
is aggregated to the weekly level in Figure 7. To the extent 
seasonal fund flow spikes are driven by predictable events such as, 
e.g., capital gains distributions, fund managers are more likely to 
be able to plan for any impacts of such events on a fund, include 
funds that hold investments with lower liquidity.
    \429\ See id.

                                Table 3--Pooled Fund Flows, as a % of Net Assets
----------------------------------------------------------------------------------------------------------------
                                                                    Percentile
                                 -------------------------------------------------------------------------------
                                        1st             5th            50th            95th            99th
----------------------------------------------------------------------------------------------------------------
Daily fund flows................           -1.60           -0.30               0            0.40               2
Weekly fund flows...............           -6.60           -1.30               0            1.80            8.30
----------------------------------------------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 77246]]

[GRAPHIC] [TIFF OMITTED] TP16DE22.006


[[Page 77247]]


[GRAPHIC] [TIFF OMITTED] TP16DE22.007

BILLING CODE 8011-01-C
b. Fund Intermediaries
    As discussed above, the proposed hard close requirement would 
affect a large group of intermediaries. Specifically, under the hard 
close requirement, intermediaries generally would need to submit orders 
for fund shares earlier than they currently do for those orders to 
receive that day's price. As discussed in greater detail below, this 
may affect all market participants sending orders to relevant funds, 
including broker-dealers, registered investment advisers, retirement 
plan recordkeepers and administrators, banks, insurance companies, and 
other registered investment companies.

[[Page 77248]]

i. Broker-Dealers
    Based on an analysis of Financial and Operational Combined Uniform 
Single (FOCUS) Reports filings as of December 2021, there were 
approximately 3,508 registered broker-dealers with over 240 million 
customer accounts.\430\ In total, these broker-dealers have over $5 
trillion in total assets as reported on Form X-17A-5.\431\ More than 
two-thirds of all broker-dealer assets and just under one-third of all 
customer accounts are held by the 21 largest broker-dealers, as shown 
in Table 4.\432\ Of the broker-dealers registered with the Commission 
as of December 2021, 434 broker-dealers were dually registered as 
investment advisers.\433\
---------------------------------------------------------------------------

    \430\ The data is obtained from FOCUS filings as of Dec. 2021. 
There may be a double-counting of customer accounts among, in 
particular, the larger broker-dealers as they may report introducing 
broker-dealer accounts as well in their role as clearing broker-
dealers. Customer Accounts includes both broker-dealer and 
investment adviser accounts for dual-registrants.
    \431\ Assets are estimated by Total Assets (allowable and non-
allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II 
and Part IIA, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to balance sheet total assets for the 
broker-dealer. The Commission does not have an estimate of the total 
amount of customer assets for broker-dealers because that 
information is not included in FOCUS filings. The Commission 
estimates broker-dealer size from the total balance sheet assets as 
described above.
    \432\ Approximately $4.97 trillion of total assets of broker-
dealers (98.7%) are at broker-dealers with total assets in excess of 
$1 billion.
    \433\ This estimate includes the number of broker-dealers who 
are also registered with either the Commission or a state as an 
investment adviser.

                     Table 4--Number of Broker-Dealers by Total Assets, as of December 2021
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cumulative
                                                                   Total number     Cumulative       number of
              Size of broker-dealer (total assets)                    of BDs       total assets      customer
                                                                                      ($ bln)        accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................................              21           3,682      75,808,084
$1 billion to $50 billion.......................................             124           1,581     153,243,391
$500 million to $1 billion......................................              30              22         518,545
$100 million to $500 million....................................             147              31       9,559,082
$10 million to $100 million.....................................             532              19         128,669
$1 million to $10 million.......................................           1,065               4         885,269
<$1 million.....................................................           1,589             0.5          10,854
                                                                 -----------------------------------------------
    Total.......................................................           3,508           5,338     240,153,894
----------------------------------------------------------------------------------------------------------------

ii. Retirement Plans
    Retirement plans and accounts are major holders of mutual funds. We 
estimate that, as of 2022Q1, approximately 54% of non-MMF mutual fund 
assets were held in retirement accounts, which include employer-
sponsored defined contribution (``DC'') plans and individual retirement 
accounts (``IRAs'').\434\ At year-end 2021, mutual funds accounted for 
58% ($6.4 trillion) of DC plan assets and 45% ($6.2 trillion) of IRA 
assets.\435\ Among DC plans, 401(k) plans held $5 trillion of assets in 
mutual funds, 403(b) plans held $670 billion, other private-sector DC 
plans held $539 billion, and 457 plans held $177 billion.\436\ 
Combined, the mutual fund assets held in DC plans and IRAs at the end 
of 2021 accounted for 32% of the $39.4 trillion U.S. retirement 
market.\437\
---------------------------------------------------------------------------

    \434\ See Inv. Co. Inst. (ICI), The U.S. Retirement Market, 
First Quarter 2022 (June), Table 28, available at https://www.ici.org/system/files/2022-06/ret_22_q1_data.xls.
    \435\ See ICI, 2022 Investment Company Factbook, Chapter 8, 
available at https://www.icifactbook.org/pdf/2022_factbook.pdf.
    \436\ Id.
    \437\ Id.
---------------------------------------------------------------------------

    According to a recent study, DC plans vary in size by both number 
of participants and plan assets.\438\ For example, as shown in the 
Table 5 below, among 401(k) plans, 94.1% of plans had less than $10 
million of plan assets. While the number of plans with plan assets over 
$1 billion is relatively small, these largest plans manage 
approximately 47.8% of all assets held in 401(k) plans.
---------------------------------------------------------------------------

    \438\ See BrightScope & Investment Company Institute, 2021, The 
BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 
401(k) Plans, 2018 (``BrightScope/ICI Report''), at 7, Ex. 1.2, 
available at www.ici.org/files/2021/21_ppr_dcplan_profile_401k.pdf. 
These data is limited to 401(k) plans covered in the Department of 
Labor Form 5500 research file, as we do not have data on the size 
distribution for other types of DC plans. We note, however, that 
401(k) plans represent approximately 70.4% of all DC plan assets. 
Investment Company Institute, ``The US Retirement Market, First 
Quarter 2022'' (June), Table 6, available at https://www.ici.org/system/files/2022-06/ret_22_q1_data.xls.

                                               Table 5--Distribution of 401(k) Plans by Plan Assets, 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Plans                       Participants                         Assets
                                                      --------------------------------------------------------------------------------------------------
                     Plan assets                                                                                         Billions of
                                                           Number          Percent        Thousands        Percent         dollars          Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than $1M........................................         343,108            58.5         6,007.5             8.4          $107.1                2.1
$1M to $10M..........................................         208,789            35.6        13,660.6            19.1           620.7               12.2
>$10M to $50M........................................          26,458             4.5         9,894.5            13.9           532.4               10.4
>$50M to $100M.......................................           3,564             0.6         4,808.0             6.7           247.1                4.8
>$100M to $250M......................................           2,407             0.4         6,744.8             9.5           374.7                7.3
>$250M to $500M......................................           1,034             0.2         5,395.1             7.6           362.1                7.1
>$500M to $1B........................................             603             0.1         4,763.9             6.7           424.1                8.3
More than $1B........................................             659             0.1        20,073.4            28.1         2,439.7               47.8
All plans............................................         586,622           100.0        71,347.7           100.0         5,108.0              100.0
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 77249]]

    The same study shows that mutual funds held 43% of private-sector 
401(k) plan assets in the sample in 2018. CITs held 33% of assets, 
guaranteed investment contracts (GICs) held 7%, separate accounts held 
3%, and the remaining 14% were invested in individual stocks (including 
company stock), individual bonds, brokerage, and other 
investments.\439\ While mutual funds accounted for at least 55% of 
assets in plans with less than $1 billion of plan assets, they 
accounted for only 23% of assets in plans with more than $1 billion of 
plan assets (dominated by CITs that accounted for 49% of plan 
assets).\440\
---------------------------------------------------------------------------

    \439\ Id.
    \440\ Id.
---------------------------------------------------------------------------

iii. Retirement Plan Recordkeepers
    According to one source, as of September 2021, the total DC 
recordkeeping assets were approximately $9.7 trillion, as shown in 
Table 6 below.\441\ The largest recordkeeper managed approximately 33% 
of all recordkeeping assets, and the 10 largest recordkeepers managed 
approximately 83% of all recordkeeping assets.
---------------------------------------------------------------------------

    \441\ Larry Rothman, Large Record Keepers Keep Dominating 
Market, Pensions & Investments, (Apr. 11, 2022), available at 
https://www.pionline.com/interactive/large-record-keepers-keep-dominating-market.

Table 6--Largest Retirement Plan Recordkeepers, as of September 30, 2021
------------------------------------------------------------------------
                                               Recordkeeping assets, $
               Recordkeeper                            billion
------------------------------------------------------------------------
Fidelity Investments......................                       $3,1698
Empower...................................                         1,048
TIAA-CREF.................................                           710
Vanguard Group............................                           702
Alight Solutions..........................                           545
Voya Financial............................                           499
Principal Financial Group.................                           449
Bank of America...........................                           346
Prudential Financial......................                           283
T. Rowe Price Group.......................                           268
All others................................                         1,676
                                           -----------------------------
    Total.................................                         9,695
------------------------------------------------------------------------

c. Other Affected Entities
    A significant portion of mutual fund orders are processed through 
NSCC's Fund/SERV platform: in 2021 Fund/SERV processed 261 million 
mutual fund transactions with the aggregate value of $8.5 
trillion,\442\ which we estimate to be at least 36.8% of the value of 
all mutual fund transactions.\443\ A part of the platform, referred to 
as Defined Contribution Clearance & Settlement, focuses on purchase, 
redemption, and exchange transactions in defined contribution and other 
retirement plans. This service handled a volume of nearly 154 million 
transactions in 2021.\444\
---------------------------------------------------------------------------

    \442\ See Depository Trust and Clearing Corporation (DTCC), 2021 
Annual Report, pg. 57, available at https://www.dtcc.com/~/media/
files/downloads/about/annual-reports/DTCC-2021-Annual-Report.
    \443\ We do not have data to calculate the value of all mutual 
fund transactions directly. Therefore, we use ICI data on long-term 
mutual funds' portfolio purchases and sales as a proxy for the total 
value of transactions in mutual fund shares, assuming that a 
significant portion of portfolio purchases reflects investor 
subscriptions and a significant portion of portfolio sales reflects 
investor redemptions. We estimate this value to be $27.07 trillion 
by adding the total value of purchases and the total value of sales 
for long-term mutual funds. See ICI, 2022 Investment Company 
Factbook, Table 31, available at https://www.icifactbook.org/22-fb-data-tables.html.
    We estimate the share of the value of mutual fund transactions 
processed by Fund/SERV as the aggregate value reported by Fund/SERV 
divided by the long-term mutual funds' portfolio purchases and 
sales. We recognize that mutual funds may effect portfolio purchases 
and sales for purposes other than investing new cash from 
subscribing investors and meeting investor redemptions, such as 
portfolio rebalancing. Therefore, the total value of transactions in 
long-term mutual fund shares may be overestimated. Accordingly, the 
share of mutual fund transaction value processed by Fund/SERV may be 
underestimated. We also recognize that the aggregate value reported 
by Fund/SERV may or may not include the value of mutual fund 
transactions via DCC&S. To the extent that the reported value 
excludes such transactions, the share of mutual fund transaction 
value processed by Fund/SERV may be further underestimated. We 
solicit comments on these statistics.
    \444\ See id.
---------------------------------------------------------------------------

    Mutual funds may employ the services of third-party or affiliate 
transfer agents. We estimate that, as of March 2022, there are 99 
mutual fund transfer agents that serve both open- and closed-end funds 
for the 2021 reporting year.\445\
---------------------------------------------------------------------------

    \445\ Mutual fund transfer agents are those transfer agents that 
answered with a positive value for any of Items 5(d)(iii-iv), 6(a-
c)(iii-iv), or 10(a) on a Form TA-2. We note that the identified 
mutual fund transfer agents may serve both open-end and closed-end 
funds. To the extent that some of the identified transfer agents 
only serve closed-end funds, the number of affected transfer agents 
may be over-estimated.
---------------------------------------------------------------------------

    We expect that a range of other entities would be affected by the 
proposal:
     Mutual fund order processing entities (besides Fund/SERV);
     Mutual fund liquidity service providers;
     Other third-party service providers.
    We do not currently have data on the number and size of these 
entities. We solicit comments on these statistics. In addition, we 
solicit comment on what other entities would be affected by the 
proposed amendments.

C. Benefits and Costs of the Proposed Amendments

1. Liquidity Risk Management Program
    The proposed rule would make several changes to the liquidity risk 
management framework adopted in 2016. In particular, it makes changes 
to (1) the manner and frequency in which funds must classify each of 
their portfolio holdings into one of several liquidity buckets; (2) the 
minimum amount a fund must hold in the highly liquid investment 
category; (3) the treatment of margin and collateral for certain 
derivatives transactions, for purposes of the highly liquid investment 
minimum and 15% limit on illiquid investments, as well as the treatment 
of a fund's liabilities for purposes of the highly liquid investment 
minimum; and (4) the

[[Page 77250]]

definition of the liquidity buckets, including illiquid investments. 
Whereas the existing rule provides funds with a considerable level of 
discretion regarding how fund investments are classified, as well as 
regarding the determination of a highly liquid investment minimum, the 
proposed rule would reduce that discretion and is intended to prepare 
funds for future stressed conditions by improving the quality of 
liquidity classifications by preventing funds from over- or under-
estimating the liquidity of their investments, including in times of 
stress. The proposed rule is also intended to provide classification 
standards that are consistent with more effective practices the staff 
has observed across funds. As a result, we expect enhanced liquidity 
across open-end funds and lower risk of a fund not being able to meet 
shareholder redemptions without significant investor dilution, which 
could reduce the risk of runs arising from the first-mover advantage. 
Thus, the proposed amendments may improve overall market resiliency.
    The proposed amendments to the liquidity risk management program 
would impose costs on open-end funds. We estimate, for Paperwork 
Reduction Act purposes, that the modification of existing collection of 
information requirements of rule 22e-4 will result in an annual cost 
increase of $7,101 per fund.\446\ In addition, funds may experience 
other costs related to changing business practices, computer systems, 
integrating new technologies, etc. We are not able to quantify many of 
these costs for several reasons. First, we do not have granular data on 
the current systems, business practices, and operating costs of all 
affected parties, which would allow us to estimate how their systems 
and practices would change along with any associated costs. Second, we 
cannot predict how many funds would respond to the proposed changes to 
the liquidity risk management program by changing their portfolio 
allocation in order to be compliant with the proposed highly liquid 
investment minimum and the 15% limit on the illiquid investments and 
how many funds may choose to convert to the closed-end form or cease to 
exist. Finally, we cannot predict how many investors would decide to 
exit open-end funds in a response to the portfolio allocation changes 
that funds may implement as a result of the proposed amendments to the 
liquidity risk management. We request comment on these and other 
potential costs of the proposed changes to the liquidity risk 
management program, particularly any dollar estimates of the costs that 
funds and other affected parties will incur as a result of the rule.
---------------------------------------------------------------------------

    \446\ See infra section IV.B.
---------------------------------------------------------------------------

a. Methodology for Liquidity Classifications
    The proposed rule would substitute the fund's reasonably 
anticipated trade size determination with a stressed trade size 
(``STS'') determination, with an STS being a set percentage of the 
fund's net assets. The proposed rule would also prescribe specific 
methods to determine when a price change should be considered 
``significant'' and remove the funds' ability to perform liquidity 
classification at the asset-class level.
    Generally, the three proposed amendments to the liquidity 
classification methodology may help funds to prepare better for future 
stress events or periods of high levels of redemptions by improving the 
quality of liquidity classifications via the requirement for more 
frequent classification and making the methodology more disciplined, 
objective, and consistent across funds. This, in turn, may help funds 
meet investor redemptions without significant trading costs, 
potentially decreasing dilution risk. We recognize, however, that the 
proposed liquidity classification methodology would still be dependent 
on the size of an investment position within a fund's portfolio 
relative to the size of the market for the investment. Therefore, 
although funds would follow a more standardized methodology for 
liquidity classifications, the same investment could be classified 
differently by different funds, depending on how much of this 
investment a fund holds, thereby reducing comparability of liquidity 
classifications between different funds. The specific economic effects 
for each of three proposed amendments are discussed below.
i. Replacing Reasonably Anticipated Trade Size With Stressed Trade Size
    Funds may currently use their subjective judgment when determining 
the meaning and calculation of reasonably anticipated trade size. The 
proposed requirement to replace the reasonably anticipated trade size 
with the STS as a set percentage of a fund's net assets would decrease 
such subjectivity because funds would no longer have discretion in 
determining the amount of each investment they should assume will be 
sold or disposed of in determining the liquidity classifications. A 
stricter methodology for liquidity classifications of funds' 
investments may be more objective and consistent, which would benefit 
investors by improving funds' ability to meet investor redemptions 
without significant levels of dilution in both normal and stressed 
market conditions. In particular, requiring a fund's classification 
model to assume the sale of the proposed stressed position size would 
better emulate the potential effects of stress on the fund's portfolio 
and help better prepare a fund for future stress or other periods where 
the fund faces higher than typical redemptions. In addition, to the 
extent that the proposed STS would be simpler and more objective than 
the determination of a reasonably anticipated trade size, all else 
equal, the operational burden or costs that funds currently experience 
in making liquidity classifications may be reduced.
    We also propose to set the STS minimum of 10%. Based on an analysis 
of historical weekly fund flows for equity and fixed income funds, we 
estimate that a random fund in a random week has approximately a 0.5% 
chance of experiencing redemptions in excess of the 10% STS, and there 
were 3.4% of weeks where more than 1% of funds experienced net 
redemptions exceeding 10%.\447\ Although this data analysis implies 
that funds infrequently experience redemptions of 10% or more, we 
believe that the 10% STS has the advantage of simulating a stress event 
and would better prepare funds to accommodate redemptions during such 
events. Although funds could consider events larger than 10% for their 
STS calculation voluntarily, we believe that the proposed requirement 
would achieve a more consistent methodology for liquidity measurement 
across funds.
---------------------------------------------------------------------------

    \447\ An analysis of historical Morningstar weekly fund flow 
data for equity and fixed income funds from 2009 through 2021 shows 
that the 1st percentile flow is approximately -6.6% while the 5th 
percentile flow is approximately -1.3%. The same analysis shows that 
the 10% STS corresponds to approximately the 0.5th percentile of 
pooled weekly fund flows. The same analysis shows that if the 5th 
percentile fund flow is computed for each week, it never exceeds the 
10% STS. If the 1st percentile fund flow is computed for each week, 
it exceeds the 10% STS for approximately 3.4% of the weeks in the 
sample.

---------------------------------------------------------------------------

[[Page 77251]]

However, we recognize that specific funds may experience varying costs 
and benefits associated with the 10% STS. For example, two funds with 
comparable levels of AUM but with underlying investments that have 
different liquidity characteristics may experience stress at different 
levels of redemptions. For example, a large-cap equity fund may not 
experience stress at the 10% level of redemptions, whereas a fixed 
income fund with comparable AUM might. As such, the extent to which 
investors of a given fund benefit from the 10% STS will vary based on 
the liquidity of its underlying investments.\448\
---------------------------------------------------------------------------

    \448\ See also section III.B.4.a.ii for discussion of fund flows 
based on fund type.
---------------------------------------------------------------------------

    Funds and their investors may incur costs as a result of replacing 
reasonably anticipated trade size with the STS. To the extent that 
funds would assign a higher liquidity category under the current 
reasonably anticipated trade size approach compared to the liquidity 
category that would be assigned using the proposed STS, the proposed 
amendment may result in funds rebalancing their portfolios in order to 
meet the highly liquid investment minimum and to comply with the limit 
on the illiquid investments. As such, a fund either may have to 
increase its holdings of highly liquid investments or decrease its 
holdings of moderately liquid and illiquid investments. As a result, 
the risk-return profile of the fund's portfolio would change towards 
more liquid and less risky investments that may have lower returns. To 
the extent that such reallocation would result in deviations from a 
benchmark return (if any), funds may experience higher tracking 
error.\449\ In addition, to the extent that investors seek particular 
risk exposures and returns that would be difficult for the affected 
funds to provide under the proposed amendments, the proposed amendments 
may drive them towards other investment vehicles that do not face daily 
redemptions, such as closed-end funds, or to other vehicles or means of 
investing that are not subject to the liquidity rule, such as 
separately managed accounts or CITs. However, to the extent that these 
other vehicles or means of investing do not offer the same investment 
strategies or do not provide the same benefits and protections as the 
open-end funds to investors, investors may find such investment avenues 
less favorable compared to open-end funds. As a result, the set of 
investment options available to investors with particular risk-return 
preferences may decrease.
---------------------------------------------------------------------------

    \449\ Tracking error is the difference between the fund's return 
and that of the benchmark which measures how closely a fund 
replicates the returns of the identified benchmark.
---------------------------------------------------------------------------

ii. Determining a Significant Change to Market Value
    Under the current rule, a fund may determine value impact (a 
``significant price change'') in a variety of ways, including methods 
that depend on the type of asset, or vendor, model, or system used. The 
proposed amendments would establish a uniform standard of how funds 
should determine what constitutes a significant price change, which 
would improve consistency and objectivity of liquidity classification 
methodologies across mutual funds. To the extent that some funds may 
currently use definitions of a significant price change that result in 
under-estimation of the price impact and classification of investments 
in more liquid categories, the proposal would limit the extent to which 
funds are able to do so. This, in turn, would help funds to prepare 
better for potential stress events and potentially reduce the risk of 
not being able to meet investors' redemptions without incurring 
significant trading costs, thereby decreasing dilution risk. The 
proposed amendment may also decrease ongoing costs related to the 
liquidity classification process, all else equal, by reducing the 
number of determinations a fund must perform during the liquidity 
classification process.
    For shares listed on a national securities exchange or a foreign 
exchange, the proposed rule would require funds to use an average daily 
trading volume threshold of 20% to determine whether a trade will cause 
a significant price change.\450\ Funds will have less discretion in 
this circumstance than under the existing rule. This should result in a 
more robust and consistent liquidity classification process that would 
help ensure that the liquidity classifications for all holdings of a 
certain investment of particular size are classified in the same manner 
across funds which, in turn, may help all funds to prepare better for 
periods of high investor redemptions.
---------------------------------------------------------------------------

    \450\ See supra section II.A.1.a.ii.
---------------------------------------------------------------------------

    For any investments other than shares listed on a national 
securities exchange or a foreign exchange, the proposed rule would 
define a significant change in market value as any sale or disposition 
that a fund reasonably expects would result in a decrease in sale price 
of more than 1%, which is the measure used in several commonly employed 
liquidity models.\451\ This alternative measure is proposed because we 
recognize that average daily trading volume in, for example, a single 
bond issue would not be representative because it does not represent 
the full pool of liquidity available for a debt security, since bonds 
are split into many different issues and differ from common shares, 
where volume is concentrated because there generally is only one class 
of shares for each issuer.
---------------------------------------------------------------------------

    \451\ Id.
---------------------------------------------------------------------------

    Although not all liquidity classification models currently specify 
a price decrease explicitly as the determination for a significant 
change in market value, we believe it would improve the quality of 
classifications to require a more objective principle. However, the 
proposed rule may still result in some heterogeneity in how funds 
classify otherwise similar holdings because funds and liquidity 
classification vendors would still be able to choose which price impact 
model to use for their classifications,\452\ depending on the 
assumptions of the fund or a liquidity classification provider. As a 
result, liquidity classifications for the same investment of the same 
size may vary across funds, to the extent that funds or liquidity 
classification vendors have different theoretical assumptions about the 
same investment. For example, it may be difficult to choose a price 
impact model for assets that do not have readily available recent price 
information, and funds may have to use subjective judgment in 
determining the sale amount that constitutes a significant change in 
market value. To the extent that such subjectivity could still result 
in over-estimation of liquidity of funds' investments, the potential 
increase in the ability of funds to meet investors' redemptions without 
significant dilution under the proposed rule may be lower than 
anticipated. In addition, to

[[Page 77252]]

the extent that the reference price against which the price impact is 
calculated is stale for some investments (i.e., investments that are 
traded infrequently), the estimated trading volume that would not cause 
a significant price change may be less accurate for such investments.
---------------------------------------------------------------------------

    \452\ There are various estimation techniques for price impact 
(market impact), such as those that use linear models, power law 
models, log models, I-STAR model, and other. See, e.g., Albert S. 
Kyle, Continuous Auctions and Insider Trading, 53 Econometrica, 1315 
(1985), Robert Almgren et. al., Direct Estimation of Equity Market 
Impact, 18 Risk 58 (2005); Elia Zarinelli et. al., Beyond the Square 
Root: Evidence for Logarithmic Dependence of Market Impact on Size 
and Participation Rate, Market Microstructure and Liquidity no. 2 
(Dec. 5, 2014) available at https://arxiv.org/pdf/1412.2152.pdf; 
Bence Toth, et.al, Anomalous Price Impact and the Critical Nature of 
Liquidity in Financial Markets (working paper, Nov. 1, 2011), 
available at https://arxiv.org/abs/1105.1694; Robert Kissell et. 
al., Optimal Trading Strategies: Quantitative Approaches for 
Managing Market Impact and Trading Risk, (AMACON 2003); Saerom Park 
et. al., Predicting Market Impact Costs Using Nonparametric Machine 
Learning Models (research article Feb. 29, 2016), available at 
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0150243.
---------------------------------------------------------------------------

iii. Removing Asset Class Classification
    The proposal to remove funds' ability to perform liquidity 
classifications at the asset-class level may improve the quality of 
liquidity classifications by reducing the potential of funds over- or 
under-estimating the liquidity of their investments. Currently, because 
the definitions of asset classes are not consistent across funds in 
terms of their scope and granularity, an investment (of the same size) 
could be classified as belonging to different asset classes by 
different funds. Moreover, if a classification is performed on an 
asset-class basis, changes in liquidity profiles of individual 
investments may not be accounted for in the way these investments are 
classified, which may lead to an over- or under-estimation of funds' 
investments' liquidity. In contrast, under the proposal, funds would 
more specifically gauge the liquidity of each investment, which could 
strengthen their liquidity management, potentially decreasing the risk 
of not being able to meet investors' redemptions without significant 
costs that could arise from an over-estimation of fund's investments' 
liquidity. To the extent that the liquidity classifications of 
investments within the same asset class would not differ between asset-
level and investment-level classifications, the proposal to remove 
funds' ability to perform liquidity classifications on the asset-class 
level may increase ongoing operational burden for funds that rely on 
this classification method without any commensurate benefits. However, 
the asset-class level classification is not expected to be compatible 
with other proposed changes to the liquidity risk management program, 
such as the value impact standard. Specifically, a fund would not be 
able meaningfully to apply a standard based on average daily trading 
volume or a price decline in a given investment at the asset class 
level because the average trading volume, or market depth generally, 
can vary from investment to investment even within the same asset 
class.
b. Removal of the Less Liquid Category
    We propose to eliminate the less liquid investment category. 
Currently, investments are defined as less liquid if it is reasonably 
expected that they could be sold within seven calendar days but the 
sale is reasonably expected to settle in more than seven days. Under 
the proposal, investments that do not sell and settle within seven 
calendar days without significant price change would be classified as 
illiquid. We believe that the proposal to remove the less liquid 
category would primarily affect open-end funds that hold bank loan 
interests, as the most common type of investment in this category is 
bank loan interests.\453\
---------------------------------------------------------------------------

    \453\ See supra section III.B.4.a.
---------------------------------------------------------------------------

    On the one hand, recent research suggests that during the period 
between March 1 and 23 of 2020, bank loan mutual funds experienced 
outflows of approximately 11% of their AUM; substantially higher than 
high-yield bond funds (which investors may consider close substitutes 
to bank loan funds) and all other types of funds.\454\ Moreover, these 
outflows had longer duration, which suggests greater risk of investor 
runs in these funds. On the other hand, other research \455\ examines 
the resilience of bank loan funds to liquidity shocks and does not find 
substantial evidence of lower liquidity among bank loan funds compared 
to corporate bond funds generally. However, the risk of not being able 
to meet investor redemptions within seven days without significant 
costs may be higher for bank loan funds compared with other types of 
funds, as the trading costs related to bank loan fund outflows 
(including costs associated with obtaining financing to bridge the 
settlement gap) may be larger than those of other types of funds. 
Specifically, as noted by LSTA, over the course of the first three 
weeks of March of 2020, bid-ask spreads for bank loans widened by 288 
basis points to a record 422 basis points.\456\ In contrast, recent 
research shows that, between February 3 and March 20 of 2020, high-
yield corporate bonds' bid-ask spreads widened by an estimated range 
between 79 \457\ and 166 \458\ basis points to 102 and 223 basis points 
respectively.
---------------------------------------------------------------------------

    \454\ Nicola Cetorelli et. al., Outflows From Bank-Loan Funds 
During COVID-19, Federal Reserve Bank of New York, Liberty Street 
Economics (June 16, 2020), available at https://libertystreeteconomics.newyorkfed.org/2020/06/outflows-from-bank-loan-funds-during-covid-19/. See also Ayelen Banegas & Jessica 
Goldenring, Leveraged Bank Loan Versus High Yield Bond Mutual Funds, 
Fin. & Econ. Discussion Series 2019-047 (Board of Governors of the 
Federal Reserve System, Washington, DC), Jun. 2019, (``Banegas/
Goldenring paper'') available at https://www.federalreserve.gov/econres/feds/leveraged-bank-loan-versus-high-yield-bond-mutual-funds.htm. This paper finds that, as of end of 2018, flows as a 
share of assets have been larger and more volatile for bank loan 
funds than for high-yield bond funds.
    \455\ Mustafa Emin et. al., How Fragile Are Loan Mutual Funds? 
(working paper, Nov. 18, 2021) available at https://ssrn.com/abstract=4024592 (retrieved from SSRN Elsevier database).
    \456\ See Loan Syndication & Trading Association (LSTA), March 
Loan Returns (April 2, 2020), available at https://www.lsta.org/news-resources/march-loan-returns-total-12-37.
    \457\ See Nina Boyarchenko, et. al., It's What You Say and What 
You Buy: A Holistic Evaluation of the Corporate Credit Facilities 
(working paper no. 8679, Nov. 11, 2020), available at https://ssrn.com/abstract=3728422 (retrieved from SSRN Elsevier database).
    \458\ See Simon Gilchrist, et. al., The Fed Takes On Corporate 
Credit Risk: An Analysis of the Efficacy of the SMCCF (working paper 
no. 2020-18, Apr. 20, 2021), available at https://ssrn.com/abstract=3829900 (retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

    Moreover, bank loan funds, unlike other funds, experience specific 
trading costs related to bridging the settlement gap, i.e., the costs 
related to using financing during the time it takes for a loan trade to 
settle. Although other types of open-end funds may use bank credit 
lines, most instruments held by open-end funds do not come with the 
same level of settlement uncertainty. Because the process of trade 
settlement for bank loans is not standardized and involves many 
parties, the settlement process can take longer. Therefore, when an 
open-end fund sells a bank loan interest, it is possible that the trade 
will not be settled for an extended amount of time. As shown in Table 7 
below, bank loan funds on average use higher amounts of financing via 
credit lines and use them for longer/shorter period of time on average.
---------------------------------------------------------------------------

    \459\ N-1A RIC credit line usage is from Form N-CEN, and 
excludes ETFs and MMFs. Data is as of Dec. 2021, incorporating 
filings received through June 3, 2022.

               Table 7--Open-End Funds' Use of Credit Lines by Fund Type, as of December 2021 459
----------------------------------------------------------------------------------------------------------------
                                     Number of      Has line of    Used line of     Avg. credit   Avg. number of
                                       funds          credit          credit         line use        days used
----------------------------------------------------------------------------------------------------------------
Bank Loan.......................              56              48               9     $29,411,240             114

[[Page 77253]]

 
Other Categories................           8,979           5,462             969       8,431,142              24
                                 -------------------------------------------------------------------------------
    Total.......................           9,035           5,510             978       8,624,210              24
----------------------------------------------------------------------------------------------------------------

    In contrast, high yield bonds primarily have T+2 settlement. 
Although high yield bonds may have the same or lower liquidity compared 
to bank loans,\460\ from the perspective of funding investor 
redemptions, bank loans are less certain to be converted to U.S. 
dollars within a specific timeframe. As a result, when engaging in 
financing to bridge the settlement gap, a fund that sells a high-yield 
bond would likely use the credit line only for two days while a fund 
that sells a bank loan will have to use it for a longer period. This, 
in turn, may increase the risk of bank loan funds not being able to 
meet investor redemptions within seven days without imposing additional 
financing costs on fund investors, which may increase dilution. 
Therefore, we believe that a limit on the amount of time a trade is 
reasonably expected to settle and convert to U.S. dollars to qualify as 
a non-illiquid investment is intended to promote liquidity in open-end 
funds and reduce investor dilution from trading costs, including wide 
bid-ask spreads and the costs related to bridging the gap between the 
maximum time allowed to meet investor redemptions and prolonged 
settlement of certain investments.\461\
---------------------------------------------------------------------------

    \460\ See supra, note 455. Authors show that, controlling for 
the fund size and rating, bank loan liquidity is similar to or 
greater than liquidity of similarly rated public bonds. The authors 
construct two indirect measures of liquidity: the first measure is 
based on the difference between the transaction prices and net asset 
values (NAVs) of shares of loan and high yield bond ETFs; the second 
measure is the perceived liquidity of corporate bonds based on the 
relationship among cash holdings, flow volatility, and fund 
holdings. See also Sergey Chernenko & Adi Sunderam, Measuring the 
Perceived Liquidity of the Corporate Bond Market (working paper no. 
27092, May 2020), available at https://www.nber.org/papers/w27092.
    \461\ See also section II.A.1.b.iii.
---------------------------------------------------------------------------

    The removal of the less liquid category may also reduce the risk of 
runs in the open-end fund sector. As discussed above, bank loan funds 
may be more prone to sector-wide outflows compared to other types of 
funds due to the low dispersion of returns across bank loan funds 
(i.e., the correlation of bank loan fund returns is higher relative to 
the correlation of returns for other types of funds), which may lead to 
further redemptions and higher investor dilution, and may consequently 
be amplified by a fund's usage of financing for a prolonged period of 
time. To the extent that bank loan funds rebalance their portfolios to 
hold bank loans with shorter settlement times, investor dilution and 
the risk of runs on bank loan funds may be reduced.
    Open-end funds may experience costs as a result of this 
amendment.\462\ First, open-end funds would experience a one-time 
switching cost to adapt the classification and reporting systems for 
the removal of the less liquid category, which would be passed on to 
funds' investors. To the extent that the settlement time for bank loan 
interests cannot be reduced, these loan interests would have to be 
reclassified as illiquid. As a result, funds that hold these 
investments may be required to rebalance their portfolio by divesting 
from bank loans interests in order to comply with the maximum allowed 
allocation towards illiquid investments, which may result in both 
aggregate holdings and individual portfolio concentrations of bank loan 
interests among open-end funds to be reduced. Such portfolio 
reallocation may result in one-time switching costs that would be 
passed on to investors. In addition, to the extent that portfolio 
concentration of bank loan interests decreases significantly for some 
bank loan funds as a result of the proposal, these funds' investment 
strategy would have to be redefined. Moreover, to the extent that some 
funds would not be able to successfully rebalance their portfolios away 
from bank loan interests with longer settlement times without losing 
investors, these funds may cease to exist or may seek shareholder 
approval to convert to a closed-end form.
---------------------------------------------------------------------------

    \462\ We recognize that those funds that primarily hold bank 
loan interests with shorter settlement times may be less affected by 
this proposed amendment. For example, loans that are larger in size, 
more standardized, and more frequently traded, such as those that 
are a part of S&P/LSTA U.S. Leveraged Loan 100 Index, may have 
shorter settlement times.
---------------------------------------------------------------------------

    Furthermore, to the extent that such portfolio reallocation results 
in lower fund returns, this may drive investors of these funds to 
either substitute their investments in open-end bank loan funds to 
other types of open-end funds or choose other types of funds or 
investment vehicles that are able to hold higher amounts of bank loan 
interests. To the extent that these other vehicles or means of 
investing do not offer the same investment strategies or do not provide 
the same benefits and protections as the open-end bank loan funds to 
investors, investors may find such investment avenues less favorable 
compared to open-end bank loan funds. As a result, the set of 
investment options available to investors with this particular strategy 
preference may decrease. This effect may be more pronounced for retail 
investors who generally have limited access to the bank loan market and 
to private funds that may hold bank loan interests.
    To the extent that investor demand for holding bank loans in a fund 
structure is high, some funds may choose to restructure as closed-end 
funds, in order to be able to keep their current holdings of bank loan 
interests. The funds that choose to do so may experience one-time 
switching costs related to shareholder votes for the fund conversion, 
such as costs of preparing and distributing proxy materials and costs 
associated with the solicitation process.\463\ In addition, some 
investors may rush to redeem their shares before the conversion which 
may increase dilution of the remaining investors.
---------------------------------------------------------------------------

    \463\ We recognize that there may be other costs funds could 
incur to convert to a closed-end fund, such as potential exchange 
listing costs or costs of conducting periodic repurchase offers.
---------------------------------------------------------------------------

    However, we recognize that while operational constraints may play a 
role in why settlement times for bank loan interests are prolonged, 
misaligned incentives of trading parties (such as delayed settlement 
compensation) and a collective action problem may also be important 
factors in determining settlement time for bank loan interests.\464\ 
Therefore, to the extent that it is currently operationally possible to 
have a shorter settlement time for bank loan interests, and to the 
extent that non-fund transaction parties would be able to speed up the 
settlement process at a relatively low cost, open-end bank loan funds 
may not have to rebalance their portfolios or restructure to a closed-
end form under the proposal.
---------------------------------------------------------------------------

    \464\ See supra section II.A.1.b.i and note 106.

---------------------------------------------------------------------------

[[Page 77254]]

c. Definition of Illiquid Investments
    We propose to amend the definition of illiquid investments to 
include investments whose fair value is measured using an unobservable 
input that is significant to the overall measurement.\465\ We recognize 
that, in light of the proposed removal of the less liquid category, 
only a small fraction of these investments that are classified as 
highly liquid or moderately liquid would be affected by this proposed 
amendment. We estimate that approximately 0.07% of all open-end fund 
assets would be affected by this amendment.\466\ Therefore, we do not 
anticipate that this amendment would significantly impact open-end fund 
sector.
---------------------------------------------------------------------------

    \465\ See supra note 112.
    \466\ See supra section III.B.4.a.
---------------------------------------------------------------------------

    This amendment may improve the quality of investments' liquidity 
classifications. To the extent that valuation using unobservable inputs 
that are significant to the overall measurement may have an increased 
risk that the fund cannot sell the investment in time to meet 
redemptions without dilution, classifying such investments as illiquid 
may reduce this risk. To the extent that this risk results in investor 
dilution, and to the extent that the overall open-end funds' holdings 
of these investments would decrease as a result of this amendment, 
investor dilution may be reduced and overall liquidity of funds that 
hold such investments may increase as a result.
    Although we understand that some funds already have a practice of 
classifying these investments as illiquid, this amendment may result in 
a one-time switching cost for funds that do not currently follow this 
practice. In addition, to the extent that some funds hold a significant 
share of their portfolio in such investments and these investments are 
not currently classified as illiquid, these funds would have to 
rebalance their portfolios and potentially change their investment 
strategy.
d. Proposed Minimum for Highly Liquid Investments
    Rule 22e-4 currently requires a fund to determine a highly liquid 
investment minimum if it does not primarily hold investments that are 
highly liquid investments. We propose for open-end funds to have a 
highly liquid investment minimum of at least 10% of the fund's net 
assets, which is the assumed stressed trade size.\467\ In addition, we 
propose to remove the provision allowing funds not to establish a 
highly liquid investment minimum if they ``primarily'' hold highly 
liquid assets.
---------------------------------------------------------------------------

    \467\ See supra note 69 (recognizing that in-kind ETFs would not 
be subject to the proposed highly liquid investment minimum 
amendments).
---------------------------------------------------------------------------

    Requiring a highly liquid investment minimum that is equal to or 
above the assumed stressed trade size of 10% of net assets may benefit 
funds and their investors by creating more standardized liquidity risk 
management among funds, thereby increasing their liquidity and helping 
all mutual funds to be better prepared to meet investor redemptions 
without incurring significant trading costs. A higher amount of liquid 
assets may help fund managers to avoid transacting at fire-sale prices 
during market stress and, therefore, control trading costs better over 
time. This, in turn, may decrease dilution risk for fund 
shareholders.\468\ By requiring a minimum of 10% of highly liquid 
assets, we set a minimum baseline level of liquidity that would help 
reduce dilution risk.
---------------------------------------------------------------------------

    \468\ Section III.B.3.b analyzes the frequency of large 
percentage redemptions from funds. We recognize that if a fund were 
to experience a 10% redemption, it could sell primarily its highly 
liquid assets (which would then be significantly more than 10% of 
each of these holdings), or it could sell a vertical slice of its 
portfolio, in which case it would sell 10% of all assets.
---------------------------------------------------------------------------

    Funds may experience costs as a result of the proposed requirement. 
We recognize that funds that currently have an established highly 
liquid investment minimum already have the procedures in place for 
ongoing monitoring for meeting the minimum. As such, we do not expect 
the direct compliance costs related to meeting the highly liquid 
investment minimum, such as monitoring costs and costs related to 
shortfall policies and procedures, to increase for these funds. 
However, those funds that have an established minimum of less than 10% 
may have to rebalance their portfolios in order to meet the proposed 
requirement if they do not hold more highly liquid investments than the 
proposed requirement. In addition, funds may need to shift their 
portfolios away from less liquid holdings, potentially leading to 
higher tracking error relative to their benchmarks (if any) \469\ and 
lower returns. However, a higher amount of liquid investments may help 
fund managers to control trading costs better over time, which may 
result in a higher long-term returns for investors. Therefore, the 
return loss of holding more liquid investments (relative to less liquid 
investments) may be fully or partially offset by the savings on funds' 
trading costs.\470\
---------------------------------------------------------------------------

    \469\ See supra note 449.
    \470\ See supra note 351 and accompanying text.
---------------------------------------------------------------------------

    To the extent that some open-end funds' portfolio allocations 
change significantly as a result of this proposal, these funds may 
experience additional costs related to disclosure of changes to the 
fund's allocations and/or strategy and costs related to a potential 
change of the fund's name. These costs would be passed on to fund 
investors.
    Funds that do not currently have an established highly liquid 
investment minimum may experience a one-time switching cost related to 
establishing shortfall policies and procedures and to reviewing the 
highly liquid investment minimum at least annually as a result of the 
proposed amendment. Funds may also experience one-time switching costs 
related to establishing monitoring procedures related to the highly 
liquid investment minimum. To the extent that some funds that do not 
currently have an established highly liquid investment minimum are able 
to leverage the experience of the funds in the same complex that do 
have an established highly liquid investment minimum, these one-time 
switching costs may be reduced for these funds.
    The proposal to remove the provision allowing funds to not 
establish a highly liquid investment minimum if they ``primarily'' hold 
highly liquid assets may eliminate compliance costs related to 
monitoring whether a fund primarily holds highly liquid assets. Because 
funds that hold a substantial amount of highly liquid investments would 
generally hold an amount of highly liquid investments that is above the 
proposed 10% highly liquid investment minimum, a separate compliance 
system that would identify whether a fund ``primarily'' holds highly 
liquid assets may be operationally inefficient. We believe that the 
``primarily'' determination would become unnecessary in light of the 
proposed highly liquid investment minimum that would be applicable to 
all funds. We recognize that cost savings from the removal of the 
``primarily'' provision would be partially or fully offset by the cost 
increase stemming from the proposed highly liquid investment minimum 
because funds currently relying on the ``primarily'' provision would 
have to build a compliance and monitoring systems around the highly 
liquid investment minimum.
e. Amendments to Calculation of the Amount of Assets That Count Toward 
the Highly Liquid Investment Minimum or the Limit on Liquid Investments
    We also propose to amend how the highly liquid investment minimum 
calculation and the calculation of the 15% limit on illiquid 
investments

[[Page 77255]]

account for the value of assets that are posted as margin or collateral 
for certain derivatives transactions, as well as the value of fund 
liabilities in the case of the highly liquid investment minimum. 
Specifically, in assessing compliance with the fund's highly liquid 
investment minimum, the proposal would require a fund to: (1) subtract 
the value of any highly liquid assets that are posted as margin or 
collateral in connection with any derivatives transaction that is not 
classified as highly liquid; and (2) subtract any fund liabilities. In 
addition, the proposal would amend the rule's limitation on illiquid 
investments to provide that the value of margin or collateral that a 
fund could only receive upon exiting an illiquid derivatives 
transaction would itself be treated as illiquid for purposes of that 
limit.
    The amendments to the highly liquid investment minimum calculation 
and the calculation of the 15% illiquid investment limit may benefit 
funds and investors. Particularly, these amendments would require funds 
to calculate the amount of highly liquid investments and illiquid 
investments in a way that more accurately reflects the amount of assets 
a fund could sell quickly to meet redemptions without significant 
dilution and the amount of assets that could not be sold within seven 
days without significant trading costs respectively. This, in turn, 
would better prepare funds for periods of increased investor 
redemptions and thereby enhance investor-protection benefits of funds' 
liquidity risk management programs.
    More specifically, we recognize that, although investments used for 
collateral are generally classified as highly liquid, the value of 
those highly liquid investments cannot be accessed unless the 
derivative is exited, which takes a longer time for derivatives 
classified as moderately liquid or illiquid. In addition, an unrealized 
loss on a derivative or other liability may result in a margin call, 
for which highly liquid investments may be used. Moreover, if a fund 
may use highly liquid investments to service its liabilities (e.g., 
paying interest on a loan), this fraction of highly liquid investments 
would also be unavailable to meet investors' redemptions. While we 
recognize that funds generally already subtract investment liabilities 
when calculating highly liquid investment minimum,\471\ subtracting all 
of the fund's liabilities may further reduce the amount of highly 
liquid investments available to satisfy the fund's highly liquid 
investment minimum. Therefore, the amendments to the highly liquid 
investment minimum calculation would help to ensure that highly liquid 
investments used to satisfy the fund's highly liquid investment minimum 
actually are available to meet shareholder redemptions.
---------------------------------------------------------------------------

    \471\ See supra section II.A.2.b.ii.
---------------------------------------------------------------------------

    Similarly, the proposed amendment to add the value of excess 
collateral of illiquid derivatives investments to the amount of 
illiquid investments for the purposes of determining compliance with 
the 15% limit on illiquid investments would limit the extent to which 
the fund's assets would be unavailable to meet redemptions because of 
the fund's associated illiquid derivatives investments. This amendment 
would effectively increase the amount of illiquid investments a fund 
holds, potentially pushing these holdings over the 15% limit and 
triggering the compliance procedures for going over the limit, which 
may impose additional costs on the fund.
    The proposed amendments may result in funds rebalancing their 
portfolios in order to meet the highly liquid investment minimum and 
comply with the limit on illiquid investments. Depending on the value 
of highly liquid assets a fund has that are posted as collateral or 
margin for non-highly liquid derivatives and the value of the fund's 
liabilities relative to the fund's total amount of highly liquid 
investments, under the proposed amendment, a fund may have to either 
increase its holdings of highly liquid assets or decrease its holdings 
of moderately liquid and illiquid derivatives in order to meet the 
highly liquid investment minimum. A fund similarly may have to decrease 
its holdings of illiquid investments or increase its holdings of highly 
liquid or moderately liquid investments as a result of the proposed 
amendment to the calculation of the limit on illiquid investments. To 
the extent that such portfolio reallocation would significantly change 
a fund's strategy, funds may experience additional costs related to 
disclosure of changes to the strategy. In addition, the risk-return 
profile of the fund's portfolio may change towards more liquid and less 
risky investments that may have lower returns. To the extent that some 
investors demand higher returns, they may choose to invest in other 
investment vehicles that could offer higher returns.
f. Other Amendments Related to Liquidity Categories
    We also propose other amendments related to the liquidity 
classification categories. First, we propose to amend the term 
``convertible to cash'' and its definition to instead refer to 
conversion to U.S. dollars, codifying prior Commission statements. 
Second, we propose to specify that funds must count the day of 
classification when determining the period in which an investment is 
reasonably expected to be convertible to cash. Third, we propose to 
simplify the definition of moderately liquid investments as those that 
are neither a highly liquid investment nor an illiquid investment.
    To the extent that, at present, open-end funds use differing 
definitions of convertible to cash and may inconsistently include or 
exclude the day of liquidity classification when performing the 
classifications, the two related proposed amendments would benefit 
funds and investors, as these amendments may improve the quality of 
liquidity classifications by reducing over- or under-estimation of 
investments' liquidity, thereby potentially reducing trading costs 
related to investors' redemptions. On the other hand, open-end funds 
that do not currently define ``convertible to cash'' as convertible to 
U.S. dollars, which may include some funds that invest in foreign 
securities, and open-end funds that do not currently count the day of 
classification during the classification process may experience a one-
time switching cost. In addition, these funds may have to rebalance 
their portfolios, to the extent that their current approach results in 
an over-estimation of investments' liquidity.
g. Frequency of Liquidity Classifications
    Currently, rule 22e-4 requires that funds review their liquidity 
classifications at least monthly and more frequently if changes in 
relevant market, trading, and investment-specific considerations are 
reasonably expected to materially affect one or more of their 
investments' classifications. We propose to require that funds classify 
all of their portfolio investments each business day.
    To the extent that funds already monitor their classifications on a 
daily basis in order to be in compliance with the current highly liquid 
investment minimum and 15% limit on illiquid investments requirements, 
we believe that this amendment likely will not produce significant 
additional benefits or costs. However, to the extent that funds do not 
monitor their classifications daily, or to the extent that monitoring 
classifications is a less stringent procedure relative to performing 
classifications for the funds that do monitor classifications daily, 
this amendment may produce benefits and costs.

[[Page 77256]]

    On the one hand, requiring daily liquidity classification could 
help ensure efficient implementation of funds' liquidity management 
programs and enhance their investor protection benefits. Specifically, 
daily liquidity classifications may help funds identify changes in 
liquidity profiles of their investments in a timelier manner and 
monitor potential increases in trading costs for specific investments, 
thereby preparing funds for more efficient trading during times of 
increased redemptions and increasing their ability to respond more 
quickly to rapid changes in liquidity of portfolio investments, which 
may decrease investor dilution. In addition, the daily classification 
requirement, in combination with the proposed standards for trade size 
and value impact, may make the liquidity classification process more 
standardized, timely, and efficient.
    On the other hand, funds may experience a one-time set-up cost and 
increased ongoing costs as a result of this amendment. First, those 
funds that generally do not evaluate their classifications more 
frequently than monthly would have to change their systems for 
performing classifications on a daily basis. In addition, these funds 
would experience increased ongoing costs due to increased frequency of 
classifications.\472\ Second, those funds that already monitor their 
classifications on a daily basis would have to change their systems, to 
the extent that monitoring classifications on a daily basis is a 
different procedure compared to the proposed requirement to perform 
classifications.
---------------------------------------------------------------------------

    \472\ Under the proposed amendments, a more frequent 
classification may not necessarily result in more frequent portfolio 
rebalancing. For example, if a fund exceeds the 15% illiquid 
threshold, it would not have to sell its illiquid investments, 
rather it would not be able to acquire more. In addition, if a fund 
falls below the highly liquid investment minimum, it would still be 
able to purchase and sell highly liquid investments. However, both 
of these events would trigger filing of Form N-RN.
---------------------------------------------------------------------------

    In addition, in times of market stress some highly liquid 
investments may become less liquid due to unusual selling pressure 
(e.g., Treasuries during March 2020), and more frequent classification 
may move these investments to less liquid buckets. In such instances 
where funds do not typically expect highly liquid investments to 
decrease in liquidity, more frequent reclassification of these 
investments may not help funds better accommodate increased redemptions 
compared to the baseline.\473\ However, to the extent funds would 
prefer to avoid triggering events that would cause additional 
compliance requirements such as Form N-RN filings, the potential for 
some investments to become less liquid in times of market stress could 
incentivize funds to be more conservative, ex-ante, in how they 
classify holdings and manage liquidity risk. This, in turn, may result 
in funds investing in more liquid assets, thereby decreasing the 
dilution risk in the mutual fund sector.
---------------------------------------------------------------------------

    \473\ For example, during Mar. 2020 the liquidity of U.S. 
government securities unexpectedly decreased. Under the proposal, 
this event would trigger more rapid re-classification into a lower 
liquidity category. However, because of the unexpected nature of 
this event, a fund would still not be prepared to immediately meet 
an increased level of redemptions.
---------------------------------------------------------------------------

2. Swing Pricing
    The proposed amendments would make several changes to the swing 
pricing framework adopted by the Commission in 2016. In particular, the 
proposed amendments would (1) require funds to implement swing pricing 
for each pricing period when a fund has any amount of net redemptions 
or when net subscriptions exceed 2% of the fund's NAV; (2) establish 
specific thresholds that determine when a fund is required to adjust 
its NAV and the factors a fund needs to incorporate into its swing 
factor; (3) require that swing factors are calculated assuming a 
vertical slice of the fund's portfolio; and (4) remove the upper limit 
on the swing factor of 2%. By requiring all funds to implement swing 
pricing, the proposed amendments would impose the estimated trading 
costs associated with redemptions and subscriptions onto investors 
whose transactions generate these costs, reducing the dilution of non-
transacting fund shareholders. As such, the proposed amendments are 
also intended to reduce the first-mover advantage that stems from the 
dilution of non-transacting shareholders, particularly during stressed 
market conditions.
    The proposed swing pricing framework would impose costs on mutual 
funds that would be passed on to their investors. We estimate, for 
Paperwork Reduction Act purposes, that the modification of existing 
collection of information requirements of rule 22c-1 associated with 
establishing and implementing swing pricing policies and procedures, 
board reporting, and recordkeeping will result in an annual cost 
increase of $7,775 per fund.\474\ Funds would also incur additional 
operational costs associated with establishing and implementing swing 
pricing policies and procedures, including the periodic calculation of 
swing factors associated with the swing pricing framework's 
thresholds.\475\ In addition, the economic benefits of swing pricing 
would be offset by the costs associated with the proposed hard close 
requirement.\476\ Finally, to the extent that the proposed swing 
pricing framework would make mutual funds less attractive to investors, 
mutual funds may experience investor outflows and/or reduced inflows.
---------------------------------------------------------------------------

    \474\ See infra section IV.C.
    \475\ Note that the swing factor itself in theory does not 
impose a net cost across all types of shareholders. Instead, swing 
pricing affects a zero-sum distribution of estimated future trading 
costs among transacting and non-transacting shareholders. The 
dilution that different types of fund shareholders ultimately 
experience will reflect this distribution in addition to the actual 
trading costs incurred by the fund from transactions that 
accommodate investor subscriptions or redemptions. Beyond the 
economic effects of the swing factor itself, the processes for 
calculating and applying the factor as well as the hard close will 
impose additional costs on all shareholders and intermediaries, 
which are discussed below.
    \476\ See infra section III.C.3 for a detailed discussion of 
benefits and costs of the proposed hard close requirement.
---------------------------------------------------------------------------

    We are not able to quantify many of the costs associated with the 
proposed swing pricing framework for several reasons. First, we do not 
have granular data on the current practices and operating costs for all 
funds, which might allow us to estimate how their systems would change 
as a result of the proposed swing pricing requirement. Second, we 
cannot predict the number of investors that would choose to keep their 
investments in the mutual fund sector nor the number of investors that 
would exit mutual funds and instead invest in other fund structures 
such as ETFs, closed-end funds, or CITs. We also cannot estimate how 
many funds would choose to upgrade their systems and processes in order 
to comply with the proposed swing pricing requirement versus how many 
funds would instead convert to an ETF or a closed-end structure. We 
request comment on the full costs of the swing pricing requirement, 
particularly any dollar estimates of the costs that funds and other 
affected parties will incur as a result of the rule.
a. Mandatory Swing Pricing
    At present, rule 22c-1 permits mutual funds to use swing pricing, 
and yet no U.S. open-end fund has chosen to use it as an anti-dilution 
tool. We propose to require all affected mutual funds to use swing 
pricing. In particular, we propose to require every fund to establish 
and implement swing pricing policies and procedures that would adjust 
the fund's NAV per share by a swing factor either if the fund has net 
redemptions of any amount or if the fund has net

[[Page 77257]]

subscriptions that exceed an identified threshold.
    We expect the proposed mandatory swing pricing requirement to 
benefit investors. First, swing pricing would protect non-transacting 
mutual fund investors because it would require transacting fund 
shareholders to bear the estimated trading costs that arise due to 
their trading activity. In contrast, currently, investors transacting 
in fund shares generally do not bear the costs associated with their 
trading activity, imposing dilution on non-transacting 
shareholders.\477\ For example, an industry study on the use of swing 
pricing in other jurisdictions estimates that dilution effects can be 
significant, with effects on annual returns of selected funds in one 
complex ranging from 10 to 66 basis points in 2019.\478\ While these 
estimates from other jurisdictions may be based on fund transaction 
cost components that differ from the U.S., such as those associated 
with government taxes and levies, to the extent that dilution effects 
are comparably significant in the U.S., the proposed mandatory swing 
pricing requirement would reduce the dilution of non-transacting fund 
shareholders.\479\ Second, mandatory swing pricing could benefit 
markets overall because it may reduce the first-mover advantage that 
arises from dilution associated with trading costs. As a result, the 
proposed amendment may mitigate the risk of runs on mutual funds and 
may decrease the risk of fire-sales for the funds' underlying 
investments.
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    \477\ In this section when we discuss trading costs, we refer to 
both direct (e.g., spread costs) and indirect trading costs (e.g., 
market impact costs).
    \478\ See BlackRock, Swing Pricing: The Dilution Effects of 
Investor Trading Activity on Mutual Funds (white paper, Oct. 2020), 
available at https://www.blackrock.com/corporate/literature/whitepaper/swing-pricing-dilution-effects-of-trading-activity-on-mutual-funds-october-2020.pdf. To our knowledge, such data on fund 
dilution are not available for the U.S. and we solicit data that 
could enable quantification of the benefits of swing pricing. See 
also supra section I.B and supra notes 59, 60, 61, and 161 for 
additional discussion of swing pricing experience in other 
jurisdictions.
    \479\ See supra section III.B.3 for a discussion of other 
sources that may contribute to dilution. We solicit comment on the 
relative impact of these sources on dilution. While the proposed 
swing pricing requirement is unlikely to reduce dilution associated 
with stale valuations directly, the proposed requirements would 
nevertheless help mitigate dilution resulting from trading costs 
associated with strategic trading behavior that may seek to take 
advantage of stale valuations.
---------------------------------------------------------------------------

    We believe that these benefits may be more pronounced in the case 
of net redemptions because dilution may be more severe when net 
redemptions occur. One reason for this asymmetry is that investor 
redemptions are required to be met within seven days, whereas the money 
a fund receives from new subscriptions is not required to be invested 
within a specific timeframe. Therefore, funds must incur the trading 
costs that exist during the seven days following investor redemptions, 
regardless of how large or small these costs are. On the other hand, 
while fund managers may generally accommodate new subscriptions by 
investing promptly to increase fund returns and reduce tracking error, 
they may also elect to wait to purchase investments at more 
advantageous prices or lower trading costs, resulting in lower dilution 
of non-transacting fund shareholders. Another reason for asymmetry in 
dilution from redemptions and subscriptions is that large redemptions 
can have a greater correlation across funds exposed to the same asset 
class in times of market stress, which in turn may induce more 
redemptions and further increase trading costs and associated 
dilution.\480\ Therefore, while swing pricing would reduce dilution 
from trading costs associated with both net subscriptions and 
redemptions, we believe that the magnitude of this anti-dilution 
benefit would be greater in the case of net redemptions.
---------------------------------------------------------------------------

    \480\ See, e.g., Dunhong Jin et. al., Swing Pricing and 
Fragility in Open-End Mutual Funds (working paper, revised Jan. 7, 
2021) available at https://ssrn.com/abstract=3280890 (retrieved from 
SSRN Elsevier database). Also see section III.B.3 and note 395 for 
additional research references.
---------------------------------------------------------------------------

    Another potential benefit of the mandatory swing pricing approach 
is that it would help overcome the collective action problem that may 
exist under the current optional framework and may have prevented 
voluntary swing pricing implementation due to the stigma that could be 
attached to being the first fund to implement swing pricing. To the 
extent that such a stigma effect is present in relation to swing 
pricing, it may deter investors from choosing funds that could 
implement swing pricing under the optional approach, and that could be 
a reason why no U.S. fund currently chooses to implement swing 
pricing.\481\ We also recognize that U.S. mutual funds are currently 
also allowed to implement certain purchase and redemption fee 
approaches (which do not necessarily require substantial operational 
changes in contrast to swing pricing), yet these funds do not widely 
use redemption fees as an anti-dilution tool, possibly because of any 
stigma attached to anti-dilution tools generally.\482\
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    \481\ While we recognize that swing pricing has been 
successfully implemented in other jurisdictions, these other 
jurisdictions do not have the same regulatory frameworks and 
investor base, which may influence investors' sentiment towards 
anti-dilution tools and the extent of the potential stigma effects. 
In addition, other jurisdictions do not have the same intermediary 
structures between funds and their investors as in the U.S. See 
supra section III.B.2.
    \482\ See supra note 67 (stating that, based on staff review of 
fund prospectuses, fewer than 5% of funds impose a redemption fee on 
at least one share class).
---------------------------------------------------------------------------

    The mandatory swing pricing requirement would impose costs on 
mutual funds, investors, their intermediaries, and other market 
participants. In addition to the costs associated with the proposed 
hard close requirement discussed below, mutual funds would experience 
initial and ongoing operational costs associated with developing and 
administering swing pricing policies and procedures, changing their 
systems to accommodate swing pricing, updating fund prospectuses, as 
well as any costs associated with educating investors about swing 
pricing procedures. These costs would ultimately be passed on to fund 
investors.
    To the extent that investors expect an increase in the costs of 
investing in mutual funds as a result of the proposed mandatory swing 
pricing, they may choose to divest from the mutual fund sector. To the 
extent that such investor outflows would be substantial, funds may 
experience a reduction in their economies of scale, which may lead to a 
further increase in fund fees. In addition, the mandatory swing pricing 
approach would reduce the set of investment choices available to 
investors, relative to the optional approach, where investors can 
choose to invest in funds that use swing pricing or funds that do not 
use swing pricing.
    The determination and application of a fund's swing factor could 
delay the publication and dissemination of the fund's NAV relative to 
current practices. To the extent that intermediaries require NAVs for 
purposes such as updating and publishing client account statements, 
they would incur costs updating their operations and systems to adapt 
to later NAV publication times. In addition, any other market 
participants, such as financial data aggregators, that depend on fund 
NAV publication would also incur costs updating their operations and 
systems to adapt to later NAV publication times.
b. Swing Threshold Framework
    The current rule permits a fund to determine its own swing 
threshold for net purchases and net redemptions, based on a 
consideration of certain factors the rule identifies.\483\ For a fund

[[Page 77258]]

experiencing net redemptions, the proposal would require the fund to 
apply a swing factor for any level of net redemptions. In addition, the 
proposed rule would establish a threshold for inclusion of market 
impact costs in its swing factor when net redemptions exceed 1% of the 
fund's net assets (the ``market impact threshold''). For funds 
experiencing net subscriptions, the proposal would require funds to 
apply a swing factor that accounts for all trading costs (i.e., 
including market impact costs) when net purchases exceed the threshold 
of 2% (the ``inflow swing threshold'').
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    \483\ The factors a fund currently must consider in determining 
the size of its swing threshold are: (1) the size, frequency, and 
volatility of historical net purchases or net redemptions of fund 
shares during normal and stressed periods; (2) the fund's investment 
strategy and the liquidity of the fund's portfolio investments; (3) 
the fund's holdings of cash and cash equivalents, and borrowing 
arrangements and other funding sources; and (4) the costs associated 
with transactions in the markets in which the fund invests. See rule 
22c-1(a)(3)(i)(B).
---------------------------------------------------------------------------

    Under the current rule, funds are able to tailor their swing 
pricing thresholds to their size, the characteristics of their 
underlying portfolio holdings, and the characteristics of their 
investor base. While this principles-based approach may be less 
burdensome for funds, some funds may find it suboptimal to implement 
swing pricing routinely due to the operational costs of doing so 
frequently. As a result, they may choose thresholds that reduce the 
frequency and impact of swing pricing on transaction prices for fund 
shares. This, in turn, could reduce the benefits of the proposed swing 
pricing requirement, including protecting non-transacting investors 
from dilution due to trading costs and reducing the first-mover 
advantage associated with such costs. Therefore, we believe that a 
uniform approach to swing thresholds would better protect non-
transacting investors in the mutual fund sector by ensuring that 
trading costs are passed on to transacting investors, regardless of 
which fund's shares investors hold in their portfolios.
    Trading costs incurred by a fund can be dilutive when a fund 
experiences either redemptions or subscriptions. However, as discussed 
above, subscriptions are likely to be less dilutive than redemptions. 
To the extent that determining the swing factor is costly, as discussed 
below, only requiring funds to do so when net subscriptions exceed 2% 
would limit the frequency with which funds incur such costs. Based on 
the analysis of historical daily fund flows in Table 3, a random fund 
on a random day has approximately a 1% chance of exceeding the inflow 
swing threshold. In addition, there were only 0.2% of days where more 
than 5% of funds in the sample experienced net subscriptions exceeding 
the inflow swing threshold.\484\ Therefore, we do not expect most funds 
to experience the costs of applying a swing factor in the case of net 
subscriptions frequently. The anti-dilutive benefits of swing pricing 
in response to net redemptions are likely to be more than those 
associated with net subscriptions, as discussed above. Therefore, we 
believe that applying swing factor on any day with net redemptions may 
benefit non-transacting investors compared to applying swing factor 
only when a certain threshold is crossed. However, to the extent that 
applying the swing factor more frequently is costly, these benefits may 
be offset by such costs.
---------------------------------------------------------------------------

    \484\ The analysis also shows that if the 99th percentile net 
fund flow is computed on each date, it exceeds the inflow swing 
threshold on approximately 34% of days.
---------------------------------------------------------------------------

    The proposed market impact threshold of 1% may result in varying 
costs and benefits for funds and their investors. For example, two 
funds that invest in underlying assets with similar liquidity 
characteristics may experience market impact at significantly different 
levels of redemptions, as measured in percentage, if they are 
significantly different in size. A 1% redemption from a fund with low 
AUM may not result in sales of assets that result in market impact, 
whereas a 1% redemption from an otherwise similar fund with 
significantly larger AUM might. Similarly, two funds with comparable 
levels of AUM holding investments with different liquidity 
characteristics may experience market impact at different levels of 
redemptions. For example, a large cap equity fund may not experience 
market impact at the 1% threshold, whereas a fixed income fund with 
comparable AUM might. As such, the extent to which a given fund and its 
investors benefit from evaluating market impact at the 1% threshold 
will vary based on factors such as the fund's size and the liquidity of 
its underlying investments. For funds that may experience market impact 
even when redemptions are below the 1% threshold, we note that funds 
can choose to incorporate market impact into their swing factor at a 
lower threshold than 1%. To the extent that calculating market impact 
may be costly, only requiring funds to do so when net redemptions 
exceed 1% would limit the frequency with which funds incur such costs. 
We estimate that a random fund on a random date has approximately a 
1.6% chance of exceeding the market impact threshold, and there were 
2.3% of dates where more than 5% of funds experienced net redemptions 
exceeding the market impact threshold.\485\
---------------------------------------------------------------------------

    \485\ An analysis of historical Morningstar daily fund flow data 
for equity and fixed income funds from 2009 through 2021 shows that 
the 1st percentile flow is approximately -1.6% while the 5th 
percentile flow is approximately -0.3%. The same analysis shows that 
the 1% market impact threshold corresponds to approximately the 
0.016 percentile of pooled daily net fund flows. The same analysis 
shows that if the 1st percentile fund flow is computed on each date, 
it exceeds the market impact threshold on approximately 84.6% of 
dates.
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c. Calculation of the Swing Factor
    The current swing pricing framework provides an upper limit of 2% 
for the swing factor and requires that the swing factor take into 
account only the near-term costs expected to be incurred by the fund as 
a result of net purchases or net redemptions that occur on the day the 
swing factor is used,\486\ as well as borrowing-related costs 
associated with satisfying redemptions; however, it does not specify 
how a fund should select investments for the purposes of estimating the 
trading costs and it does not require a fund to include market impact 
costs in the swing factor.\487\ We propose removing the current upper 
limit of 2% for the swing factor and requiring a fund's swing pricing 
administrator to make good faith estimates, supported by data, of the 
overall costs, including market impact costs under certain conditions, 
that the fund would incur if it purchased or sold a pro rata amount of 
each investment in its portfolio equal to the amount of net purchases 
or net redemptions (i.e., a vertical slice).\488\ Because a fund would 
need to calculate its costs based on the purchase or sale of a vertical 
slice of its portfolio, rather than selecting specific investments to 
be sold/purchased and estimating the cost of selling/purchasing those 
specific investments, we propose removing borrowing costs from the 
swing factor calculation.
---------------------------------------------------------------------------

    \486\ These near-term costs include spread costs, transaction 
fees, and charges arising from asset purchases or asset sales 
resulting from those purchases or redemptions.
    \487\ See rule 22c-1(a)(3)(i)(C).
    \488\ See proposed rule 22c-1(b)(2).
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i. Vertical Slice Assumption
    The vertical slice assumption may benefit investors of the affected 
funds. Specifically, the vertical slice assumption is designed to 
recognize the potential longer-term costs of reducing a fund's 
liquidity and would more fairly reflect the costs imposed by redeeming 
or purchasing investors than an approach that focuses solely on the 
costs associated with the instruments that a fund expects to buy or 
sell (or

[[Page 77259]]

expected borrowing costs, in the case of redemptions). For example, if 
investor redemptions continue for multiple days, a fund that sells its 
most liquid investments on the first day could experience increased 
trading costs on subsequent days because it has to sell a bigger 
fraction (relative to a vertical slice) of its less liquid assets. As a 
result, redeeming investors on subsequent days would be charged more 
than investors who redeemed on the earlier date via a higher swing 
factor. In addition, the future costs associated with rebalancing the 
fund portfolio to its pre-redemption level of highly liquid investments 
are not currently permitted to be incorporated into the swing factor 
because they are not near-term costs that may be considered under the 
current rule. Therefore, the proposed vertical slice assumption would 
help to ensure that redeeming investors bear not just the immediate 
trading costs they impose on the fund, but also, in cases where a fund 
sells its most liquid investments to meet redemptions first, the 
estimated transaction costs associated with rebalancing the fund's 
portfolio to its pre-redemption level of highly liquid investments, 
such that subsequent redeeming investors are not charged for the costs 
associated with past redemptions.
    We recognize that selling a vertical slice of a portfolio in order 
to meet investor redemptions may not be a practice used by all mutual 
funds during all times. For example, recent research documents that 
during tranquil market conditions, corporate bond funds tend to reduce 
liquid asset holdings to meet redemptions; however, when aggregate 
uncertainty rises these funds tend to scale down their liquid and 
illiquid assets proportionally to preserve portfolio liquidity.\489\ 
Another paper finds that some funds holding less liquid assets reacted 
to redemptions in March 2020 by adding to their cash buffers even after 
meeting investor redemptions, rather than selling their most liquid 
assets first or selling a vertical slice of their portfolio.\490\ 
Therefore, we recognize that the vertical slice assumption could result 
in using estimates of transaction costs in the calculation of the swing 
factor that differ from the estimated trading costs tailored to a 
different asset liquidation approach. As a consequence, to the extent 
that the trading costs estimated based on the vertical slice assumption 
are higher or lower than estimated trading costs of the fund's 
portfolio liquidation strategy, redeeming investors may be over- or 
under-charged relative to the immediate trading costs of a fund's 
actual liquidation strategy.
---------------------------------------------------------------------------

    \489\ See Hao Jiang, et al., Dynamic Liquidity Management by 
Corporate Bond Mutual Funds, J. Fin. & Quantitative Analysis 1622, 
no. 5 (Aug. 2021).
    \490\ See Andreas Schrimpf, et. al., Liquidity Management and 
Asset Sales by Bond Funds in the Face of Investor Redemptions in 
March 2020 (Mar. 17, 2021) available at https://ssrn.com/abstract=3799868 (retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

ii. Market Impact Costs
    We propose requiring funds to include a good faith estimate of 
market impact costs in the calculation of their swing factors when (1) 
net subscriptions are above the inflow swing threshold or (2) when net 
redemptions exceed the market impact threshold of 1%. To the extent 
that funds are able to forecast market impact costs accurately, this 
requirement would ensure that transacting investors bear, in addition 
to direct transaction costs, the estimated impact of their transactions 
on the ultimate price a fund pays or receives for any investments it 
buys or sells. This may allow non-transacting shareholders to recapture 
more of the dilution imposed on the fund by transacting fund investors. 
As a result, the proposed market impact inclusion may also help reduce 
first-mover advantage.
    Several factors may limit the anti-dilution benefits of including 
market impact costs in the swing factor. First, funds may incur costs 
in obtaining reasonable ex-ante estimates of market impact costs, 
either because they need to pay vendors for such estimates or because 
they need to exert costly effort to develop such estimates internally. 
These costs may ultimately be passed on to investors. Second, it may be 
difficult and sometimes not feasible to develop objective estimates of 
market impact for some of the investments that mutual funds hold, such 
as those that generally lack a robust and liquid secondary market 
(e.g., municipal securities and small-cap equities). In addition, 
market impact may be more difficult to estimate during periods of 
stress when trading in certain markets may be limited or stop. 
Therefore, funds may need to use subjective discretion to determine 
market impact estimates in certain circumstances, which may result in 
funds over- or under-estimating the true ultimate market impact costs 
associated with a given day's orders. This, in turn, would result in 
over- or under-charging transacting investors, exposing them to 
additional risk regarding the price at which they will ultimately 
transact their shares.\491\
---------------------------------------------------------------------------

    \491\ Transacting investors already face market risk when 
submitting an order to buy or sell fund shares because these orders 
must be submitted prior to the time at which a fund determines its 
NAV.
---------------------------------------------------------------------------

    Third, because funds would still have some discretion in 
determining their swing factors, such as discretion over which price 
impact model is used to estimate market impact, some funds may have an 
incentive to under- or overestimate their swing factors, depending on 
the circumstances. For example, a fund may choose to underestimate 
market impact, biasing the swing factor estimate downwards, in order to 
attract investors that prefer less volatile transaction prices for fund 
shares. On the other hand, funds may have an incentive to overestimate 
market impact and overcharge transacting investors relative to the 
trading costs they are expected to impose on the fund, because doing so 
may increase the performance of the fund.\492\ However, the proposed 
requirement that funds report each swing factor on Form N-PORT may 
mitigate any incentive funds have to under- or overestimate their swing 
factors, as it will provide public transparency regarding the size of 
these NAV adjustments.\493\
---------------------------------------------------------------------------

    \492\ When a fund overcharges transacting investors, the fund 
increases its assets and hence the performance of the fund.
    \493\ See supra section III.B.4.
---------------------------------------------------------------------------

iii. Removal of the Upper Limit on the Swing Factor
    The proposed removal of the upper limit on the swing factor may 
benefit fund investors by permitting swing pricing to address the 
dilution that transacting investors impose on a fund more fully. The 
magnitude of this benefit would depend on how often funds' trading 
costs exceed the current 2% swing factor. To the extent that trading 
costs are more likely to exceed this threshold during stressed periods, 
we expect this amendment to benefit non-transacting fund investors 
during such periods when dilution may be increasing, which may further 
address the first-mover advantage related to dilution from trading 
costs. In addition, to the extent that trading costs for certain types 
of funds are more likely to exceed the current 2% swing factor, the 
proposed amendment would ensure that investors in these funds are as 
protected from dilution as investors in funds for which trading costs 
generally correspond to a swing factor lower than 2%. These benefits 
may be partially offset because the removal of the upper limit for the 
swing factor may also have a destabilizing effect during periods of 
stress. For example, if investors expect that trading costs will 
continuously increase, and that the swing factor will

[[Page 77260]]

increase accordingly, they may be incentivized to redeem their shares 
at the onset of market stress, when the swing factor is lower.
iv. Removal of Borrowing Costs From the Swing Factor
    We propose removing borrowing costs from the costs that should be 
included in the swing factor. To the extent that the vertical slice 
assumption would result in higher magnitude swing factors, any decrease 
in swing factor magnitude due to the proposed removal of borrowing 
costs from the swing factor calculation may be fully or partially 
offset. Therefore, we do not expect this aspect of proposal to have 
substantial effects. Although affected funds would still be allowed to 
engage in bank or inter-fund borrowing in order to fund investor 
redemptions, the proposed swing factor calculation will not reflect 
potential borrowing costs for funds that do use borrowing to fund 
redemptions.\494\ To the extent that these costs are higher than the 
estimated costs of buying or selling a vertical slice of a fund's 
portfolio, they would be borne by investors remaining in the fund, 
limiting the anti-dilution benefits of the proposal.
---------------------------------------------------------------------------

    \494\ Fund borrowing may defer but not always eliminate the need 
for a fund to sell portfolio investments, as a fund will eventually 
have to re-pay the loan. As a result, a fund may incur borrowing 
costs in addition to trading costs, but only the latter would be 
captured by the adjustment of NAV by the swing factor under the 
proposal.
---------------------------------------------------------------------------

3. Hard Close Requirement
    With respect to putting swing pricing into practice, requiring a 
hard close would ensure that funds receive more timely flow 
information. Because swing pricing requires both fund flows and 
estimates of trading costs, requiring a hard close should reduce any 
flow estimation error that would otherwise occur if funds had to rely 
heavily on estimated fund flows in adjusting their NAV. In addition, by 
providing funds with more complete flow information, the hard close 
requirement could have auxiliary benefits unrelated to swing pricing, 
including settlement modernization, and order processing 
improvements.\495\ Also, a fund that knows its flows sooner may be able 
to plan and implement trading strategies to meet those flows in a more 
cost effective manner.
---------------------------------------------------------------------------

    \495\ See supra section II.C.3.a for additional discussion.
---------------------------------------------------------------------------

    The hard close requirement may change operational burdens for 
mutual funds and other parties related to mutual fund order processing. 
Currently, because mutual fund flows from different intermediaries and 
investors are received by funds at different times, fund transfer 
agents may have to process the orders in multiple batches that may span 
until the next day. On the one hand, if doing so is costly in terms of 
labor and/or strain on the processing systems and to the extent that 
these costs are non-negligible, the hard close requirement may decrease 
operational burden by allowing all orders to be processed within a 
shorter time frame. On the other hand, to the extent that processing 
all orders in a short amount of time, as it would be implied under the 
proposal, requires more manpower and/or more processing capabilities, 
the hard close requirement may increase operational burden of open-end 
fund transfer agents. This effect may be more pronounced for smaller 
transfer agents that do not enjoy economies of scale.
    In addition, the hard close requirement may allow funds to plan 
next-day and future activity related to today's redemptions or 
subscriptions more efficiently. For example, the hard close would in 
some cases improve the reliability of the flow information fund 
portfolio managers use by eliminating cancellations and corrections. In 
addition, if a portfolio manager uses flow information posted at the 
custodian, the hard close generally would provide timelier flow 
information. To the extent that these effects are present, the hard 
close requirement would allow funds to have timelier information that 
would permit them to plan and execute their trades in a more efficient 
manner. This, in turn, may reduce funds' tracking errors and may help 
prevent any error corrections or trade cancellations after the pricing 
time.
    However, requiring a hard close may impose significant switching 
costs (e.g., changing business practices, computer systems, integrating 
new technologies, etc.) on funds, their intermediaries, and service 
providers that could ultimately be passed on to investors. We recognize 
that these switching costs could be larger for certain types of 
intermediaries. For example, some intermediaries may have more layers 
of intermediation than others, and, therefore, would have to update 
more systems and processes. As another example, some intermediaries may 
have more reporting and recordkeeping requirements than others, and 
would have to update more systems and processes to comply with the hard 
close requirement. In addition, some intermediaries have their 
processes and systems set up such that the daily price information is 
required before any orders can be processed. For example, retirement 
plan recordkeepers and any affiliated brokers and trust companies, as 
well as DCS&S, would have to modify their processes and systems 
substantially, as these processes currently require daily price 
information for all investments prior to processing of any investment 
instructions from the plan participants. In addition, retirement plans 
may have to modify their provisions, and employers sponsoring these 
plans may need to modify payroll systems, as well as change the 
information (e.g., websites, manuals, and training materials) they 
provide to employees regarding how to submit orders, as a result of the 
hard close requirement.
    A substantial number of affected retirement plans are small in size 
as shown in Table 5. Therefore, a large number of small plans may be 
disproportionally affected by the implementation costs related to the 
proposed hard close because they may not enjoy economies of scale. To 
the extent that these costs are too large relative to the size of 
assets under management, some of the plans may cease to exist or choose 
to offer other investment vehicles such as ETFs or CITs. For example, 
in 2003, one commenter stated that one cost related to a hard close 
that was substantially similar to what we are proposing would be 
requiring submission of trades on sub-account levels rather than on an 
omnibus level, which would result in an incremental cost increase of 
$4.1 million per year for this commenter with 1.3 million of omnibus 
trades per year.\496\ To the extent that not all investors have a 
choice of intermediary, such as participants in employee-provided 
retirement plans, the costs stemming from the proposed hard close 
requirement may be borne by either investors (i.e., plan participants) 
or their employers that sponsor the plan.
---------------------------------------------------------------------------

    \496\ Comment Letter of Charles Schwab (Oct. 27, 2003) on 2003 
Hard Close Proposing Release, File No. S7-27-03, available at 
https://www.sec.gov/rules/proposed/s72703/s72703-2.pdf.
---------------------------------------------------------------------------

    In addition, to the extent that not all intermediaries may be able 
to comply with the hard close requirement, the investors that use these 
intermediaries may face a decreased ability to invest in mutual funds 
via certain intermediaries. To the extent that the strategies that 
open-end funds subjected to the proposed requirement cannot be 
replicated or to the extent that such replication would be more costly 
outside of the mutual fund sector (e.g., via a separately managed 
account), investors may end up with either less

[[Page 77261]]

diversified portfolios, or experience higher costs of investing.
    The hard close requirement may disadvantage certain investors that 
do not have a choice in their intermediary, if it precludes them from 
responding to market events after a specific cut-off time that is 
earlier than 4 p.m. ET or lengthens the amount of time for completing 
certain types of transactions \497\ compared to investors that submit 
orders directly to funds. For example, if an intermediary sets up a 
cut-off time for transactions that is earlier than the fund cut-off 
time (4 p.m.), investors in mutual funds that use these intermediaries 
will not be able to react to market events that take place between an 
intermediary cut-off and the fund cut-off time, thereby increasing a 
market risk for investors that trade via intermediaries with earlier 
cut-off times. However, investors that trade directly with a fund or 
use intermediaries with later cut-off times would have an advantage and 
still be able to respond to some or all market events during this time 
frame (depending on the applicable cut-off time), allowing them to 
decrease their market risk relative to investors that would be pushed 
to next-day pricing.
---------------------------------------------------------------------------

    \497\ See supra section II.C.3.d.
---------------------------------------------------------------------------

    In addition, to the extent that investors designate their employers 
to make retirement contributions to intermediaries via payroll 
procedures, and to the extent that payroll procedures have to be 
performed during a specific time frame in order for transaction to 
receive that day's price, the employers may experience a cost of 
switching the system to accommodate an earlier cut-off time for orders. 
These effects may be more pronounced for employers and investors in the 
western regions of the U.S. who may not have a sufficient time window 
to process contributions and/or (re)allocate their portfolios. In 
addition, to the extent that some intermediaries already impose an 
earlier cut-off time for investors' orders, the hard close may entail 
an even earlier cut-off time, which may further disadvantage investors.
    In addition, the proposed hard close might affect current order 
processing for funds of funds. We understand that an upper-tier fund in 
a fund of funds structure may not submit its purchase or redemption 
orders for lower-tier funds' shares until after 4 p.m. Under the 
proposed rule, the upper-tier fund would have to submit purchase or 
redemption orders for lower-tier funds' shares before the lower-tier 
funds' designated pricing time in order to receive that day's price for 
the orders.
    We are not able to quantify many of the costs of the hard close 
requirement for several reasons. First, we cannot predict how the costs 
would be allocated between funds and their intermediaries because we do 
not have detailed information about the number of intermediate steps 
required to be completed between the time an investor places an order 
and the time a fund receives this order for each type of an 
intermediary and which party currently bears the costs of each 
intermediate step. Second, we do not have granular data related to the 
current practices and operating costs for each intermediary type, both 
those that are regulated by the Commission and those that are not. 
Therefore, we cannot predict how their systems and practices would 
change in response to the hard close requirement and estimate the 
associated costs of these changes. Third, we cannot predict how many 
intermediaries will choose to upgrade their systems and processes in 
order to maintain their ability to offer mutual funds to the client, 
how many intermediaries will choose to impose an earlier cut-off time 
for investor orders, and the number of intermediaries that will retain 
their existing systems and order cut-off times and offer products that 
would not be subject to the proposed hard close requirement, such as 
CITs, ETFs, or closed-end funds in place of mutual funds. Finally, we 
cannot predict how many investors will respond to changes that 
intermediaries may implement in response to the hard close requirement 
by divesting from the mutual fund sector. We request comment on these 
costs of the hard close requirement, particularly any dollar estimates 
of the costs that funds, intermediaries, and other affected parties 
will incur as a result of the rule.
4. Commission Reporting and Public Disclosure
    The Commission is proposing to change reporting frequency of Form 
N-PORT, to change public availability of certain items on Form N-PORT, 
and to amend Forms N-PORT, N-CEN, and N-1A. The proposed amendments are 
intended to increase transparency around funds' activities related to 
liquidity management and anti-dilution tools and to make information 
more usable by filers, regulators, investors, and other potential data 
users. The proposed amendments would also provide more information 
about a fund's portfolio and its liquidity risk profile to investors, 
thereby improving their portfolio allocation decisions.
    Open-end funds will experience costs as a result of the proposed 
changes to the three forms. In connection with the proposed information 
collection requirements under the Paperwork Reduction Act, we estimate 
that the proposed changes to Form N-PORT would result in an internal 
cost increase of $2,472,356 and an external cost increase of 
$5,613,175, the proposed changes to Form N-1A would result in internal 
cost increase of $10,609,390; and the proposed changes to Form N-CEN 
would not on aggregate result in an increase of ongoing costs.\498\
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    \498\ See infra sections IV.D, IV.E, and IV.F. These annual 
direct costs include ongoing as well as initial costs, with the 
latter being amortized over three years.
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a. Commission Reporting Frequency
    Currently funds file Form N-PORT reports for the first, second, and 
third months of each fiscal quarter with the Commission 60 days after 
the end of the third month of the quarter. We are proposing to require 
funds to file Form N-PORT reports with the Commission within 30 days 
after the end of each month. We believe that this amendment would help 
the Commission to oversee funds' activities on a timelier basis. We do 
not expect this part of proposal to have substantial economic effects 
on funds, as funds already are required to maintain records of the 
information that Form N-PORT requires no later than 30 days after the 
end of each month and many funds report monthly information about their 
portfolio holdings on a voluntary basis to third party data 
aggregators, generally with a lag of 30 to 90 days, which in turn make 
them available to investors and other data users for a fee.\499\ To the 
extent it is less efficient for fund groups to submit on a more 
frequent monthly basis instead of in one batch after quarter-end, the 
costs borne by fund groups may marginally increase under the proposal.
---------------------------------------------------------------------------

    \499\ See rule 30b1-9. Also see section II.E.1.b. and note 287.
---------------------------------------------------------------------------

    The data the Commission would receive on Form N-PORT reports within 
30 days of month-end would include portfolio information which, 
depending on the fund, may not currently be public. To the extent this 
nonpublic information was subject to a data breach before its scheduled 
publication 60 days after month-end, unauthorized access could harm 
shareholders by expanding the opportunities for professional traders or 
others to exploit the information. However, the Commission has controls 
and systems for the use and handling of the proposed modified and new 
data in a manner that reflects the sensitivity of the data and is 
consistent with the maintenance of its confidentiality. In addition, as 
discussed below, many funds already

[[Page 77262]]

publicize their monthly holdings, which reduces the sensitivity of the 
information the Commission would store confidentially, and Form N-PORT 
reports would become publicly available 60 days after month-end.
b. Public Availability of Form N-PORT Data and Aggregate Liquidity 
Disclosure
    Currently, funds are required to make the report for the third 
month of every quarter available to the public. We are proposing to 
make funds' monthly reports on Form N-PORT public 60 days after the end 
of each monthly reporting period. We are also proposing to require an 
open-end fund to provide information regarding the aggregate percentage 
of its portfolio in each of the three proposed liquidity classification 
categories, which would become public on the same time frame.
    Public disclosure of aggregate liquidity classifications would help 
investors to assess the liquidity profile of the funds in which they 
are investing, and may be more useful to investors than the narrative 
liquidity disclosure the Commission adopted in 2018. The proposed 
disclosure may provide more information about a fund's liquidity risk 
profile to investors, thereby improving their portfolio allocation 
decisions. In addition, observing other funds' aggregate liquidity 
profiles might provide some information that is useful in a fund's own 
liquidity classification process. These benefits may be offset to the 
extent that liquidity classifications are not directly comparable 
across mutual funds, although the proposal would establish minimum 
standards that reduce the amount of discretion funds currently have in 
classifying their investments. We expect that funds will incur one-time 
and ongoing costs associated with preparing the portion of Form N-PORT 
associated with the aggregate liquidity profile, as discussed in 
section IV.
    The proposal would triple the amount of data made available to 
investors and other potential users on Form N-PORT in a given year. To 
the extent that investors currently are not able to obtain monthly 
portfolio data from other sources, such as fund websites or third-party 
data aggregators the proposed requirement would enhance the ability of 
investors to monitor funds' portfolios, which in turn may help 
investors to make more efficient investment decisions.\500\ Many funds 
report their monthly portfolios to third party data aggregators. 
Because the data made available to data aggregators is inconsistent 
across funds and time, the proposed amendment would increase 
consistency of portfolio data available to investors and other data 
users. To the extent that 60 days is not a long enough delay in 
disclosure of portfolio data, funds may be subject to predatory trading 
or ``copycatting activities'' that could potentially affect portfolio 
returns.\501\ This effect may be more pronounced for funds with more 
proprietary trading strategies.
---------------------------------------------------------------------------

    \500\ See e.g., Ji-Woong Chung et. al., Intended Consequences of 
More Frequent Portfolio Disclosure (working paper, Apr. 17, 2022), 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4086186 (retrieved from SSRN Elsevier 
database).
    \501\ A recent working paper examines the costs of Form 13F 
disclosure and finds that additional disclosure may harm portfolio 
returns over time. See David Kwon, The Differential Effects of the 
13f Disclosure Rule on Institutional Investors (working paper, May 
5, 2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4095482 (retrieved from SSRN Elsevier 
database).
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c. Other Amendments to Forms N-PORT, N-CEN, and N-1A
    We are proposing to remove the reporting requirement for swing 
pricing on Form N-CEN and replace it with a new reporting requirement 
on Form N-PORT that would require information about the number of times 
the fund applied a swing factor during the month and the amount of each 
swing factor applied. We are also proposing amendments to Form N-CEN to 
identify and provide certain information about service providers a fund 
uses to fulfill the requirements of rule 22e-4. In addition, instead of 
classifying an RSSD ID as an LEI, we propose to provide separate line 
items where a fund would report an RSSD ID, if available, in the event 
that an LEI is not available for an entity. We also propose to amend 
certain items and definitions on Form N-PORT to conform them to the 
proposed amendments. Finally, we propose to amend Item 11(a) of Form N-
1A to require, if applicable, that funds disclose that if an investor 
places an order with a financial intermediary, the financial 
intermediary may require the investor to submit its order earlier to 
receive the next calculated NAV. In addition, as a result of the 
proposed swing pricing requirement, funds would be required to disclose 
information about swing pricing in response to certain existing items 
in the form.\502\
---------------------------------------------------------------------------

    \502\ See Items 6(d), 4(b)(2)(ii), 4(b)(2)(iv)(E), and 13(a) of 
Form N-1A.
---------------------------------------------------------------------------

    The proposed amendments would increase transparency around funds' 
activities in several ways. First, additional information about funds' 
service providers would enable investors and other data users to assess 
fund liquidity management practices and help the Commission oversee the 
industry better. Second, information about swing pricing application 
can help the Commission and investors understand swing factor 
adjustments a given fund makes and evaluate how often a fund has any 
net redemptions or has net subscriptions of more than 2% and the amount 
of the swing factor adjustment.
    The proposed amendments would impose PRA costs, as discussed in 
above. Some funds may already maintain some of the information they 
would be required to report under the proposal in the ordinary course 
of business. However, we recognize that funds would incur some costs in 
reporting the information. We recognize that, due to economies of 
scale, such costs may be more easily borne by larger fund families, and 
that costs borne by funds would be passed along to investors in the 
form of higher fees and expenses. In addition, the proposed disclosures 
of each swing factor and the number of times a swing factor was applied 
may create incentives for funds to compete on this dimension. 
Specifically, investors who prefer lower variability in the value of 
their investments may move capital from funds that had high historical 
swing factors to funds with lower swing factors. However, while NAV 
swings penalize redeemers or subscribers under certain circumstances, 
they benefit investors remaining in the fund, which may make funds 
actively using swing pricing more attractive to longer term investors.
    The proposed amendments related to entity identifying information 
would help the Commission and market participants to identify entities 
related to funds' businesses more efficiently.

D. Effects on Efficiency, Competition, and Capital Formation

1. Efficiency
    The proposed amendments may affect allocative efficiency in several 
ways. First, the proposed changes to the liquidity classification 
methodology, proposed public disclosure of funds' aggregate liquidity 
classifications, and swing pricing disclosures are expected to benefit 
investors by reducing information asymmetries between funds and 
investors. To the degree that some investors may currently be 
uninformed about liquidity risks of funds' investments, the proposed 
disclosure requirements may increase transparency about liquidity costs 
transacting investors impose on remaining fund investors and liquidity 
risks in open-end funds. To the degree that greater

[[Page 77263]]

transparency about liquidity risk of mutual funds may lead some risk 
averse investors to use other instruments, in lieu of mutual funds for 
long-term investment, allocative efficiency may increase.\503\ In 
addition, the increased transparency may result in greater allocative 
efficiency as investors with low tolerance of liquidity risk and costs 
may choose to reallocate capital to funds that have lower liquidity 
risk and costs. Further, to the degree that uncertainty about the 
proposed swing pricing requirement may reduce the attractiveness of 
affected funds to investors, transparency about historical swing 
factors may reduce those adverse effects.
---------------------------------------------------------------------------

    \503\ See, e.g., Jennifer Huang et. al., Shifting and Mutual 
Fund Performance, 24 Rev. Fin. Stud. 2575, no. 8 (2011). The paper 
argues that if investors are not fully aware of risk-shifting 
behavior or if the changing risk level hampers their ability to 
assess fund performance, then individual portfolios are less likely 
to be efficient.
---------------------------------------------------------------------------

    Second, market efficiency for funds' underlying investments may 
increase, to the extent that the proposed amendments mitigate the risk 
of runs on open-end funds and decrease fire-sales for the funds' 
underlying investments. In addition, a potential shift in demand from 
illiquid to liquid investments may encourage the development of market 
structures that increase the liquidity of investments that are 
currently less liquid. For example, currently, only a fraction of 
traded bank loan interests has a standardized settlement process and 
transparent prices and quotations. To the extent that the proposed 
amendments would lead market participants to standardize and shorten 
the settlement process for bank loan interests, the prices and spreads 
for bank loans may become more transparent at a sector level, 
increasing the efficiency in this market. On the other hand, the 
proposed liquidity requirements may lead funds to allocate less to 
these investments. Absent other frictions, the difference in demand for 
these investments could be made up for by other investors or other the 
same investors through other structures (such as more direct 
investment). However, if this difference in demand is not fully 
absorbed by other market participants, the efficiency in this market 
may decrease.
    Third, the hard close requirement may make portfolio allocation 
less efficient for investors, to the extent that intermediaries used by 
these investors would impose an earlier cut-off time for orders and 
investors would not be able to reflect the entire day's market 
information into their allocation decisions. In addition, to the extent 
that certain types of orders would no longer be executed at today's 
prices and rather would be sent to funds the next day, investors may be 
exposed to additional market risk as well as potentially decreased 
portfolio returns because an intermediary may hold the cash from 
investors' orders submitted after the cut-off time (but before 4p.m. 
ET) until it could submit these orders at the end of the next day.
    The proposed amendments may affect funds' portfolio efficiency. For 
example, funds may start considering the liquidity of investments and 
their overall portfolios to a higher degree when making portfolio 
allocation decisions and considering other factors, such as an 
investment's risk and expected return, to a relatively lower degree. 
This may reflect an optimal choice, to the extent that funds' investors 
believe that illiquidity of a fund's portfolio is more costly relative 
to the cost of foregoing less liquid portfolio investments that may 
offer higher returns. On the other hand, if liquidity considerations 
lead to deviations from the fund's investment strategy or benchmark 
return, the proposed amendments may decrease the efficiency of funds' 
portfolios.
    The proposed daily classifications may also affect funds' portfolio 
efficiency. On the one hand, if daily fluctuations in market values of 
a fund's portfolio investments are large (and therefore the daily 
changes in the dollar value of the stressed trade size is also large) 
but revert to the mean within several days, liquidity classification 
for the same portfolio position may also fluctuate daily while 
eventually reverting to the mean. In this scenario, funds may start 
managing the portfolio positions inefficiently in order to be in 
compliance with the highly liquid investment minimum and the 15% limit 
on illiquid investments. On the other hand, daily classifications may 
increase informational efficiency of the funds' investments, to the 
extent that funds' demand for daily information results in increased 
availability of such information offered by third-party providers. As a 
result, funds' portfolio allocation decisions may become more 
efficient.
    The proposed amendments may also affect operational efficiency of 
funds and intermediaries. First, to the extent that the proposed 
removal of the less liquid category results in an increased 
standardization of settlement practices and a reduction of settlements 
times for bank loan interests and other investments that are currently 
classified as less liquid, a reduction in allowed settlement time for 
investments in order to qualify as moderately liquid investments may 
facilitate operational efficiency of funds that trade these 
investments. Second, the proposed removal of the less liquid category 
may facilitate operationalizing funds' swing pricing by reducing 
uncertainty related to trading costs for investments that are currently 
classified as less liquid. In particular, to the extent that open-end 
funds will become more certain about trades' settlement dates, it may 
allow them to more accurately estimate trading costs and, therefore, 
more accurately estimate the swing factor. Third, intermediaries may 
improve their order-processing systems as a result of the proposed hard 
close requirement, improving ongoing operational efficiency for both 
intermediaries and funds.\504\
---------------------------------------------------------------------------

    \504\ See supra section II.C.3 for additional discussion.
---------------------------------------------------------------------------

2. Competition
    The proposed amendments may affect the competitive landscape for 
open-end funds. There are two main economic effects discussed above 
that may cause the change in the competitive landscape for open-end 
funds: (1) cost increases for funds, fund managers, and fund 
administrators stemming from proposed changes in the liquidity risk 
management program, proposed mandatory swing pricing, and the hard 
close; and (2) additional constraints on funds' holdings of certain 
investments that could limit these funds' investment strategies due to 
proposed changes to funds' liquidity classifications, the proposed 
definition of illiquid investments, and proposed changes to the highly 
liquid investment minimum.
    Competition within the open-end fund sector may evolve as a result 
of the two effects stated above in several ways. First, to the extent 
that certain funds substantially change their investment strategies 
towards more liquid investments, the number of open-end funds that hold 
more liquid investments may increase, and competition among those funds 
for investors may increase. Conversely, competition among funds that 
hold less liquid investments may decrease. These effects depend also 
upon how investor demand for funds with liquid and illiquid investments 
may change with the proposed amendments. Second, to the extent that 
smaller open-end funds would experience a more substantial operational 
burden compared to larger fund complexes that exhibit economies of 
scale and may be able to set up their trading desks in a more efficient

[[Page 77264]]

manner,\505\ smaller funds may become less competitive than larger 
funds. As a result, smaller funds may decide to liquidate or to convert 
to other fund structures, such as ETF or closed-end structures, to the 
extent such conversion would be less costly compared to remaining a 
mutual fund. Third, to the extent that some open-end funds may 
currently deliver higher returns because they set a lower highly liquid 
investment minimum and reasonably anticipated trade size compared to 
other funds with similar investment strategies but higher highly liquid 
investment minimums and reasonably anticipated trade sizes, the 
proposed amendments to apply uniform minimum for the stressed trade 
size and highly liquid investment minimum may minimize such a 
competitive advantage in performance and level the field among open-end 
funds. Finally, to the extent that investors would prefer funds with 
less volatile transaction prices for fund shares under the proposed 
swing pricing requirement, funds with larger trading costs may become 
less competitive relative to the funds with smaller trading costs.
---------------------------------------------------------------------------

    \505\ See e.g., Gjergii Cici et. al., Trading Efficiency of Fund 
Families: Impact on Fund Performance and Investment Behavior, 88 J. 
Banking & Fin.1 (Dec. 22, 2015, rev. Jan. 12, 2016), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2514203. The 
authors find that by operating more efficient trading desks that 
help reduce trading costs, fund families improve the performance of 
their funds significantly relative to fund families with less 
efficient trading desks.
---------------------------------------------------------------------------

    Competition for investment flows between open-end funds and other 
collective investment vehicles within retail and institutional non-
retirement space may also be affected. To the extent that the proposed 
amendments reduce investor dilution and the liquidity risk of open-end 
funds, some investors may increase their holdings of open-end funds 
relative to other investment vehicles. That said, we also recognize 
that some investors may attach more importance to investing in less 
liquid investments through a pooled vehicle with the ability to redeem 
on a daily basis and may view potential costs of dilution as the price 
of shareholder liquidity.
    In addition, there are three reasons why investors may reduce their 
investment in open-end funds, making open-end funds less competitive 
with other types of investment vehicles, such as closed-end funds 
(e.g., interval funds), ETFs, or CITs. First, holding open-end funds 
may become relatively more costly compared to these other collective 
investment vehicles. Second, some investors may prefer to have holdings 
of less liquid investments, such as bank loan interests or investments 
that are valued using unobservable inputs that are significant to the 
overall measurement, such as long-dated currency swaps and three-year 
options on exchange-traded shares, within a collective investment 
vehicle structure. Third, some investors may be averse to the potential 
effects of the proposed swing pricing requirements, such as redeeming 
investors that may be charged for more than the dilutive costs they 
impose on the fund, as well as any investor averse to the increased 
uncertainty regarding the price at which the investor's fund 
transactions will ultimately execute.
    For these reasons, some open-end funds may decide to offer their 
existing strategies in alternative fund structures, such as ETF or 
closed-end fund structures instead of maintaining these strategies 
within open-end funds under the proposed rule.\506\ Funds may make such 
a determination if doing so would be more cost-efficient, if they 
anticipate that investors would prefer to invest in their strategies 
via these alternative structures, or if their existing strategies would 
no longer be viable under the proposed amendments that call for an 
increased share of more liquid investments in funds' portfolios. This 
may give fund complexes or other financial institutions that have more 
experience in these alternative structures a competitive advantage over 
those that do not. In addition, some open-end fund strategies may be 
more amenable to being migrated to other structures than others. For 
example, a passive open-end fund that does not rely on specialized 
skills or knowledge of a fund manager may be relatively easy to offer 
as an ETF. On other hand, while some active investment strategies are 
available as ETFs, funds may consider the structure less attractive if 
they consider the daily revelation of their holdings undesirable and 
they determine that obtaining the exemptive relief that would enable 
them to structure the fund as a non-transparent ETF would be too 
costly.\507\ Such funds may end up at a competitive disadvantage to 
those that can more easily offer their strategies in other structures 
under the proposal.
---------------------------------------------------------------------------

    \506\ To the extent existing mutual funds convert to ETFs, 
certain investors in these funds may incur long-term capital gains 
taxes as a result of such conversions.
    \507\ See Precidian ETFs Trust, et al., Investment Company Act 
Release Nos. 33440 (Apr. 8, 2019) [84 FR 14690 (Apr. 11, 2019)] 
(notice) and 33477 (May 20, 2019) (order) and related application 
(``2019 Precidian'') for an example of exemptive relief pertaining 
to non-transparent ETFs.
---------------------------------------------------------------------------

    Competition between open-end funds and other collective investment 
vehicles, such as ETFs, and CITs,\508\ as well as separately managed 
accounts, within the retirement space may also be affected. As 
discussed in section III.B.2, processes and systems related to 
executing investors' orders within their retirement plans require 
knowledge of NAVs prior to sending investors' trades to funds, and it 
may be costly to change these processes. To the extent that retirement 
plans can offer collective investment vehicles or ETFs that are not 
open-end funds but have similar investment strategies to open-end funds 
at a lower cost, open-end funds would become less competitive within 
the retirement sector. One type of a vehicle that offers similar 
investment strategies to open-end funds at a lower cost is CITs. CITs 
differ in certain respects, however. For instance, CIT fees are bespoke 
for each plan, meaning that fees are individually negotiated and a plan 
participant cannot roll a CIT investment to an IRA when leaving the 
plan. Recent analysis from ICI demonstrates that, as of 2018, among all 
assets held in 401(k) plans, mutual funds comprise 43% while CITs 
amount to 33%.\509\ To the extent that the proposed hard close 
requirement would make mutual funds more costly or difficult to trade 
relative to CITs, the share of CITs among retirement assets may further 
grow making open-end funds less competitive.
---------------------------------------------------------------------------

    \508\ CITs are an alternative to mutual funds for defined 
contribution plans. Like mutual funds, CITs pool the assets of 
investors and invest those assets according to a particular 
strategy. Unlike mutual funds, which are regulated under the 
Investment Company Act of 1940, CITs are regulated under banking 
laws and are not marketed as widely as mutual funds; which reduces 
their operational and compliance costs compared with mutual funds.
    \509\ See BrightScope/ICI working paper at 2.
---------------------------------------------------------------------------

    The proposed hard close requirement may have effects on competition 
among intermediaries. First, to the extent that intermediaries that are 
affiliated with fund complexes have an advantage in processing fund 
orders more swiftly compared to intermediaries that are not affiliated 
with the funds they offer, the former may not have to impose earlier 
order deadlines on investors, which would result in competitive 
advantage over intermediaries that are not affiliated with the funds 
they offer. Second, to the extent that larger intermediaries enjoy 
economies of scale and would be able to implement the hard close in a 
more cost-effective way relative to smaller intermediaries, smaller 
intermediaries may become less competitive as they may have to pass

[[Page 77265]]

the implementation costs on to their investors.
    To the extent that daily classifications would require a more 
frequent use of liquidity classification providers, demand for 
liquidity classification providers may increase. To the extent that 
funds would expand their outsourcing of liquidity classifications, 
competition among outside liquidity classification providers may 
increase. However, to the extent that some liquidity classification 
providers currently used by funds have operational capacity only for 
less frequent than daily provision of services, they may become less 
competitive compared to those that can provide the service on a daily 
basis.
    The proposed amendments may also affect competition in markets for 
funds' underlying investments. To the extent that open-end funds would 
change their overall portfolio towards more liquid investments as a 
result of the proposed amendments, and to the degree that such 
reallocation would be correlated across funds, competition in the 
markets for more liquid investments may increase, while competition in 
market for less liquid investments may decrease, which may further 
decrease the liquidity of these investments. For example, the proposed 
removal of the less liquid category may affect competition in the 
secondary market for bank loan interests. To the extent that open-end 
funds would demand bank loan interests that are more liquid and 
standardized in terms of the settlement process, competition in the 
bank loan market may be affected--both among the loan issuers and loan 
administrators. Specifically, increased demand for shorter settlement 
may drive bank loan market participants to compete with each other via 
offering shorter settlement for their trades, including among 
counterparties who are willing to contract for expedited settlement, to 
the extent that 15% of bank loan interests held by open-end funds \510\ 
is a substantial enough share of the bank loan market for funds to have 
bargaining power in this market. To the extent that settlement times do 
not improve as a result of this amendment, bank loan interests with 
longer settlement times may become less competitive with loan interests 
that have shorter settlement times. Third, to the extent that open-end 
fund investors would substitute funds that hold bank loans for funds 
that hold close alternatives, such as high-yield bond funds, as a 
result of the proposal, demand for funds holding these instruments may 
increase. In addition, to the extent that open-end funds become more 
limited in how much of bank loan interests they can hold directly, 
open-end funds may increase their holdings of CLOs, which in turn could 
increase demand for CLOs and competition among CLOs. Finally, to the 
extent that the demand for bank loan interests decreases as a result of 
the proposal, these instruments would become less competitive overall.
---------------------------------------------------------------------------

    \510\ See note 422 and accompanying text.
---------------------------------------------------------------------------

3. Capital Formation
    The proposed amendments may affect capital formation. First, to the 
extent that the above efficiency and competition effects result in 
investor outflows from the mutual fund sector, capital formation within 
the sector may be reduced, while capital formation via banks and trust 
companies, ETFs, or other vehicles may increase. Second, to the extent 
that open-end funds would demand more liquid investments, the capital 
formation for issuers of these investments may increase. On the other 
hand, to the extent that funds would become more limited in the amount 
of investments with lower liquidity profiles they are able to make 
(such as investments that are valued using unobservable inputs that are 
significant to the overall measurement and investments that are 
currently classified as less liquid and illiquid), the capital 
formation for issuers of investments that are currently classified in 
less liquid categories may decrease.
    For example, a recent paper \511\ shows that, although CLOs (the 
largest lender of leveraged loans) increase their purchases of 
outstanding bank loan interests in the secondary market at times when 
bank loan funds face outflows, they reduce their lending in primary 
market at the same time; which highlights the externality imposed by 
bank loan fund redemptions on capital formation for non-investment 
grade firms. Therefore, to the extent that open-end funds would hold 
fewer bank loans in their portfolios as a result of this amendment, the 
externality discussed above may be reduced and capital formation for 
non-investment grade firms could improve. On the other hand, to the 
extent that market settlement processes do not change, and to the 
extent that open-end bank loan funds are not converted to closed-end 
funds, the demand for bank loan interests may decrease, reducing 
capital formation for non-investment grade firms. This effect may be 
more pronounced for smaller issuers, to the extent that their 
securities are classified into less liquid categories more frequently 
compared to larger issuers.
---------------------------------------------------------------------------

    \511\ Thomas M[auml]hlmann, Negative Externalities of Mutual 
Fund Instability: Evidence from Leveraged Loan Funds, 134 J. Banking 
& Fin. (2022).
---------------------------------------------------------------------------

    Finally, the proposed amendments are expected to decrease the risk 
of fire sales of funds' underlying investments that may occur as a 
result of an increased selling pressure experienced by open-end funds 
during periods of high redemptions. This, in turn may increase 
confidence in markets for investments held in open-end funds' 
portfolios, thereby aiding capital formation for these investments.

E. Alternatives

1. Liquidity Risk Management
a. Stressed Trade Size and Significant Changes in Market Value
    Although tightening of inputs would reduce fund discretion in the 
methodology for liquidity classification relative to the baseline, 
funds would still have discretion in the use of models to calculate 
price impact under the proposal. One alternative that could alleviate 
this concern would be to define a list of investments that qualify as 
highly liquid investments explicitly, as well as the list of illiquid 
investments or to define liquidity of each security, regardless of its 
amount held by a fund. For example, we could define highly liquid 
investments similarly to the way Federal banking agencies define high 
quality liquid assets (``HQLA'') for the purposes of liquidity coverage 
ratio rules.\512\ This approach would simplify funds' compliance and 
may eliminate the need to calculate reasonably anticipated trade size 
or stressed trade size. As a result, an investment would be more 
consistently classified across funds, regardless of the amounts of this 
investment held by each fund. However, this approach would put the 
Commission in the position of determining the liquidity of each 
investment or investment type in the market, which may be difficult to

[[Page 77266]]

maintain over time and may over- or under-include securities that may 
demonstrate equal liquidity characteristics, as this alternative regime 
only covers HQLA and not all investments that could be held by a fund.
---------------------------------------------------------------------------

    \512\ See 12 CFR 50.20 (Office of the Comptroller of the 
Currency); 12 CFR 249.20 (Federal Reserve Board); 12 CFR 329.20 
(Federal Deposit Insurance Corporation). HQLA are composed of Level 
1 and Level 2 assets. Level 1 assets generally include cash, central 
bank reserves, Treasuries, certain agency securities, and certain 
marketable securities backed by sovereigns and central banks, among 
others. Level 2 assets are composed of Level 2A and Level 2B assets. 
Level 2A assets include, for example, certain debt guaranteed by a 
government sponsored entity or by a sovereign entity. Level 2B 
assets include, for example, investment grade corporate bonds, and 
publicly traded common equities that meet certain conditions, and 
investment grade municipal obligations. See also Bank for 
International Settlements (BIS), Basel Committee on Banking 
Supervision, LCR30 High-Quality Liquid Assets (final report, Dec. 
31, 2019), available at https://www.bis.org/basel_framework/chapter/LCR/30.htm?tldate=20191231&inforce=20191215.
---------------------------------------------------------------------------

    As an alternative, we could have proposed a higher level of STS. 
For example, an STS that is equal to 100% would assume a full 
liquidation of a position. Under this alternative, the classification 
of an investment would depend on the absolute value of the whole 
position rather than a percentage of a position. This approach may more 
accurately reflect liquidity needs during the times of increased 
redemptions, to the extent that funds sell their most liquid holdings 
first in order to meet redemptions.\513\ An STS that is higher than 10% 
but lower than 100% would have the effect that is similar but lower in 
magnitude. While a higher STS might better reflect that funds may need 
to sell a higher fraction of a particular investment than 10%, it 
nonetheless could be the case that a 10% STS is a better measure for 
determining liquidity under the proposed requirement for vertical slice 
assumption.
---------------------------------------------------------------------------

    \513\ For example, if a fund experiences net outflows equal to 
10% of its net assets, and the fund's highly liquid assets comprise 
20% of its portfolio, the fund would be able to fund all outflows 
with the proceeds from highly liquid assets. On the other hand, a 
10% STS would test whether 10% x 20% = 2% of the fund's holdings 
could be sold without significantly changing the price of these 
holdings in order to meet redemptions. In this scenario, the fund 
may need to sell additional holdings that may be more costly to 
trade due to their lower liquidity classification.
---------------------------------------------------------------------------

    As another alternative, we could have proposed a lower level of 
STS. To the extent that some funds currently set their reasonably 
anticipated trade size lower than 10%, these funds may experience less 
changes in the classifications of their investments, which may result 
in less portfolio adjustments in order to comply with the 15% limit on 
illiquid investments and the highly liquid investments minimum. 
However, we believe that the 10% STS has the advantage of simulating a 
stress event and would better prepare funds to accommodate redemptions 
during such events. We seek comment on whether a level of STS lower 
than 10% would be a more appropriate STS that would ensure funds 
classify their investments in a way that would safeguard the fund and 
its shareholders during stressed times.
    As another alternative, we could have proposed an STS that would 
depend on an individual fund's flows. For example, each fund could be 
required to use an STS that is equal to a certain percentile (e.g., 
99th percentile) of the fund's highest week of absolute flows or net 
outflows over a specified period of time (e.g., 3, 5, or 10 
years).\514\ Under this alternative, funds would have a liquidity 
classification approach that is more tailored to their strategy and 
investor base. This approach would be less discretionary compared to 
the baseline but more discretionary compared to the proposal. To the 
extent that some funds may never experience net outflows that amount to 
10% of their net assets, this alternative could be more appropriate for 
such funds. However, this alternative may result in inconsistent 
classifications among funds that have similar holdings. For example, if 
an established fund and a new fund have identical portfolios, the new 
fund would not have the same level of historical flows as the 
established fund, to the extent that the established fund existed 
during periods of stress and the new fund did not. This would result in 
two different STSs for identical funds.
---------------------------------------------------------------------------

    \514\ Basing the calculation on absolute, rather than net, flows 
would be designed to reflect that large inflows have the possibility 
of translating to similarly large outflows.
---------------------------------------------------------------------------

    As another alternative, we could have proposed an STS that would 
differ for funds with different investment strategies. For example, 
because during times of stress certain investments generally remain 
relatively liquid, we could have proposed a lower STS for funds with 
strategies that generally invest in more liquid assets, such as certain 
equities or government securities. However, under certain 
circumstances, large concentrations of any asset type (including those 
assets that are generally very liquid) held by a fund may weaken the 
fund's ability to dispose of such assets without a significant cost 
imposed on the fund's investors.\515\ Therefore, we believe that 
requiring funds with different types of strategies to have the same STS 
would appropriately prepare all funds for stress events. In addition, 
although this approach would be more tailored to net flows trends 
specific to particular types of funds, this alternative may result in 
inconsistent application of the STS because there is no single taxonomy 
of fund types and there would be limited utility in proposing a new 
taxonomy given the previously noted concerns about an approach that 
differs by fund type.
---------------------------------------------------------------------------

    \515\ For example, during Mar. 2020, the U.S. Treasury market 
became less liquid than usual.
---------------------------------------------------------------------------

    For determining whether a sale or disposition would significantly 
change the market value of an investment, we could have proposed a 
higher or lower value impact standard. For example, we could have 
proposed that a sale or disposition of less than or more than 20% of a 
security listed on a national securities exchange or foreign exchange, 
or a decrease in sale price of less than or more than 1% for other 
investments, would result in a significant change in market value. 
Setting a stricter test for what would constitute a significant change 
in market value may lead funds to classify investments as less liquid 
than under the proposed rule, and correspondingly, setting a more 
lenient test would lead to more liquid classifications. Because funds 
currently use different value impact standards today, increasing or 
reducing the thresholds in the rule may align with some funds' current 
practices, while the proposed rule may align with other funds' current 
practices. Therefore, any approach to defining the value impact 
standard would require some funds to change their current 
methodologies.
b. Amendments to Liquidity Classification Categories and Definitions
    As an alternative, we could have proposed an approach that provides 
additional time, beyond seven calendar days, for a sale to settle and 
convert to U.S. dollars before a fund must classify the investment as 
illiquid. For example, we could have proposed to define moderately 
liquid investments as those that a fund reasonably expects to be able 
to sell within seven days without a significant change in market value 
and to be convertible to U.S. dollars within an additional seven days. 
Under this alternative, all the economic effects of removing the less 
liquid investment category discussed above would still be present, 
however, their magnitude may be reduced. As a result, not as many bank 
loan funds would have to rebalance their portfolios towards shorter-
settlement loans and other investments, contract for expedited 
settlement, or restructure as a different investment vehicle. At the 
same time, the potential need to arrange expedited settlement to meet 
redemptions in the midst of market stress, as well as the potential 
borrowing costs a fund incurs to meet redemptions and the resulting 
dilution of fund investors, would not be reduced by as much as it would 
under the proposal. Therefore, we believe that aligning the time it 
takes to receive proceeds from the trade with the statutory requirement 
to meet investor redemptions within seven days would be a more 
economically sound step towards helping to ensure funds can meet 
redemptions within seven days and reducing investor dilution.
    We could have proposed that a fund start measuring the number of 
days in

[[Page 77267]]

which it reasonably expects a stressed trade size would be convertible 
to U.S. dollars without significantly changing its market value after 
the date of classification, instead of on the date of classification as 
proposed. Under this alternative, funds' liquidity classifications 
would be marginally less liquid. We understand some funds are using 
this method of counting the number of days currently and would not have 
to make any changes to their methodology; however, those funds that 
begin counting on the date after classification would need to make 
changes and their classifications would be more liquid than they are 
currently. We believe that funds should measure days consistently in 
order to help funds meet redemptions within seven days without 
significant trading costs.
c. Frequency of Liquidity Classifications
    As an alternative, we could have proposed to require classification 
on a less frequent basis, for example, weekly. Under this alternative, 
funds would have less operational burden relative to the proposed daily 
classification requirement. In addition, to the extent that portfolio 
allocations of funds are noisy on a daily basis due to, for example, 
trading related to tracking errors or inability to invest newly 
incoming cash from investors immediately, weekly classifications may be 
more appropriate from an operational perspective. However, weekly 
classifications could reduce the effectiveness of the rule by delaying 
the identification of significant liquidity issues, such as a rise in 
illiquid investments or a drop in highly liquid investments, 
particularly at the onset of market stress when a fund might begin to 
face increasing levels of redemptions. Therefore, we believe daily 
classifications would promote better monitoring of a fund's liquidity 
and ability to more rapidly understand and respond to changes that 
affect the liquidity of the fund's portfolio.
d. Definition and Calculation of Highly Liquid Investment Minimum and 
Proposed Limit on Illiquid Investments
    As an alternative, we could have proposed different highly liquid 
investment minimums for different type of funds, with lower highly 
liquid investment minimums for funds with strategies that generally 
invest in more liquid assets, such as equities or government 
securities. However, under certain circumstances, large concentrations 
of any asset type (including those assets that are generally very 
liquid) held by a fund may weaken the fund's ability to dispose of such 
assets without a significant cost imposed on the fund's investors.\516\ 
Therefore, we believe that requiring funds with different types of 
strategies to have a highly liquid investment minimum of at least 10% 
would appropriately prepare all funds for stress events. In addition, 
although this approach would be more tailored to net flows trends 
specific to particular types of funds, this alternative may result in 
the inconsistent application of highly liquid investment minimums 
because there is no single taxonomy of fund types and there would be 
limited utility in proposing a new taxonomy given the previously noted 
concerns about an approach that differs by fund type.
---------------------------------------------------------------------------

    \516\ See note 515.
---------------------------------------------------------------------------

    As another alternative, we could have proposed to require funds to 
maintain a highly liquid investment minimum that is lower or higher 
than the proposed 10% minimum, such as a minimum of at least 5% or 15%. 
A lower required threshold would require fewer changes to some funds' 
portfolios and would be less likely to affect performance. However, a 
lower minimum would result in funds being less prepared to meet 
redemptions in stressed periods. A higher highly liquid investment 
minimum would better ensure that a fund can meet redemptions in 
stressed periods, but would require more significant changes to some 
funds' portfolios and would likely have a larger effect on fund 
performance. Further, to the extent that certain funds would benefit 
from a highly liquid investment minimum that is greater than 10% 
because, for example, they have a concentrated shareholder base, such 
funds could establish a higher minimum under the proposal. Similarly, 
we considered a lower limit on a fund's illiquid investments, such as a 
5% or 10% limit. The alternatives would further limit a fund's ability 
to acquire illiquid investments, which would limit the mismatch between 
the time a fund must pay redemptions and the time it can sell its 
investments without significant dilution. However, lowering the limit 
on illiquid investments while also expanding the definition of illiquid 
investment would more significantly affect funds that currently invest 
in less liquid investments.
    As another alternative, we could have proposed to define 
investments used for collateral and margin purposes of moderately 
liquid and illiquid investments as moderately liquid and illiquid 
respectively. However, by reducing the fund's highly liquid investments 
by the value of amounts posted as margin or collateral, the proposed 
approach would avoid burdens associated with tracking specific 
securities posted as margin or collateral and reclassifying investments 
as they are posted as margin or collateral and recalled. The proposed 
approach also would not understate the liquidity of securities that are 
posted as margin or collateral because each security would continue to 
be classified based on its own characteristics rather than based on the 
characteristics of the derivative it is tied to, and instead the 
adjustments would only be made at the aggregate level.
2. Swing Pricing
    This section discusses alternatives to the proposed swing pricing 
requirements. These alternatives include variations on the swing 
pricing requirements, variations on the thresholds used to determine 
the swing factor, and tools other than swing pricing that may achieve 
some of the same anti-dilutive goals of the proposed rule. These 
alternatives could be used independently or in combination with each 
other, and also could be paired with a hard close or the alternatives 
to the hard close we discuss in the next section, depending on the 
degree to which a given alternative does or does not require a fund to 
have complete order flow information at the time a fund strikes its 
NAV.
a. Alternative Approaches Within the Swing Pricing Framework
    As an alternative, we could have proposed different thresholds for 
net redemptions, net subscriptions, and inclusion of market impact. For 
example, we could have required funds to adjust the NAV only when net 
redemptions exceed a specified swing threshold, allowing funds to not 
adjust the NAV at all when redemptions are low in magnitude, as the 
proposal does for net subscriptions. To the extent that determining a 
swing factor is costly, only requiring funds to do so when net 
redemptions exceeded a threshold would limit the frequency with which 
funds incur such costs. However, because net redemptions are likely to 
dilute fund shareholders by a larger magnitude compared to net 
subscriptions, such an alternative may forego some of the benefits non-
transacting fund shareholders would be expected to receive under the 
proposal.
    The proposal also could have used a different market impact 
threshold, or no threshold, requiring that funds always include market 
impact in their swing factor calculations. A higher (lower) market 
impact threshold would reduce (increase) the number of days for which

[[Page 77268]]

affected funds must calculate market impact costs for their portfolio 
investments, reducing (increasing) any related costs and operational 
challenges. However, a higher (lower) market impact threshold would 
also reduce (increase) the amount of dilution from redemptions that is 
recaptured by funds and accrued to non-transacting shareholders, 
assuming some funds do not opt to set lower market impact thresholds, 
as permitted under the proposal.
    Similarly, the proposal could have used a different swing threshold 
for net subscriptions, or no threshold, requiring that funds always 
adjust their NAV in response to net subscriptions. A higher (lower) 
threshold for net subscriptions would reduce (increase) the number of 
days for which affected funds must calculate swing factors, reducing 
(increasing) any related costs and operational challenges. However, a 
higher (lower) threshold for net subscriptions would also reduce 
(increase) the amount of dilution from subscriptions that is recaptured 
by open-end funds and accrue to non-transacting shareholders, assuming 
some funds do not opt to set lower threshold for net subscriptions, as 
permitted under the proposal.
    As another alternative, we could have required that funds only 
apply a swing factor when they experience net redemptions rather than 
requiring that they also apply a swing factor when net subscriptions 
exceed 2%. Removing the requirement that funds apply a swing factor for 
net subscriptions would remove any operational costs funds may incur in 
implementing swing pricing for net subscriptions and may reduce the 
uncertainty that subscribing investors face regarding the share price 
at which their subscription orders will ultimately transact. However, 
while we recognize that subscriptions tend to be less dilutive than 
redemptions, the trading costs incurred by funds to accommodate 
subscriptions can still be dilutive. Therefore, non-transacting 
investors would be exposed to more dilution risk under this 
alternative.
    As an alternative, the proposal could have also permitted funds to 
use a default swing factor (e.g., 2% or 3%) when estimating trading 
costs accurately may be more difficult, such as in times of market 
stress. A fund's swing pricing administrator, adviser, or a majority of 
the fund's independent directors could be permitted to determine 
whether market conditions are sufficiently stressed to invoke this 
default swing factor. This alternative could benefit investors by 
mitigating shareholder dilution during periods of increased market 
uncertainty when standard analyses that funds use to estimate trading 
costs may fail to capture these costs accurately, to the extent that 
the standard analyses result in underestimation of trading costs. 
However, this alternative would provide funds with more discretion in 
determining when their swing factor applies in a way that is less 
transparent and consistent for fund shareholders, which increases the 
chance that funds may take advantage of such discretion in order to 
boost the performance of a fund. In addition, a default swing factor 
may not be a good approximation of the actual trading costs a fund will 
incur during the periods it is applied, which could either overcharge 
transacting investors relative to the trading costs they impost on a 
fund or undercharge transacting investors, limiting the extent to which 
non-transacting shareholder dilution is mitigated.
    As another alternative, the proposal could have defined the market 
impact threshold or inflow swing threshold on a fund-by-fund basis, 
with a reference to a fund's historical flows. For example, each fund 
could have been required to determine the trading days for which it had 
its highest outflows over a set time period, and set its market impact 
threshold based on the 1-5% of trading days with the highest 
redemptions. Similarly, each fund could have been required to determine 
the trading days for which it had its highest inflows or outflows over 
a set time period, and set its inflow or outflow swing threshold based 
on the 1-5% of trading days with the highest redemptions or 
subscriptions. While this alternative could allow funds to customize 
their swing thresholds to their historical flows, such an alternative 
may create strategic incentives for fund complexes to open and close 
funds depending on historical transaction activity. For example, to the 
degree that the estimation of market impact factors or other trading 
costs may be costly, or to the extent that investors prefer funds that 
do not apply swing factors as frequently, fund families may choose to 
close funds that experienced high redemptions to avoid the application 
of market impact factors. In addition, allowing funds to determine 
their own thresholds based on historical data may lead to less 
comparability across funds with respect to when investors expect funds 
to incorporate market impact or swing their NAV in response to net 
subscriptions or net redemptions.
b. Alternatives to Swing Pricing
i. Liquidity Fees \517\
---------------------------------------------------------------------------

    \517\ See also section II.D.1.a for additional discussion of 
liquidity fee alternatives.
---------------------------------------------------------------------------

    As an alternative to the proposed swing pricing requirement, we 
could have proposed to require funds to charge liquidity fees to 
transacting investors. There are various types of fees that we 
considered, which are discussed below.
(a) Dynamic Liquidity Fee
    As an alternative, we could have proposed a dynamic liquidity fee 
that could, in principle, be equivalent to swing pricing from the point 
of view of the transacting investor. For example, this alternative 
could charge transacting investors the estimated trading, spread, and, 
in some cases, market impact costs associated with their subscription 
or redemption activity, allowing remaining shareholders to recoup these 
costs and mitigate dilution. Under this alternative, like under the 
proposed swing pricing framework, a fund would be required to determine 
a given day's liquidity fee for subscribers or redeemers based on the 
fund's net flows. Specifically, on a day with net redemptions 
(subscriptions), the fund would determine a liquidity fee that reflects 
the costs redeeming (subscribing) investors are expected to impose on 
the fund and would only charge redeeming (subscribing) investors the 
fee.
    From an economic (namely non-operational) perspective, the 
difference between a liquidity fee and swing pricing is the effect on 
subscribing (redeeming) investors when a fund experiences net 
redemptions (subscriptions) and how the anti-dilution benefit is shared 
among transacting and non-transacting fund investors. Specifically, 
under swing pricing, in the case of net redemptions, subscribing 
investors would purchase fund shares at a discount relative to the NAV 
because there will be only one transaction price for fund shares 
determined by swing pricing. Similarly, in the case of net 
subscriptions, redeeming investors would receive a premium for their 
redeemed shares because the transaction price for fund shares would be 
adjusted above the NAV. As a result, some of the recouped dilution 
costs from net redemptions (subscriptions) are diverted to other 
transacting investors--subscribers (redeemers)--rather than to non-
transacting fund investors.\518\ If the fund

[[Page 77269]]

charges a liquidity fee, on the other hand, subscribing (redeeming) 
investors would not be purchasing (selling) fund shares at a discount 
(premium) in the case of net redemptions (subscriptions). Instead, the 
fee would be borne by redeemers (subscribers) without the commensurate 
benefit to subscribers (redeemers) and would fully accrue to the fund 
instead.\519\ From this perspective, a liquidity fee may be fairer to 
redeeming (subscribing) fund investors in the case of net redemptions 
(subscriptions) compared to swing pricing. In addition, relative to 
swing pricing, liquidity fees would be more transparent regarding the 
liquidity costs transacting investors are charged and would not change 
day-to day fund returns that investors observe.\520\
---------------------------------------------------------------------------

    \518\ Under the proposed swing pricing requirement, a fund would 
still recoup the full dilution costs associated with net redemptions 
by charging redeemers for both the dilution cost of redemptions as 
well as the cost of allowing subscribers to fund shares at a 
discount when the fund experiences net redemptions. Similarly, a 
fund would still recoup the full dilution costs associated with net 
subscriptions by charging subscribers for both the dilution cost of 
subscriptions as well as the cost of allowing redeemers to sell 
shares at a premium when the fund experiences net subscriptions in 
excess of 2%.
    \519\ See e.g., Eaton Vance Comment Letter at https://www.sec.gov/comments/s7-16-15/s71615-151.pdf for a description of 
mechanics and an assertion that fees are economically superior.
    \520\ We recognize that while swing pricing may change the 
returns that investors see on a daily basis, it would not change 
monthly returns and returns reported on a fund's statement relative 
to a fee.
---------------------------------------------------------------------------

    However, liquidity fees may be more operationally challenging to 
implement relative to the proposed swing pricing requirement. With 
swing pricing, a fund can pass liquidity costs on to redeeming or 
purchasing investors via downward or upward adjustments in the NAV to 
determine the transaction price for fund shares, with intermediaries 
receiving this price at the end of the trading day. With a liquidity 
fee, however, a fund would have to rely on intermediaries to pass the 
liquidity costs on to transacting investors, which may involve greater 
operational complexity for intermediaries compared to swing pricing. 
While we recognize that some funds and their intermediaries are 
currently able to apply redemption fees under rule 22c-2, applying 
dynamic liquidity fees that may change in size from day-to-day may 
involve greater operational complexity and costs. For instance, 
liquidity fees may require more coordination with a fund's 
intermediaries because these fees need to be imposed on a transaction-
by-transaction basis by each intermediary involved--which may be 
difficult with respect to omnibus accounts that intermediaries may 
create to aggregate all customer activity and holdings in a fund. We 
could instead require intermediaries to submit purchase and redemption 
orders separately to transact in a fund's shares, as some 
intermediaries already do. This could allow funds or their transfer 
agents to apply fees directly, but this type of requirement would also 
require some intermediaries to make operational changes because they 
would no longer be able to net otherwise offsetting customer purchases 
and redemptions.
    As noted above, this type of dynamic fee would depend on fund flow 
information. A dynamic fee could be applied at the time of an investor 
transaction, in which case a hard close would still be required so that 
a fund has complete flow information by the time the NAV is struck, 
allowing the fund to determine the corresponding dynamic fee. 
Alternatively, the fee could be processed separately and applied to an 
investor's account on a delayed basis, obviating the need for a hard 
close because funds would no longer need complete flow information at 
the time of the initial investor transaction.\521\ Delayed application 
of the fee, however, may raise complications related to collecting fee 
amounts from investors, particularly when an investor has otherwise 
redeemed the full amount of its holdings. Follow-on fees also 
significantly increase the number of transactions to process, and may 
complicate reporting for custodians and advisers in situations where a 
transaction may occur in one reporting period but the fee related to 
the transaction is not applied until the next reporting period. In 
addition, an intermediary may face difficulties projecting upcoming 
cash balances in its client accounts if there are upcoming fees to be 
charged, but the amounts of those fees are unknown. The fund itself may 
also have challenges with projecting its own cash balance if it cannot 
predict when accrued fees will be received from each intermediary.
---------------------------------------------------------------------------

    \521\ See also section II.D.1.a for additional discussion of 
delayed fee application.
---------------------------------------------------------------------------

(b) Set Fee
    Another alternative could be a simple fee framework that would 
require funds to charge a set fee of a specified percentage of the 
transaction (e.g., 1%). This fee could be designed to either apply for 
all investor transactions, apply if redemptions or subscriptions exceed 
certain thresholds, or apply only on the redemption side or only on the 
purchase side. Such an alternative could reduce the operational burdens 
imposed on funds with respect to estimating trading costs and market 
impact and, in the case of a fee that is always charged, also would not 
require that a fund receive full order flow data before its NAV is 
struck. However, this alternative could also lead funds to over- or 
under-charge transacting investors because the trading costs a fund 
experiences for a given level of net redemptions or subscriptions may 
vary nonlinearly with the size of net redemptions or net subscriptions. 
For example, a fund trading to accommodate relatively small redemptions 
or subscriptions would most likely not result in market impact costs, 
while accommodating substantial redemption or subscription activity 
might result in market impact costs. As a result, a fund might 
undercharge transacting investors relative to the trading costs their 
activity imposes on a fund in cases when the set fee is lower than the 
trading costs implied by the fund's aggregate investor activity. 
Therefore, in such instances this alternative may be less effective 
than swing pricing at mitigating dilution. Similarly, a fund might 
overcharge transacting investors relative to the trading costs their 
activity imposes on a fund in cases when the set fee is higher than the 
trading costs implied by the fund's aggregate investor activity, non-
transacting investors are enriched at the expense of transacting 
investors. If such a set fee could be calibrated correctly, the effects 
of under- or over-charging transacting investors might offset each 
other. However, perfectly calibrating a fee would require that a fund 
correctly forecast the likelihood and magnitude of net redemptions and 
net subscriptions, as well as the corresponding trading costs 
associated with such flows, which may not be feasible.
(c) Fee Adjusted for Bid-Ask Spreads or Other Transaction Costs
    Relatedly, another simpler liquidity fee alternative could still 
use fees that are dynamic in the sense that they respond to market 
conditions such as bid-ask spreads or other known transaction costs 
associated with trading underlying investments, but are not tailored to 
the order flow a fund receives on a given day. For example, a fund 
could charge a liquidity fee on both subscriptions and redemptions on a 
given day that reflects the estimated costs of buying and selling the 
fund's underlying assets, respectively, excluding factors that depend 
on order flow, such as market impact. Such an alternative would still 
require funds to estimate trading costs, but would not require that a 
fund receive full order flow data before its NAV is struck. 
Economically, this alternative is equivalent to dual pricing, discussed

[[Page 77270]]

below, which instead charges these costs by establishing separate 
transaction prices for subscriptions and redemptions.
(d) Liquidity Fee When Trading Costs Significantly Increase \522\
---------------------------------------------------------------------------

    \522\ See also section II.D.3.b for additional discussion of 
this alternative.
---------------------------------------------------------------------------

    As another alternative, we could have proposed a liquidity fee that 
would only apply under certain conditions, such as when trading costs 
are significantly above those typically experienced. Under this 
approach, either the Commission could define the circumstances that 
would trigger the fee or funds could define the conditions under which 
the fee would apply. In the latter case, a fund would establish written 
policies and procedures designed to mitigate dilution and recoup the 
costs the fund reasonably expects to incur as a result of shareholder 
redemptions.
    In both scenarios, this alternative may be less costly for funds 
relative to the above alternatives, to the extent that applying the fee 
less frequently is less operationally burdensome. Under this 
alternative, funds would be able to recoup trading costs when these 
costs significantly increase (e.g., during periods of market stress), 
without increasing the costs of operation during other times. The 
benefits of this approach to investors would depend on the relative 
magnitude of dilution realized during normal periods when trading costs 
are not significantly increasing versus the cost of applying an anti-
dilution tool on a daily basis. To the extent that dilution during 
normal times is negligible while the operational burden of applying the 
fee is not, a fee that applies only when trading costs increase 
significantly may benefit fund investors. However, to the extent that 
dilution during normal times can accumulate to a significant amount 
over time, fund investors would not be protected against it. The 
benefit of this alternative would also depend on whether the specified 
conditions that trigger the fee could be anticipated by investors prior 
to the fund imposing the fee. To the extent that investors would be 
able to forecast that a fund is moving closer to the fee trigger, they 
may decide to preemptively redeem their shares before the fee is 
initiated, potentially exacerbating the first-mover advantage and 
contributing to further fund stress.
    The economic tradeoffs of this alternative would also depend on 
whether a fund defines the circumstances under which the fee would 
apply or the Commission would define such circumstances. Under the 
first scenario, funds would be able to tailor the triggers to their 
specific circumstances, such as the fund size, the portfolio 
characteristics, and investor base composition, as well as the 
historically observed dilution. As a result, funds may be better 
equipped to protect their investors during times of increased trading 
costs. However, under this scenario, fund discretion over the fee 
triggers may result in some funds defining triggers in a suboptimal way 
in order to compete with similar funds for investors. Under the second 
scenario, funds would not have such discretion, which could better 
protect investors from dilution. However, because mutual funds vary 
significantly in their portfolios and sizes, it would be challenging to 
establish a trigger that is not dependent on timely flow information 
and would equally protect investors of all funds from dilution.
(e) Liquidity Fee for Funds That Are Not Primarily Highly Liquid When 
Trading Costs Increase Significantly
    As another alternative, we could have proposed a liquidity fee only 
for certain types of funds. For example, we could have proposed a fee 
that funds that are not primarily highly liquid (e.g., funds that hold 
less than an identified percentage of their portfolio in highly liquid 
assets, such as less than 50%, 66%, or 75%) would be required to impose 
during periods of increased trading costs. Under this alternative, 
affected funds and their investors would experience similar benefits 
and costs as in the alternative above. However, the aggregate magnitude 
of these effects would be smaller because it would not affect all 
mutual funds. To the extent that funds that invest primarily in highly 
liquid investments do not experience trading cost increases that are as 
substantial as all other funds during periods of market stress, this 
alternative may benefit investors in primarily highly liquid funds by 
not imposing additional costs related to establishing policies and 
procedures related to the liquidity fee. However, all funds would have 
to establish procedures for monitoring whether they hold primarily 
highly liquid investments or not.
    The cost savings of this alternative relative to the alternative 
that would require a fee for all funds during periods of increased 
trading costs would depend on how often highly liquid investments may 
become temporarily less liquid. To the extent that funds expect certain 
investments that are highly liquid during normal times to become less 
liquid during stress periods, these funds may have to preemptively 
establish compliance around the liquidity fee implementation. This 
effect would be more pronounced for funds that are near the 50% 
threshold.
    This alternative may also affect competition in the mutual fund 
sector, to the extent it could make investment in mutual funds that are 
not primarily highly liquid less attractive to investors. In addition, 
some funds may exit some of their moderately liquid and illiquid 
investments in order to fall under the definition of primarily highly 
liquid. This, in turn, may make markets for moderately liquid and 
illiquid investments more illiquid and negatively affect capital 
formation for these investments.
ii. Dual Pricing \523\
---------------------------------------------------------------------------

    \523\ See also section II.D.1.b for additional discussion of 
this alternative.
---------------------------------------------------------------------------

    As an alternative to the proposed swing pricing requirement, we 
could have required that funds implement dual pricing, which is used in 
some other jurisdictions. Dual pricing would effectively set two 
transaction prices for a fund: one price for purchases and another for 
redemptions. The price adjustments for the funds' shares could either 
be constant or calculated to reflect the estimated costs of buying and 
selling the fund's underlying investments, excluding factors that 
depend on order flow, such as market impact. The first approach would 
be similar to one of the set fee alternative discussed above, as it 
would be less reliant on fund flow information than the proposed swing 
pricing requirement, but the charge imposed on transacting investors 
would also less accurately reflect the specific liquidity features of 
the fund's current investments in light of the size of the redemptions 
the fund is experiencing. As an example of the second approach, a fund 
would set its purchase price to be the fund's NAV on that day plus an 
amount that reflects the potential trading costs such as bid-ask 
spreads that subscriptions impose on a fund given current market 
conditions, and exclude factors such as market impact that may require 
knowledge of the fund's order flow on that day. Similarly, the 
redemption price of a fund share would be the fund's NAV minus an 
amount that reflects the potential trading costs redemptions would 
impose on a fund given current market conditions. Operationally, dual 
pricing would not require that funds receive complete order flow data 
prior to determining their dual transaction prices, removing the need 
for a hard

[[Page 77271]]

close. However, dual pricing would require intermediaries and other 
market participants to update their processes to handle two potential 
transaction prices rather than a single NAV, which would impose costs 
on such intermediaries. In addition, intermediaries that currently 
submit a single net order (e.g., using omnibus accounting) would need 
to separately submit aggregate purchases and aggregate redemptions to a 
fund, which would impose costs on such intermediaries.
iii. Spread Cost Adjustment on Days With Estimated Net Outflows \524\
---------------------------------------------------------------------------

    \524\ See also section II.D.3.a for additional discussion of 
this alternative.
---------------------------------------------------------------------------

    Another alternative to the proposed swing pricing requirement would 
be to require that funds use estimated flows to determine whether they 
expect to have net redemptions on a given day and, if so, to require 
that the fund adjust its current NAV to reflect good faith estimates of 
spread costs.\525\ This alternative would not require funds to assess 
market impact, nor would it require that funds use swing pricing on 
days when a fund estimates that there will be net subscriptions. By 
setting the price for fund shares to reflect good faith estimates of 
spread costs on days when a fund estimates it will have net outflows, 
the fund would protect non-transacting investors from dilution due to 
the spread costs, to the extent that the fund correctly estimates the 
direction of the net flows. This approach could ameliorate first-mover 
advantage because redeeming shareholders would be required to pay at 
least the spread component of transaction costs imposed on the fund by 
their redemptions on days where the fund accurately predicts that it 
will experience net redemptions. As a result, this alternative may help 
to mitigate run risk and potential fire sales of funds' portfolio 
holdings. However, basing the decision to apply a spread cost 
adjustment on estimated flows may reduce the effectiveness of this 
alternative by possibly causing the fund to adjust its share price down 
on days where transacting investors ultimately do not dilute remaining 
fund shareholders. While applying a spread cost adjustment on days when 
a fund incorrectly predicts net redemptions could result in more 
shareholder dilution than if an adjustment had not been applied, this 
possibility would not impede the effectiveness of the alternative to 
mitigate first-mover advantage.
---------------------------------------------------------------------------

    \525\ U.S. GAAP states that if an asset measured at fair value 
has a bid price and an ask price (for example, an input from a 
dealer market), the price within the bid-ask spread that is most 
representative of fair value in the circumstances shall be used to 
measure fair value, and that the use of bid prices for asset 
positions is permitted but not required for these purposes. See FASB 
ASC 820-10-35-36C. Therefore, we recognize that requiring a fund's 
share price to be determined using bid-side values for the 
underlying investments would introduce inconsistency in instances 
where the fund does not use bid prices to value securities for 
purposes of U.S. GAAP. As a result, funds needing to apply different 
pricing for these different purposes could experience incremental 
effort and cost.
---------------------------------------------------------------------------

    The alternative would impose lower costs on funds and 
intermediaries relative to the proposed swing pricing requirement 
because there would be no requirement for a hard close and no 
requirement to estimate market impact factors or other transaction 
costs. By limiting the adjustment of the share price to a step function 
(i.e., share price is either adjusted to reflect spread costs or not at 
all), the alternative avoids any imprecision that may be introduced by 
having the size of the fund's share price adjustment also depend on the 
size of predicted net outflows. To the extent that funds currently do 
not implement swing pricing because of existing operational challenges 
or any stigma that may be associated with the use of that tool, this 
alternative would likely overcome these challenges by prescribing an 
approach that is mandatory and that could be implemented more easily 
under existing operational structures compared to the proposed swing 
pricing requirement that would rely on a hard close while still 
providing some anti-dilution benefits to mutual fund investors.
iv. A Choice of an Anti-Dilution Tool
    As another alternative to the proposed swing pricing requirement, 
we could have proposed to require all funds to implement an anti-
dilution tool, while allowing them to choose among several tools, such 
as swing pricing, liquidity fees, or other alternative approaches 
discussed above. This alternative may benefit funds and their 
investors, to the extent that certain anti-dilution tools are better 
suited for certain types of funds in reducing investor dilution. For 
example, funds that have infrequent subscriptions or redemptions may 
find a liquidity fee less operationally costly to implement compared to 
other tools. Similarly, funds that have more volatile flows on a day-
to-day basis may find that swing pricing would be a more effective 
approach to combat dilution because the trading costs would be recouped 
instantaneously with investors' trading activity, compared to liquidity 
fees that would not be recouped by a fund until a later date. Further, 
funds that have de minimis transaction costs for prolonged periods of 
time may find a liquidity fee that would only apply during stressed 
conditions more appropriate from the operational prospective. This 
alternative may benefit mutual fund investors by increasing investor 
choice relative to the proposal. To the extent that different investors 
have varying preferences for anti-dilution tools, they would be able to 
invest in the mutual fund sector according to their preferences. As 
such, this alternative may increase competition in the mutual fund 
sector. However, this alternative could be more costly relative to the 
proposal and other alternatives discussed above because fund 
intermediaries and service providers would need to establish systems 
that accommodate all the anti-dilution options that would exist across 
mutual funds.
3. Hard Close Requirement
    The proposal would require a hard close, meaning that an order may 
be executed at the current day's price only if the fund or its 
designated parties receive the order before 4 p.m. ET. As discussed in 
section III.B.3, funds and intermediaries are likely to incur 
significant costs in order to comply with the hard close requirement. 
Therefore, we have considered alternative approaches to the hard close 
requirement.
a. Indicative Flows \526\
---------------------------------------------------------------------------

    \526\ See also section II.D.2.a for additional discussion of 
this alternative.
---------------------------------------------------------------------------

    One alternative to the proposed hard close requirement would be to 
require that funds receive indicative flow information from 
intermediaries by an established time. This approach would be less 
likely to affect investors who place orders near the 4 p.m. ET pricing 
time, as intermediaries may not necessarily need to establish earlier 
cut-off times. While intermediaries would incur one-time costs to 
update their systems and processes to calculate indicative flow 
information, as well as ongoing costs related to the transmission of 
the indicative flow information to funds or their designated parties, 
these costs would be lower than the costs intermediaries would incur 
under the proposed hard close requirement. The proposed hard close 
requirement, however, would likely not result in the same ongoing costs 
for intermediaries that this alternative would require. For example, 
intermediaries may need to develop a process for estimating indicative 
flows and sending them to funds, separate from the process of 
submitting orders to fund transfer agents and Fund/SERV.

[[Page 77272]]

Likewise, funds would need to develop processes for receiving the 
indicative flow information and monitoring whether each intermediary 
has provided indicative flow information in a timely manner. Moreover, 
indicative flow information likely would be less accurate and complete 
than the flow information funds would receive under the proposed hard 
close requirement. As a result, funds' swing pricing determinations may 
be less accurate than under the proposal (e.g., a fund may not adjust 
its NAV when it should have, or vice versa, due to incomplete flow 
information), which would limit a fund's ability to mitigate dilution 
through swing pricing.
b. Estimated Flows \527\
---------------------------------------------------------------------------

    \527\ See also section II.D.2.b for additional discussion of 
this alternative.
---------------------------------------------------------------------------

    Another alternative approach to a hard close would be to continue 
allowing funds to use reasonable estimates of their flows in 
determining transaction costs from investors' trading activity and to 
provide them with a safe harbor in cases where the produced estimates 
of the funds' net flows are different from realized net flows. This 
approach would have limited effect on intermediaries, as funds would 
base their estimates on models incorporating available information. 
However, because funds would base anti-dilution decisions on less 
precise flow data, this alternative could reduce the effectiveness of a 
fund's swing pricing by possibly causing it to adjust its NAV on days 
where transacting investors ultimately do not dilute remaining fund 
shareholders. On days where a fund estimates the direction of flows 
incorrectly, e.g., if a fund forecasts that it will experience net 
subscriptions but actually experiences net redemptions, applying a 
swing factor could result in more shareholder dilution than if a swing 
factor had not been applied. This may make mutual funds less attractive 
to investors. However, the success of this approach would depend on how 
well funds can predict the additional flows that they receive after 
their NAV has been determined.
c. Later Cut-Off Times for Intermediaries \528\
---------------------------------------------------------------------------

    \528\ See also section II.D.2.c for additional discussion of 
this alternative.
---------------------------------------------------------------------------

    Another alternative is to establish later cut-off times for 
intermediaries to submit order flow information, for example, two or 
three hours after the fund's pricing time (e.g., 6 or 7 p.m. ET if the 
fund's pricing time is 4 p.m. ET). Under this alternative, 
intermediaries would have more time to submit their orders to funds and 
may not need to impose a cut-off time for investor orders earlier than 
the pricing time. To the extent that investors would not be subjected 
to an earlier cut-off time under this alternative, investors that use 
affected intermediaries would not experience disadvantage over 
investors that trade with the fund directly in terms of different 
degree of market risk described above. However, although this 
alternative may be more beneficial to investors compared to the 
proposed hard close requirement, it would require similar operational 
changes and impose similar costs. For example, retirement plan 
recordkeepers would still need to submit orders before receiving funds' 
prices. This alternative, however, may be less disruptive than the 
proposed hard close requirement for intermediaries that typically 
provide orders by around 6 or 7 p.m. ET, which we understand is the 
case for many broker-dealers. Under this approach, funds would likely 
need to publish their prices later than current practice to provide 
time to make swing pricing decisions. This could delay the distribution 
of pricing information to the public and to intermediaries. However, 
because intermediaries would no longer be revising orders contingent on 
the fund's share price to the same extent, this may not be as 
disruptive as a later NAV publication would be under the status quo.
4. Commission Reporting and Public Disclosure
    As an alternative, we could have proposed public disclosure of 
position-level liquidity classifications. This alternative may provide 
more information about a fund's liquidity risk profile to investors, 
thereby improving their portfolio allocation decisions. While funds may 
have gained some insight into how other funds manage liquidity risk via 
their narrative disclosures, to the extent those disclosures tended to 
be boilerplate, observing other funds' liquidity profiles might provide 
some information that is useful in a fund's own liquidity 
classification process. Although the process for funds' liquidity 
classifications will be more uniform across funds under the proposal, 
we recognize that the same investment may still be classified 
differently by different funds due to classifications being position-
dependent (i.e., the more of a security is held by a fund, the less 
liquid its classification would be). Therefore, even if position-level 
liquidity classifications are disclosed, the comparison of 
classifications across funds may still not be as meaningful for 
investors in all cases. Position-level disclosure also could 
potentially reveal additional information about a fund's trading 
strategy if, for example, a security was classified as illiquid solely 
because the fund had material non-public information about the 
security. In addition, investors also may find the proposed aggregate 
liquidity information more useful, to the extent that they are focused 
on a fund's overall liquidity profile rather than the liquidity of any 
particular investment.
    We also could have proposed filings would become public when they 
are filed as opposed to keeping the filings confidential until 30 days 
after they are filed (60 days after the end of the reporting period). 
This could take several forms. For example, we could maintain the 
proposed filing deadline, which would mean that a fund's filing would 
be due and become public 30 days after the end of the reporting period. 
Alternatively, we could pair a publication-upon-filing framework with 
lengthening the delay between the end of the reporting period (for 
example, to 45 days after the end of the period). Making filings public 
immediately upon filing could improve investor understanding of fund 
portfolios because they would be able to review the information closer 
to real time (though still with a substantial delay), assuming that the 
filing deadline was 30 days after each month end as proposed. This 
would enhance the ability of investors to choose the right fund that 
suits their portfolio construction goals. Many funds already make 
portfolio information public with a 30-day delay on a voluntary basis, 
but this alternative would result in a consistent framework across the 
entire open-end fund industry. This approach would also reduce the 
amount of information the Commission would be required to keep 
confidential.\529\ On the other hand, to the extent funds are at risk 
of predatory trading or copy-catting when their portfolios become 
public sooner, this approach could serve to increase those risks.\530\
---------------------------------------------------------------------------

    \529\ Certain data would remain confidential, such as the 
composition of the fund's ``miscellaneous securities.'' See supra 
section II.E.1.d.
    \530\ See supra note 287 (comment letter from major industry 
participant citing research showing that risk of predatory trading 
or copycatting as a result of increased publication frequency is 
overstated).
---------------------------------------------------------------------------

    We could have taken the inverse approach as well. Instead of 
providing for publication at the same time information is filed, we 
could have provided for a longer period between the time information is 
filed and when

[[Page 77273]]

it is made public, and also could have extended the deadline for 
filing. The benefits and costs of this alternative would likewise be 
the reverse of the publication-upon-filing alternative. Namely, this 
alternative could reduce the risks of predatory trading or copy-catting 
because by the time the information became public, it would be more 
likely to be stale. On the other hand, it would also be less useful to 
investors seeking to understand their funds and, if we paired a delay 
in publication with a delay in the deadline for filing with the 
Commission, it would be less useful to the Commission as well.

F. Request for Comment

    We request comment on all aspects of the economic analysis of the 
proposed amendments. To the extent possible, we request that commenters 
provide supporting data and analysis with respect to the benefits, 
costs, and effects on competition, efficiency, and capital formation of 
adopting the proposed amendments or any reasonable alternatives. In 
particular, we ask commenters to consider the following questions:
    234. What additional qualitative or quantitative information should 
be considered as part of the baseline for the economic analysis of 
these amendments?
    235. Are the benefits and costs of proposed amendments accurately 
characterized? If not, why not? Should any of the costs or benefits be 
modified? What, if any, other costs or benefits should be taken into 
account? If possible, please offer ways of estimating these benefits 
and costs. What additional considerations can be used to estimate the 
benefits and costs of the proposed amendments?
    236. Are the benefits and costs of the proposed swing pricing 
amendments accurately characterized? If not, why not? What, if any, 
other costs or benefits should be taken into account? If possible, 
please offer ways of estimating these benefits and costs.
    237. Are the effects on competition, efficiency, and capital 
formation arising from the proposed amendments accurately 
characterized? If not, why not?
    238. Are the economic effects of the above alternatives accurately 
characterized? If not, why not? Should any of the costs or benefits be 
modified? What, if any, other costs or benefits should be taken into 
account?
    239. Are the economic effects of the alternative approaches to 
implementing swing pricing adequately characterized? If not, why not? 
Should any of the costs or benefits be modified? What, if any, other 
costs or benefits should be taken into account?
    240. Are there other reasonable alternatives to the proposed 
amendments that should be considered? What are the costs, benefits, and 
effects on competition, efficiency, and capital formation of any other 
alternatives?
    241. What effects would the proposed changes have on (1) investment 
options available to investors if certain asset classes are not 
available or are less available in open-end vehicles (including UITs); 
and (2) the markets for those underlying assets, including, but not 
limited to, the market for bank loan interests.
    242. How likely is it that open-end fund managers will choose to 
offer their products via different structures, such as ETFs, closed-end 
funds, or CITs, rather than comply with the proposed requirements? 
Relatedly, how likely is it that investors will move assets from open-
end funds to other types of funds in response to the proposed 
requirements?
    243. Are there data sources or data sets that can help refine the 
estimates of the benefits and costs associated with the proposed 
amendments? If so, please identify them.
    244. Are there data sources that can help us estimate the aggregate 
number and value of transactions in mutual fund shares with more 
accuracy? If so, please identify them.
    245. Which third-party service providers would be affected the most 
by the proposed amendments? Please explain why. If possible, please 
provide data on the number and size of such entities.
    246. Would these amendments cause a fund or any third-party service 
providers assessing liquidity to have new or unforeseen burdens? Would 
this increase the cost of third-party services?
    247. Would certain types of funds have to substantially rebalance 
their portfolios as a result of the proposed changes to the liquidity 
risk management program? Provide a list of specific investments that 
funds would have to hold in limited amounts under the proposed 
amendments. Are there close alternatives to these investments that 
funds would be able to hold? For example, can bank loan interests be 
substituted with CLOs? If no, please explain why.
    248. Can the vertical slice assumption for the purposes of 
calculation of stressed trade size be implemented for all types of fund 
investments? For example, are there indivisible minimum trade units for 
any investments for which 10% of such an investment would not be 
possible to sell due to such indivisibility? How do funds currently 
operationalize the calculation of the reasonably anticipated trade 
size: via a vertical slice assumption or in any other way for 
indivisible investments?
    249. What price impact models do funds currently use for liquidity 
classifications of their investments? Are there advantages of using one 
model over another? Are there price impact models available to use only 
through certain third-party service providers assessing liquidity? Do 
service providers assessing liquidity vary in costs for their services?
    250. What would be the costs of obtaining daily pricing and 
liquidity information for the purposes of daily liquidity 
classifications? What are the current costs related to obtaining such 
information?
    251. Do funds currently monitor their liquidity classifications on 
a daily basis? Are there specific types of funds that do not currently 
evaluate their classifications more frequently than monthly?
    252. To what extent would funds implement swing pricing if it were 
optional, rather than mandatory, as long as funds received complete 
order flow data prior to determining their NAVs on a given day?
    253. How dilutive are fund purchases relative to fund sales? How do 
the benefits of swing pricing in response to purchases compare to the 
benefits of swing pricing in response to sales?
    254. Which components of trading costs contribute the most to fund 
dilution? How significant are market impact costs? If we adopted an 
alternative that excluded market impact from swing factor calculations, 
would the rule's effectiveness at mitigating dilution be significantly 
reduced?
    255. Of the alternatives to swing pricing discussed above, which 
strikes the most appropriate balance of investor benefits and 
implementation costs? Is it more operationally complex and costly to 
charge fund investors a liquidity fee, or to use dual pricing?
    256. What are the benefits of processing trade information via 
omnibus accounts? How costly would transmitting individual investor 
order information to funds be for intermediaries? Are per-trade costs 
the same for all intermediaries? Would there be other ancillary 
benefits associated with a move away from omnibus account and order 
netting?
    257. What other costs or impediments beyond system switching costs 
would the proposed hard close requirement impose? Will these costs be 
different for different types of intermediaries? If so,

[[Page 77274]]

what is the differential? How do these costs compare to the potential 
future benefits of the hard close, such as more efficient order 
processing?
    258. Will certain intermediaries be unable to bear the costs of the 
proposed hard close requirement? If yes, please explain why. Would the 
costs differ, depending on whether an intermediary or a service 
provider is affiliated with a fund family or not?
    259. What effect will a hard close requirement have on the 
availability of certain transaction types offered to investors? Please 
list the types of transactions that would become unavailable under the 
proposed hard close requirement?
    260. Would investors and other data users benefit significantly 
from the proposed monthly N-PORT disclosures? Would the quality and 
availability of mutual funds' portfolio data available to investors and 
other users improve significantly under the proposed amendments?
    261. Would the proposed aggregate liquidity disclosure benefit 
investors? What are the benefits and costs of such disclosure relative 
to investment-by-investment liquidity classification disclosure? Are 
there any substantial burdens that funds would experience with the 
detailed liquidity classification disclosure beyond the costs 
associated with the disclosure process itself?

IV. Paperwork Reduction Act

A. Introduction

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\531\ We are submitting the proposed 
collections of information to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA.\532\ The proposed 
amendments would have an effect on the current collection of 
information burdens of rules 22e-4 and 22c-1 under the Investment 
Company Act, as well as Forms N-PORT and N-CEN under the Investment 
Company Act and Form N-1A under the Investment Company Act and the 
Securities Act.
---------------------------------------------------------------------------

    \531\ 44 U.S.C. 3501 through 3521.
    \532\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The titles for the existing collections of information we are 
amending are: (1) ``Rule 22e-4 (17 CFR 270.22e-4) under the Investment 
Company Act of 1940, Investment Company Liquidity Risk Management 
Programs'' (OMB control number 3235-0737); (2) ``Rule 22c-1 Under the 
Investment Company Act of 1940, Pricing of redeemable securities for 
distribution, redemption and repurchase'' (OMB control number 3235-
0734); (3) ``Rule 30b1-9 and Form N-PORT'' (OMB control number 3235-
0730); (4) ``Form N-1A under the Securities Act of 1933 and under the 
Investment Company Act of 1940, Registration Statement of Open-End 
Management Investment Companies'' (OMB control number 3235-0307); and 
(5) ``Form N-CEN'' (OMB control number 3235-0729).
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. Each requirement to disclose 
information, offer to provide information, or adopt policies and 
procedures constitutes a collection of information requirement under 
the PRA. These collections of information would help funds manage 
liquidity, mitigate dilution of shareholders' interests, and provide 
information to the Commission and investors. The Commission staff would 
also use the collection of information in its examination and oversight 
program in identifying patterns and trends across registrants. We 
discuss below the collection of information burdens associated with the 
proposed rule and form amendments.

B. Rule 22e-4

    Rule 22e-4 requires funds to establish a written liquidity risk 
management program that is reasonably designed to assess and manage 
liquidity risk. Several of the proposed amendments to rule 22e-4 would 
modify existing collection of information requirements. These 
amendments include:
     Changing the framework for classifying the liquidity of a 
fund's portfolio investments, including requiring use of a stressed 
trade size, defining the value impact standard, and requiring daily 
reviews of the fund's liquidity classifications. We believe funds would 
update their policies and procedures that incorporate liquidity risk 
management program elements to reflect these proposed amendments.
     Expanding the scope of funds that must determine and 
maintain a highly liquid investment minimum. As a result of this 
proposed change, additional funds would be required to comply with the 
current rule's collection of information requirements related to highly 
liquid investment minimums. These collection of information 
requirements include:
    [cir] The fund's investment adviser or officers designated to 
administer the liquidity risk management program must provide a written 
report to the fund's board at least annually that describes a review of 
the adequacy and effectiveness of the fund's liquidity risk management 
program, including the operation of the highly liquid investment 
minimum.
    [cir] The fund must adopt and implement policies and procedures for 
responding to a shortfall of the fund's assets that are highly liquid 
investments below its highly liquid investment minimum, which must 
include reporting to the fund's board of directors with a brief 
explanation of the causes of the shortfall, the extent of the 
shortfall, and any actions taken in response, and, if the shortfall 
lasts more than 7 consecutive calendar days, an explanation of how the 
fund plans to come back into compliance with its minimum within a 
reasonable period of time.
    [cir] A fund must maintain a written record of how its highly 
liquid investment minimum and any adjustments to the minimum were 
determined, as well as any reports to the board regarding a shortfall 
in the fund's highly liquid investment minimum, for five years, the 
first two years in an easily accessible place.
    The respondents to rule 22e-4 are open-end management investment 
companies, including, under certain circumstances, in-kind ETFs and the 
principal underwriters or depositors of unit investment trusts, but 
excluding money market funds. None of the proposed amendments would 
affect the rule's collection of information requirements for unit 
investment trusts or in-kind ETFs. Compliance with rule 22e-4 is 
mandatory for funds. Information provided to the Commission in 
connection with staff examinations or investigations is kept 
confidential subject to the provisions of applicable law. If 
information collected pursuant to rule 22e-4 is reviewed by the 
Commission's examination staff, it is accorded the same level of 
confidentiality accorded to other responses provided to the Commission 
in the context of its examination and oversight program.
    In our most recent Paperwork Reduction Act submission for rule 22e-
4, we estimated a total aggregate annual hour burden of 28,150 hours, 
and a total aggregate annual external cost burden of $0.\533\ Based on 
filing data as of

[[Page 77275]]

December 2021, we estimate that 11,488 funds would be subject to these 
proposed amendments.\534\ The proposed collections of information are 
designed to help increase the likelihood that funds are better prepared 
to manage liquidity during stressed conditions, and help protect 
investors from dilution. These collections would also help facilitate 
the Commission's inspection and enforcement capabilities.
---------------------------------------------------------------------------

    \533\ The most recent rule 22e-4 PRA submission was approved in 
2020 (OMB Control No. 3235-0737). That PRA estimated that 846 fund 
complexes were subject to rule 22e-4. We continue to believe that 
funds within the same fund complex would experience certain 
efficiencies in responding to the collection of information 
requirements and, depending on the size of the fund complex, per 
fund costs may be higher or lower than our estimated averages; 
however, we are changing from a fund complex to a per fund estimate 
based on staff experience with per fund burdens and to improve the 
quality of this estimate.
    \534\ As of Dec. 2021, we estimate 11,488 open-end funds, 
excluding money market funds.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to rule 22e-4. 
The following estimates of average burden hours and costs are made for 
purposes of the Paperwork Reduction Act.

[[Page 77276]]

[GRAPHIC] [TIFF OMITTED] TP16DE22.008


[[Page 77277]]



C. Rule 22c-1

    Rule 22c-1 enables funds to use swing pricing as a tool to mitigate 
shareholder dilution. Swing pricing is currently optional for certain 
open-end funds. The proposed amendments would amend rule 22c-1 to make 
swing pricing for open-end funds (other than ETFs or money market 
funds) mandatory instead of optional. Funds that would be required to 
implement swing pricing under our amendments must establish and 
implement swing pricing policies and procedures.\535\ The policies and 
procedures must: (1) provide that the fund will adjust its net asset 
value if the fund has net redemptions or if it has net purchases 
exceeding the inflow swing threshold; and (2) specify the process for 
determining the swing factor. The rule also would require a fund to 
retain a written copy of the periodic report provided to the board 
prepared by the swing pricing administrator that describes, among other 
things, the swing pricing administrator's review of the adequacy of the 
fund's swing pricing policies and procedures and the effectiveness of 
their implementation. The retention of these records is necessary to 
allow the staff during examinations of funds to determine whether a 
fund is in compliance with its swing pricing policies and procedures 
and with rule 22c-1.
---------------------------------------------------------------------------

    \535\ See proposed rule 22c-1(b).
---------------------------------------------------------------------------

    Compliance with rule 22c-1(b) would be mandatory for funds subject 
to the proposed swing pricing requirements. Based on filing data as of 
December 2021, we estimate that 9,043 funds would be subject to these 
proposed amendments.\536\ Information provided to the Commission in 
connection with staff examinations or investigations is kept 
confidential subject to the provisions of applicable law. If 
information collected pursuant to rule 22c-1 is reviewed by the 
Commission's examination staff, it is accorded the same level of 
confidentiality accorded to other responses provided to the Commission 
in the context of its examination and oversight program.
---------------------------------------------------------------------------

    \536\ As of Dec. 2021, we estimate 9,043 open-end funds, 
excluding money market funds and ETFs.
---------------------------------------------------------------------------

    The most recent PRA submission estimated that 5 fund complexes had 
funds that might adopt swing pricing policies and procedures under the 
optional rule.\537\ The current estimated hour burdens and time costs 
associated with rule 22c-1, including the burden associated with the 
requirements that funds adopt policies and procedures and obtain board 
approval of them, provide periodic written reports by the swing pricing 
administrator to the board, and retain certain records and written 
reports related to swing pricing, are an average aggregate annual 
burden of 113 hours and average aggregate time costs of $73,803.\538\
---------------------------------------------------------------------------

    \537\ The most recent rule 22c-1 PRA submission was approved in 
2020 (OMB Control No. 3235-0734). We continue to believe that funds 
within the same fund complex would experience certain efficiencies 
in responding to the collection of information requirements and, 
depending on the size of the fund complex, per fund costs may be 
higher or lower than our estimated averages; however, we are 
changing from a fund complex to a per fund estimate based on staff 
experience with per fund burdens and to improve the quality of this 
estimate.
    \538\ The estimated burden hours include 280 total hours (or 56 
hours per fund complex) to initially prepare and approve swing 
pricing policies and procedures, amortized over 3 years, and 20 
total hours (or 4 hours per fund complex) to retain swing pricing 
records under rule 22c-1 each year.
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    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to rule 22c-1. 
The following estimates of average burden hours and costs are made 
solely for purposes of the Paperwork Reduction Act.
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[[Page 77279]]

D. Form N-PORT

    Form N-PORT requires registered management investment companies 
(except for money market funds and small business investment companies) 
and ETFs that are organized as unit investment trusts to report 
portfolio holdings information in a structured, XML format. The form is 
filed electronically using the Commission's electronic filing system, 
EDGAR. We propose the following amendments to Form N-PORT:
     The proposed amendments to Form N-PORT would require 
filing Form N-PORT on a monthly basis, within 30 days after the end of 
each month. Currently, a fund must maintain in its records the 
information that is required to be included on Form N-PORT not later 
than 30 days after the end of each month, but is only required to file 
that information within 60 days after the end of every third month. We 
are not proposing to adjust the estimated collection of information 
burden in connection with this change, in part because we believe the 
reduced recordkeeping burden is commensurate with the increased burden 
associated with filing the information that previously would have been 
preserved as a record. The Commission similarly did not adjust the PRA 
burden estimate when it amended Form N-PORT to move from a requirement 
to file reports monthly to a requirement to prepare the information 
monthly but file it quarterly.\539\
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    \539\ See 2018 Liquidity Disclosure Adopting Release, supra note 
22, at section IV.B.
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     We are proposing to require each open-end fund (other than 
money market funds and in-kind ETFs) to report the aggregate percentage 
of its portfolio represented in each of the three proposed liquidity 
categories, which would be publicly available. These funds would be 
required to adjust the reported amounts to account for the amounts of 
margin or collateral posted in connection with certain derivatives 
transactions as well as outstanding liabilities, and to report 
information about the value of these adjustments. Currently, these 
funds are required to report position-level liquidity information on a 
non-public section of Form N-PORT, meaning the amendments would require 
aggregating that information, making the required adjustments, and 
reporting the adjusted aggregate information as well as information 
about the adjustments that were made.
     For open-end funds that would be subject to the swing 
pricing requirement under the proposal, we are proposing to provide 
enhanced transparency into the frequency and amount of each fund's 
swing pricing adjustments. Specifically, the proposal would require 
these funds to report information about the number of days a fund 
applied a swing factor during the month and the amount of each swing 
factor applied.
     We also propose conforming amendments to certain existing 
items to account for other aspects of the proposal, including 
amendments to the filing frequency of unstructured portfolio 
information on Part F of Form N-PORT and miscellaneous holdings 
disclosure to account for the proposal to make monthly Form N-PORT 
information available to the public, amendments to reflect the proposed 
amendments to rule 22e-4, and amendments to certain entity identifiers.
    The respondents to these collections of information will be 
management investment companies (other than money market funds and 
small business investment companies) and ETFs that are organized as 
unit investment trusts. We estimate that there are 12,153 such funds 
required to file on Form N-PORT, although certain of the proposed new 
collections of information would apply to subsets of these funds, as 
reflected in the below table.\540\ The proposed collections of 
information are mandatory for the identified types of funds. Certain 
information reported on the form is kept confidential, and we propose 
that this would continue to be the case.\541\ We propose that all other 
responses to Form N-PORT reporting requirements would not be kept 
confidential, and instead would be made public 60 days after the end of 
the month to which they relate (30 days after they are filed); 
currently, only the report for every third month is made public. The 
proposed amendments are designed to assist the Commission in its 
regulatory, disclosure review, inspection, and policymaking roles, and 
to help investors and other market participants better assess different 
fund products.
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    \540\ The most recent Form N-PORT PRA submission was approved in 
2022 (OMB Control No. 3235-0730). That PRA submission estimated that 
11,980 funds were required to file on Form N-PORT. Our current 
estimate has increased due to changes in the numbers of funds.
    \541\ See General Instruction F of Form N-PORT; General 
Instruction F of proposed Form N-PORT.
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    In our most recent PRA submission for Form N-PORT, we estimated the 
annual aggregate compliance burden to comply with the current 
collection of information requirements in Form N-PORT is 1,839,903 
burden hours with an internal cost burden of $654,658,288 and an 
external cost burden estimate of $113,858,133. We estimate that funds 
prepare and file their reports on Form N-PORT either by (1) licensing a 
software solution and preparing and filing the reports in house, or (2) 
retaining a service provider to provide data aggregation, validation, 
and/or filing services as part of the preparation and filing of reports 
on behalf of the fund. We estimate that 35% of funds subject to the N-
PORT filing requirements will license a software solution and file 
reports on Form N-PORT in house, and the remaining 65% will retain a 
service provider to file reports on behalf of the fund.
    Table 10 below summarizes our initial and ongoing annual burden 
estimates associated with the proposed amendments to Form N-PORT. The 
following estimates of average burden hours and costs are made solely 
for purposes of the Paperwork Reduction Act.
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[[Page 77281]]


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BILLING CODE 8011-01-C

E. Form N-1A

    Form N-1A is used by registered open-end management investment 
companies (except insurance company separate accounts and small 
business investment companies licensed under the United States Small 
Business Administration), to register under the Investment Company Act 
and to offer their shares under the Securities Act. Unlike many other 
Federal information collections, which are primarily for the use and 
benefit of the collecting agency, this information collection is 
primarily for the use and benefit of investors. The information filed 
with the Commission also permits the verification of compliance with 
securities law requirements and assures the public availability and 
dissemination of the information. In our most recent Paperwork 
Reduction Act submission for Form N-1A, we estimated for Form N-1A a 
total annual aggregate ongoing hour burden of 1,672,077 hours, and the 
total annual aggregate external cost burden is $132,940,008.\542\ 
Compliance with the disclosure requirements of Form N-1A is mandatory, 
and the responses to the disclosure requirements will not be kept 
confidential.
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    \542\ The most recent Form N-1A PRA submission was approved in 
2021 (OMB Control No. 3235-0307).
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    We propose to amend Item 11(a) of Form N-1A to require, if 
applicable, that funds disclose that if an investor places an order 
with a financial intermediary, the financial intermediary may require 
the investor to submit its order earlier to receive the next calculated 
NAV. In addition, as a result of the proposed amendments to rule 22c-1 
to require that certain funds use swing pricing, we estimate that 
additional funds would be required to disclose information about swing 
pricing in response to certain existing items in the form.\543\ The 
Commission previously estimated that 474 funds would choose to use 
swing pricing under the optional framework.\544\ We now estimate that 
9,043 funds would be required to use swing pricing and to disclose 
relevant information on Form N-1A.\545\ We also propose to remove the 
requirement to provide an upper limit on the swing factor from Item 
6(d).
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    \543\ See Items 6(d), 4(b)(2)(ii), 4(b)(2)(iv)(E), and 13(a) of 
Form N-1A.
    \544\ See Swing Pricing Adopting Release, supra note 11, at 
n.544 and accompanying text.
    \545\ This estimate, which is as of Dec. 2021, is based on Form 
N-CEN filings received through May 2022.
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    Table 11 below summarizes our initial and ongoing annual burden 
estimates associated with the proposed amendments to Form N-1A. The 
following estimates of average burden hours and costs are made solely 
for purposes of the Paperwork Reduction Act.

[[Page 77282]]

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F. Form N-CEN

    Form N-CEN requires registered investment companies, other than 
face-amount certificate companies to report annual, census-type 
information. Filers must submit this report electronically using the 
Commission's EDGAR system in XML format. We propose the following 
amendments to Form N-CEN:
     Adding a requirement that an open-end fund that uses a 
liquidity service provider report: (a) the name each liquidity service 
provider; (b) identifying information, including the legal entity 
identifier and location, for each liquidity service provider; (c) if 
the liquidity service provider is affiliated with the fund or its 
investment adviser; (d) the asset classes for which that liquidity 
service provider provided classifications; and (e) whether the service 
provider was hired or terminated during the reporting period;
     Removing requirements that a filer report certain 
information regarding its use of swing pricing; and
     Revising the approach to certain entity identifiers.\546\
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    \546\ We do not believe that the proposed amendments to separate 
the concepts of LEI and RSSD ID more clearly in the form would 
change the burdens of the current form, as the form already requires 
a fund to report the RSSD ID, if any, if a financial institution 
does not have an assigned LEI.
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    The respondents to these collections of information will be 
registered investment companies with the exception of face amount 
certificate companies. We estimate that there are 2,754 such 
registrants required to file on Form N-CEN.\547\ The proposed 
collections of information are mandatory. Responses are not kept 
confidential. The purpose of Form N-CEN is to satisfy the filing and 
disclosure requirements of section 30 of the Investment Company Act, 
and of rule 30a-1 thereunder. The proposed amendments are designed to 
facilitate the Commission's oversight of registered funds and its 
ability to assess trends and risks.
---------------------------------------------------------------------------

    \547\ This estimate, which is as of Dec. 2021, is based on Form 
N-CEN filings received through May 2022.
---------------------------------------------------------------------------

    In our most recent PRA submission for Form N-CEN, we estimated the 
annual aggregate compliance burden to comply with the current 
collection of information requirements in Form N-CEN is 54,890 burden 
hours with an internal cost burden of $19,267,461 and an external cost 
burden estimate of $1,344,981.\548\
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    \548\ The most recent Form N-CEN PRA submission was approved in 
2021 (OMB Control No. 3235-0729). The previous PRA submission 
estimated that 2,835 registrants were required to file on Form N-
CEN. Our current estimate has decreased due to changes in the 
numbers of registrants.

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[[Page 77283]]

    Table 12 below summarizes our initial and ongoing annual burden 
estimates associated with the proposed amendments to Form N-CEN. The 
following estimates of average burden hours and costs are made solely 
for purposes of the Paperwork Reduction Act.
[GRAPHIC] [TIFF OMITTED] TP16DE22.013

G. Request for Comment

    We request comment on whether these estimates are reasonable. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (1) evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) determine whether there are ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information 
requirements of the proposed amendments should direct them to the OMB 
Desk Officer for the Securities and Exchange Commission, 
[email protected], and should send a copy to 
Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-1090, with reference to File No. 
S7-26-22. OMB is required to make a decision concerning the collections 
of information between 30 and 60 days after publication of this 
release; therefore a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days after publication of this 
release. Requests for materials submitted to OMB by the

[[Page 77284]]

Commission with regard to these collections of information should be in 
writing, refer to File No. S7-26-22, and be submitted to the Securities 
and Exchange Commission, Office of FOIA Services, 100 F Street NE, 
Washington, DC 20549-2736.

V. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the 
Regulatory Flexibility Act (``RFA'').\549\ It relates to: (1) the 
proposed amendments concerning funds' liquidity risk management 
programs under rule 22e-4; (2) the proposed swing pricing amendments 
under rule 22c-1(b); (3) the proposed hard close requirement under rule 
22c-1(a); and (4) the proposed disclosure amendments to Form N-1A, Form 
N-PORT, and Form N-CEN.
---------------------------------------------------------------------------

    \549\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Actions

    The Commission is proposing amendments to its current rules for 
open-end funds regarding liquidity risk management programs and swing 
pricing. The proposed amendments would provide additional standards for 
making liquidity determinations, amend certain aspects of the liquidity 
categories, and require more frequent liquidity classifications. The 
objectives of the proposed liquidity amendments are to improve 
liquidity risk management programs to better prepare these funds for 
stressed conditions and improve transparency in liquidity 
classifications. The proposed amendments also require any open-end 
fund, other than a money market fund or exchange-traded fund, to use 
swing pricing. The objectives of swing pricing are to more fairly 
allocate costs, reduce the potential for dilution of investors who are 
not currently transacting in the fund's shares, and reduce any 
potential first-mover advantages. In addition, the Commission is 
proposing a ``hard close'' requirement for these funds. The proposed 
hard close amendments would serve multiple objectives, including 
facilitating funds' ability to operationalize swing pricing by ensuring 
that funds receive timely flow information and to modernize order 
processing generally. Finally, the Commission is proposing amendments 
to reporting requirements that apply to certain registered investment 
companies, including registered open-end funds (other than money market 
funds), registered closed-end funds, and unit investment trusts. These 
proposed amendments seek to improve fund disclosure by requiring more 
timely reporting of monthly portfolio holdings and related information 
to the Commission and the public, amend certain reported identifiers, 
and make other amendments to require additional information about open-
end funds' liquidity risk management and use of swing pricing. Each of 
these objectives is discussed in detail in section II above.

B. Legal Basis

    The Commission is proposing the rule and form amendments contained 
in this document under the authority set forth in the Investment 
Company Act, particularly sections 6, 8, 22, 24, 30, 31, 34, 38, and 45 
thereof [15 U.S.C. 80a-1 et seq.], the Investment Advisers Act, 
particularly section 206 thereof [15 U.S.C. 80b-1 et seq.], the 
Exchange Act, particularly sections 10, 13, 15, 23, and 35A thereof [15 
U.S.C. 78a et seq.], the Securities Act, particularly sections 7, 10, 
17, and 19 thereof [15 U.S.C. 77a et seq.], and the Trust Indenture 
Act, particularly section 319 thereof [15 U.S.C. 77aaa et seq.].

C. Small Entities Subject to the Amendments

    An investment company is a small entity if, together with other 
investment companies in the same group of related investment companies, 
it has net assets of $50 million or less as of the end of its most 
recent fiscal year.\550\ Commission staff estimates that, as of June 
2022, there were 46 open-end management investment companies that would 
be considered small entities; this number includes 2 money market funds 
and 11 open-end ETFs. Commission staff also estimates that, as of June 
2022, there were 31 closed-end investment management companies and 5 
unit investment trusts that would be considered small entities.
---------------------------------------------------------------------------

    \550\ See 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

1. Liquidity Risk Management Programs
    The proposed amendments to rule 22e-4 would provide additional 
standards for making liquidity determinations, amend certain aspects of 
the liquidity categories, and require more frequent liquidity 
classifications. Specifically, the proposal would provide objective 
minimum standards that funds would use to classify investments, 
including by: (1) requiring funds to assume the sale of a stressed 
trade size, rather than the rule's current approach of assuming the 
sale of a reasonably anticipated trade size in current market 
conditions; (2) defining the value impact standard with more 
specificity on when a sale or disposition would significantly change 
the market value of an investment; and (3) removing classification by 
asset class. The proposed amendments would also remove the less liquid 
investment category, which would reduce the number of liquidity 
categories from four to three, and expand the scope of the illiquid 
investment category. In addition, the proposed amendments would extend 
the requirement to maintain a highly liquid investment minimum to a 
broader scope of funds and would change how the highly liquid 
investment minimum calculation and the calculation of the 15% limit on 
illiquid investments take into account the amount of assets that are 
posted as margin or collateral for certain derivatives transactions. 
Finally, the proposal would require daily classifications.
    We estimate that approximately 44 funds are small entities that 
would be required to comply with the proposed amendments to the 
liquidity risk management program requirement.\551\ The proposed 
amendments would impose burdens on all open-end funds subjected to the 
rule, including those that are small entities. We discuss the specifics 
of these burdens in the Economic Analysis and Paperwork Reduction Act 
sections above. These sections also discuss the professional skills 
that we believe compliance with this aspect of the proposal would 
require. While we would expect larger funds or funds that are part of a 
large fund complex to incur higher costs related to the proposed 
liquidity rule amendments in absolute terms relative to a smaller fund 
or a fund that is part of a smaller fund complex, we would expect a 
smaller fund to find it more costly, per dollar managed, to comply with 
the proposed requirements because it would not be able to benefit from 
a larger fund complex's economies of scale. For example, larger fund 
complexes would have economies of scale in amending existing liquidity 
risk management policies and procedures

[[Page 77285]]

and in revising their frameworks for classifying the liquidity of 
investments.
---------------------------------------------------------------------------

    \551\ See text following supra note 550. Money market funds are 
excluded from the proposed liquidity risk management program 
requirement. In addition, in-kind ETFs are not subject to the 
current rule's classification requirements or highly liquid 
investment minimum requirements and, therefore, would not be subject 
to the proposed amendments to these provisions. Because in-kind ETFs 
are subject to certain of the proposed amendments, such as 
amendments to the calculation of the 15% limit on illiquid 
investments, we include all 11 of the small funds that are open-end 
ETFs in the estimated number of small entities affected.
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2. Swing Pricing
    Under the proposal, every open-end fund other than an excluded fund 
would be required to establish and implement swing pricing policies and 
procedures that adjust the fund's current NAV per share by a swing 
factor either if the fund has net redemptions or if it has net 
purchases of more than 2% of the fund's net assets. The swing pricing 
administrator would be required to review investor flow information to 
determine: (1) if the fund experiences net purchases or net 
redemptions; and (2) the amount of net purchases or net redemptions. In 
determining the swing factor, the proposed rule would require a fund's 
swing pricing administrator to make good faith estimates, supported by 
data, of the costs the fund would incur if it purchased or sold a pro 
rata amount of each investment in its portfolio to satisfy the amount 
of net purchases or net redemptions (i.e., a vertical slice). 
Additionally, under the proposed rule, the fund's board of directors 
would be required to: (1) approve the fund's swing pricing policies and 
procedures; (2) designate the fund's swing pricing administrator; and 
(3) review, no less frequently than annually, a written report prepared 
by the swing pricing administrator. Finally, under the proposed rule 
the fund would be required to maintain the swing pricing policies and 
procedures and a copy of the written report in an easily accessible 
place.
    We estimate that approximately 33 funds are small entities that 
would be required to comply with the proposed swing pricing 
requirement.\552\ The proposed requirement would impose burdens on all 
open-end funds (other than money market funds and ETFs), including 
those that are small entities. We discuss the specifics of these 
burdens in the Economic Analysis and Paperwork Reduction Act sections 
above. These sections also discuss the professional skills that we 
believe compliance with this aspect of the proposal would require. 
While we would expect larger funds or funds that are part of a large 
fund complex to incur higher costs related to the proposed swing 
pricing requirement in absolute terms relative to a smaller fund or a 
fund that is part of a smaller fund complex, we would expect a smaller 
fund to find it more costly, per dollar managed, to comply with the 
proposed requirement because it would not be able to benefit from a 
larger fund complex's economies of scale. For example, a larger fund 
complex would have economies of scale in developing and adopting swing 
pricing policies and procedures. This is particularly true for larger 
fund complexes that currently employ swing pricing in their operations 
in a foreign jurisdiction, such as in Europe.
---------------------------------------------------------------------------

    \552\ See text following supra note 550. ETFs and money market 
funds are excluded from the proposed swing pricing requirement.
---------------------------------------------------------------------------

3. Hard Close
    We are proposing amendments to rule 22c-1 to require a hard close 
for funds that are subject to the proposed swing pricing requirement. 
The hard close would provide that a request to redeem or purchase a 
fund's shares may be executed at the current day's price only if the 
fund, its designated transfer agent, or a registered securities 
clearing agency receives the eligible order before the pricing time as 
of which the fund calculates its NAV. Orders received after the fund's 
established pricing time would receive the next day's price.
    We estimate that approximately 33 funds are small entities that 
would be required to comply with the proposed hard close 
requirement.\553\ The proposed amendments would impose burdens on all 
open-end funds (except for money market funds and ETFs), including 
those that are small entities. We discuss the specifics of these 
burdens in the Economic Analysis section above. The proposed hard close 
may involve costs to change business practices, operations, and 
computer systems, including integration of new technologies, for funds, 
including small entities, which may require specialized operational and 
technology skills. We would expect that the burdens of these changes 
would be greater for smaller entities relative to the size of their 
business than for larger entities, which would benefit from economies 
of scale.
---------------------------------------------------------------------------

    \553\ See text following supra note 550. ETFs and money market 
funds are excluded from the proposed hard close requirement.
---------------------------------------------------------------------------

    We estimate that the proposed hard close would also affect 8 small 
transfer agents.\554\ Intermediaries that are small entities would also 
be affected; however, we lack data for accurately estimating the number 
of these other intermediaries that are small entities that service 
open-end fund shareholders and would be affected by the proposed hard 
close amendments. Those other intermediaries may include a subset of: 
471 small advisers,\555\ 731 small broker-dealers,\556\ 1,280 small 
recordkeepers,\557\ 3,529 small bank entities,\558\ and small insurance 
companies.\559\ Furthermore, how much these proposed amendments would 
affect these intermediaries would be determined largely by the 
importance these intermediaries and their clients place on receiving 
the NAV calculated on the day a client places an order.
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    \554\ A ``small transfer agent'' is a transfer agent that: (1) 
received less than 500 items for transfer and less than 500 items 
for processing during the preceding six months (or in the time that 
it has been in business, if shorter); (2) transferred items only of 
issuers that would be deemed small businesses or small 
organizations; and (3) maintained master shareholder files that in 
the aggregate contained less than 1,000 shareholder accounts or was 
the named transfer agent for less than 1,000 shareholder accounts at 
all times during the preceding fiscal year (or in the time that it 
has been in business, if shorter); and (4) is not affiliated with 
any person (other than a natural person) that is not a small 
business or small organization. See rule 0-10(h) under the Exchange 
Act. We estimate 8 affected small transfer agents, based on the 
number of small transfer agents reporting mutual fund activity in 
their filings on Form TA-2 as of Mar. 31, 2022.
    \555\ A ``small adviser'' is a SEC-registered investment adviser 
that: (1) has assets under management having a total value of less 
than $25 million; (2) did not have total assets of $5 million or 
more on the last day of the most recent fiscal year; and (3) does 
not control, is not controlled by, and is not under common control 
with another investment adviser that has assets under management of 
$25 million or more, or any person (other than a natural person) 
that had total assets of $5 million or more on the last day of its 
most recent fiscal year. We estimate 471 small advisers, based on 
filings on Form ADV as of Dec. 2021.
    \556\ A ``small broker-dealer'' is a broker or dealer that: (1) 
had total capital (net worth plus subordinated liabilities) of less 
than $500,000 on the date in the prior fiscal year as of which its 
audited financial statements were prepared pursuant to rule 17a-5(d) 
under the Exchange Act or, if not required to file such statements, 
a broker or dealer that had total capital (net worth plus 
subordinated liabilities) of less than $500,000 on the last business 
day of the preceding fiscal year (or in the time that it has been in 
business, if shorter); and (2) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization. See rule 0-10(c) under the Exchange Act. We estimate 
731 small broker-dealers, based on filings of FOCUS Reports as of 
Dec. 2021.
    \557\ See Pension Benefit Statements--Lifetime Income 
Illustrations [85 FR 59132 (Sept. 18, 2020)], at n.71 and 
accompanying text. We estimate 1,280 small recordkeepers, based on 
filings of Form 5500 as reported by the Department of Labor, in the 
2017 plan year. According to that data, there were 1,725 
recordkeepers servicing defined contribution plans. The 445 largest 
recordkeepers serviced plans holding approximately 99% of total plan 
assets, while the remaining 1,280 (small recordkeepers) serviced 
plans holding a mere 1%. The Department of Labor considered other 
thresholds for recordkeepers and selected the 99 percent threshold 
for recordkeepers to include more recordkeepers in cost estimates, 
and thus avoid underestimating costs.
    \558\ See Rules Regarding Availability of Information [85 FR 
57616 (Sept. 15, 2020)], at n.7 and accompanying text (stating that 
as of Mar. 2020, there were approximately 2,925 small bank holding 
companies, 132 small savings and loan holding companies, and 472 
small State member banks). We estimate a total of 3,529 small banks 
supervised by the Federal Reserve as of Mar. 2020.
    \559\ We lack data for estimating the number of small insurance 
companies.

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[[Page 77286]]

4. Reporting Requirements
a. Form N-1A
    Form N-1A is the form used by certain open-end management 
investment companies to register under the Investment Company Act and 
to register their securities under the Securities Act. We propose to 
amend Item 11(a) of Form N-1A to require, if applicable, that funds 
disclose that if an investor places an order with a financial 
intermediary, the financial intermediary may require the investor to 
submit its order earlier to receive the next calculated NAV. We also 
propose to remove the requirement to provide an upper limit on the 
swing factor from Item 6(d).
    We estimate that approximately 33 funds are small entities that 
would be required to comply with our proposed amendments for Form N-
1A.\560\ The proposed amendments would impose burdens on all open-end 
funds (other than money market funds and ETFs), including those that 
are small entities. We discuss the specifics of these burdens in the 
Economic Analysis and Paperwork Reduction Act sections above. These 
sections also discuss the professional skills that we believe 
compliance with this aspect of the proposal would require. We recognize 
that, due to economies of scale, the costs associated with the proposed 
amendments to Form N-1A may be more easily borne by larger fund 
complexes than smaller ones, and that costs borne by funds would be 
passed along to investors in the form of higher fees and expenses.
---------------------------------------------------------------------------

    \560\ See text following supra note 550. ETFs and money market 
funds file reports on Form N-1A but would not be impacted by our 
proposed amendments.
---------------------------------------------------------------------------

b. Form N-PORT
    Form N-PORT requires open-end and closed-end funds, as well as ETFs 
organized as UITs, to report monthly portfolio holdings information on 
a quarterly basis in a structured, XML format. We propose the following 
amendments to Form N-PORT: (1) require funds to file Form N-PORT on a 
monthly basis, within 30 days after the end of each month; (2) require 
open-end funds to report the aggregate percentage of a fund's portfolio 
represented in each of the three proposed liquidity categories, which 
would be publicly available; (3) provide enhanced transparency into the 
frequency and amount of a fund's swing pricing adjustments; and (4) 
changes to entity identifiers.
    We estimate that approximately 75 open-end and closed-end funds are 
small entities that would be required to comply with our proposed 
amendments for Form N-PORT.\561\ The proposed amendments would impose 
burdens on all Form N-PORT filers, including those that are small 
entities. We discuss the specifics of these burdens in the Economic 
Analysis and Paperwork Reduction Act sections above. These sections 
also discuss the professional skills that we believe compliance with 
this aspect of the proposal would require. We recognize that, due to 
economies of scale, the costs associated with the proposed amendments 
to Form N-PORT may be more easily borne by larger fund complexes than 
smaller ones, and that costs borne by funds would be passed along to 
investors in the form of higher fees and expenses.
---------------------------------------------------------------------------

    \561\ See text following supra note 550. Money market funds do 
not file Form N-PORT. While exchange-traded funds organized as unit 
investment trusts file Form N-PORT, there are no such funds that 
would be considered small entities.
---------------------------------------------------------------------------

c. Form N-CEN
    Form N-CEN is used to collect annual, census-type information for 
all registered investment companies, other than face-amount certificate 
companies. Filers must submit this report electronically using the 
Commission's EDGAR system in XML format. We propose amendments to Form 
N-CEN that would identify liquidity service providers and certain 
related information, as well as remove the requirements that a filer 
report information regarding its use of swing pricing, which is being 
moved to Form N-PORT. We also propose amendments related to entity 
identifiers.
    We estimate that approximately 82 funds are small entities that 
would be required to comply with our proposed amendments for Form N-
CEN.\562\ The proposed amendments would impose burdens on all Form N-
CEN filers, including those that are small entities. We discuss the 
specifics of these burdens in the Economic Analysis and Paperwork 
Reduction Act sections above. These sections also discuss the 
professional skills that we believe compliance with this aspect of the 
proposal would require. We recognize that, due to economies of scale, 
the costs associated with the proposed amendments to Form N-CEN may be 
more easily borne by larger fund complexes than smaller ones, and that 
costs borne by funds would be passed along to investors in the form of 
higher fees and expenses.
---------------------------------------------------------------------------

    \562\ See text following supra note 550. In-kind ETFs would not 
be affected by the proposed amendments to report information about 
liquidity classification vendors but, to avoid under-estimating the 
number of small entities, we assume that the 11 small entity ETFs 
are not in-kind ETFs and would be affected by the change. We 
similarly assume that all 44 funds that are small entities would use 
a liquidity classification vendor, although this may not be the 
case. If a fund does not use a liquidity classification vendor, it 
would not be required to report information about a vendor on Form 
N-CEN.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We do not believe that the proposed amendments would duplicate, 
overlap, or conflict with other existing Federal rules.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish our stated objectives, while minimizing any 
significant economic impact on small entities. We considered the 
following alternatives for small entities in relation to the proposed 
amendments to rules 22e-4 and 22c-1, as well as the proposed disclosure 
and reporting requirements: (1) establishing different requirements 
that take into account the resources available to small entities; (2) 
exempting small entities from all or part of the requirements; (3) 
clarifying, consolidating, or simplifying requirements under the rules 
for small entities; and (4) using performance rather than design 
standards.
    We do not believe that establishing different requirements for, or 
exempting, any subset of funds, including funds that are small 
entities, from the proposed amendments to rule 22e-4 would permit us to 
achieve our stated objectives. As discussed above, we believe that the 
proposed liquidity amendments would improve liquidity risk management 
programs to better prepare funds for stressed conditions and improve 
transparency in liquidity classifications. Small funds do not entail 
less liquidity risk than larger funds, and investors in small funds 
would benefit from improvements in the liquidity risk management 
programs and more transparent liquidity classifications just as 
investors in larger funds would. We therefore do not believe it would 
be appropriate to establish different requirements for, or exempt, 
funds that are small entities from the proposed liquidity risk 
management amendments to rule 22e-4. Similarly, our objectives would 
not be served by clarifying, consolidating, or simplifying the 
liquidity requirements for small entities. With respect to using 
performance rather than design standards, the proposed amendments 
primarily use design rather than performance standards to better 
prepare funds for stressed market conditions, prevent funds from over-
estimating the

[[Page 77287]]

liquidity of their investments, and improve transparency of fund 
liquidity.
    Regarding the proposed changes to the liquidity classification 
framework, we acknowledge that to the extent that small funds would 
experience a more substantial operational burden compared to larger 
fund complexes that exhibit economies of scale, smaller funds may 
become less competitive than larger funds. However, we believe there 
are no significant alternatives for smaller funds other than exemption, 
and providing an exemption from the proposed liquidity classification 
changes could subject investors in small funds to greater liquidity 
risk and would create diverging liquidity frameworks among funds, as 
small funds are already subject to the current rule's liquidity 
classification requirements.
    Additionally, we are not establishing different requirements for, 
or exempting, funds that are small entities from the swing pricing 
requirement, because we believe that all funds should be required to 
use swing pricing as a tool to mitigate potential shareholder dilution. 
We do not believe that the potential dilution that proposed rule 22c-
1(b) is meant to prevent would affect large funds and their 
shareholders more significantly than small funds and their 
shareholders. We acknowledge that a fund that is a small entity would 
need to incur the costs of compliance with the proposed amendments to 
the rule, which may constitute a greater percentage of the small fund's 
net assets than with a larger fund. We also acknowledge that certain 
larger fund groups with both U.S. and European operations may already 
have experience with swing pricing that smaller funds would not, which 
could result in greater costs, relative to a fund's net assets, for 
smaller funds than larger ones. However, despite these considerations, 
we do not believe that investors in small funds should be afforded less 
protection against the risk of dilution than investors in large funds.
    We therefore do not believe it would be appropriate to establish 
different requirements for, or to exempt, funds that are small entities 
from the proposed swing pricing requirement. For example, we are not 
allowing funds that are small entities to use a different inflow swing 
threshold or market impact threshold than those the proposed rule 
identifies. As discussed above, we do not believe the potential 
dilution that the proposed swing pricing requirement is meant to 
prevent would affect large funds and their shareholders more 
significantly than small funds and their shareholders. Permitting funds 
that are small entities to use higher thresholds could subject small 
funds to greater dilution than larger funds, and we believe all 
investors should be afforded the same protection against the risk of 
dilution.\563\ Similarly, our objectives would not be served by 
clarifying, consolidating, or simplifying the swing pricing 
requirements for small entities. With respect to using performance 
rather than design standards, the proposed amendments primarily use 
design rather than performance standards to promote more consistent and 
uniform standards for all funds. We are also not establishing different 
requirements for, or exempting, funds that are small entities from the 
proposed hard close requirement because we believe the requirement is 
important to every fund's ability to operationalize swing pricing. Our 
hard close proposal is designed to support the proposed swing pricing 
amendments by facilitating the more timely receipt of fund order flow 
information. We believe that requiring a hard close would reduce a 
fund's reliance on estimates, providing more accurate swing factor 
determinations. We do not believe investors in smaller funds would 
benefit from a greater use of estimates than investors in larger funds. 
We therefore do not believe it would be appropriate to establish 
different requirements for, or exempt, funds that are small entities 
from the proposed hard close requirement in rule 22c-1. Similarly, our 
objectives would not be served by clarifying, consolidating, or 
simplifying the hard close requirement for small entities. With respect 
to using performance rather than design standards, the proposed 
amendments primarily use design rather than performance standards to 
promote more consistent and uniform standards for all funds.
---------------------------------------------------------------------------

    \563\ While we recognize that smaller funds may be less likely 
than larger funds to have market impact costs at the 1% threshold 
for net redemptions or the 2% threshold for net purchases, as 
discussed above, we believe uniform thresholds for all funds would 
provide a consistent and objective threshold for all funds to 
consider market impacts.
---------------------------------------------------------------------------

    Finally, we do not believe that the interest of investors would be 
served by establishing different requirements for, or exempting, funds 
that are small entities from the proposed disclosure and reporting 
amendments, or subjecting these funds to different disclosure and 
reporting requirements than larger funds. We believe that all fund 
investors, including investors in funds that are small entities, would 
benefit from disclosure and reporting requirements that would permit 
them to make investment choices that better match their risk 
tolerances. Furthermore, we note that the current disclosure 
requirements on Form N-1A, Form N-PORT, and Form N-CEN do not 
distinguish between small entities and other funds. Similarly, our 
objectives would not be served by clarifying, consolidating or 
simplifying the proposed disclosure and reporting requirements for 
small entities. With respect to using performance rather than design 
standards, the proposed amendments primarily use design rather than 
performance standards to promote more consistent and uniform standards 
for all funds.
    We recognize that, due to economies of scale, the costs associated 
with the proposed amendments to these forms may be more easily borne by 
larger fund complexes than smaller ones, and that costs borne by funds 
would be passed along to investors in the form of higher fees and 
expenses. However, we believe there are no significant alternatives for 
smaller funds other than exemption, and providing exemptions for 
smaller funds from the proposed reporting and disclosure requirements 
would disadvantage investors in smaller funds by creating a lack of 
information about these funds' use of swing pricing or aggregate 
liquidity classifications.

G. General Request for Comment

    The Commission requests comments regarding this IRFA. We request 
comments on the number of small entities that may be affected by our 
proposed amendments, including for the affected small intermediaries 
that we lack data to quantify with accuracy, and whether the proposed 
amendments would have any effects not considered in this analysis. We 
request that commenters describe the nature of any effects on small 
entities subject to the rules and forms, and provide empirical data to 
support the nature and extent of such effects. We also request comment 
on the proposed compliance burdens and the effect these burdens would 
have on smaller entities.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \564\ we must advise OMB whether a proposed 
regulation constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results in or is likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for

[[Page 77288]]

consumers or individual industries; or (3) significant adverse effects 
on competition, investment or innovation.
---------------------------------------------------------------------------

    \564\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on whether the proposal would be a ``major 
rule'' for purposes of SBREFA. We request comment on the potential 
impact of the proposed rule on the economy on an annual basis; any 
potential increase in costs or prices for consumers or individual 
industries; and any potential effect on competition, investment, or 
innovation. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.

Statutory Authority

    The Commission is proposing the rule and form amendments contained 
in this document under the authority set forth in the Investment 
Company Act, particularly sections 6, 8, 22, 24, 30, 31, 34, 38, and 45 
thereof [15 U.S.C. 80a-1 et seq.], the Investment Advisers Act, 
particularly section 206 thereof [15 U.S.C. 80b-1 et seq.], the 
Exchange Act, particularly sections 10, 13, 15, 23, and 35A thereof [15 
U.S.C. 78a et seq.], the Securities Act, particularly sections 7, 10, 
17, and 19 thereof [15 U.S.C. 77a et seq.], the Trust Indenture Act, 
particularly section 319 thereof [15 U.S.C. 77aaa et seq.], and 44 
U.S.C. 3506-3507.

List of Subjects in 17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rules and Rule and Form Amendments

    For the reasons set forth in the preamble, the Commission is 
proposing to amend title 17, chapter II of the Code of Federal 
Regulations as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The authority citation for part 270 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
    Section 270.22c-1 also issued under secs. 6(c), 22(c), and 38(a) 
(15 U.S.C. 80a-6(c), 80a-22(c), and 80a-37(a));
* * * * *
    Section 270.31a-2 is also issued under 15 U.S.C. 80a-30.
0
2. Amend Sec.  270.22c-1 by revising it to read as follows:


Sec.  270.22c-1   Pricing of redeemable securities for distribution, 
redemption and repurchase.

    (a) Forward pricing required. No registered investment company 
issuing any redeemable security, no person designated in such issuer's 
prospectus as authorized to consummate transactions in any such 
security, no principal underwriter of, or dealer in, any such security 
shall sell, redeem, or repurchase any such security except at a price 
based on the current net asset value of such security established for 
the next pricing time after receipt of a direction to purchase or 
redeem such security.
    (1) The investment company's board of directors must initially set 
the pricing time(s), and must make and approve any changes to the 
pricing time(s).
    (2) The investment company must calculate the current net asset 
value of any redeemable security at least once daily, Monday through 
Friday, at the pricing time(s) its board of directors set, except on:
    (i) Days during which the investment company receives no direction 
to purchase or redeem its redeemable securities; or
    (ii) Customary national business holidays described or listed in 
the prospectus and local and regional business holidays listed in the 
prospectus.
    (3) For an investment company that is required to implement swing 
pricing under paragraph (b) of this section:
    (i) A direction to purchase or redeem the investment company's 
redeemable securities is eligible to receive the price established for 
a pricing time solely if the investment company, its designated 
transfer agent, or a registered clearing agency receives an eligible 
order before that pricing time; and
    (ii) The price an eligible order receives is based on the current 
net asset value as of the pricing time and includes any adjustment to 
the current net asset value required by paragraph (b) of this section.
    (b) Swing pricing requirement. A registered open-end management 
investment company (but not a registered open-end management investment 
company that is regulated as a money market fund under Sec.  270.2a-7 
or an exchange-traded fund as defined in paragraph (d) of this section) 
(a ``fund'') must establish and implement swing pricing policies and 
procedures as described in paragraphs (b)(1) through (5) of this 
section in order to adjust its current net asset value per share to 
mitigate dilution of the value of its outstanding redeemable securities 
as a result of shareholder purchase or redemption activity.
    (1) The fund's swing pricing policies and procedures must:
    (i) Provide that the fund must adjust its net asset value per share 
by a swing factor if the fund has net redemptions or if the fund has 
net purchases exceeding its inflow swing threshold. The swing pricing 
administrator must review investor flow information to determine if the 
fund has net purchases or net redemptions and the amount of net 
purchases or net redemptions. The swing pricing administrator is 
permitted to make such determination based on reasonable, high 
confidence estimates; and
    (ii) Specify the process for determining the swing factor, in 
accordance with paragraph (b)(2) of this section.
    (2) In determining the swing factor, the swing pricing 
administrator must make good faith estimates, supported by data, of the 
costs the fund would incur if it purchased or sold a pro rata amount of 
each investment in its portfolio equal to the amount of net purchases 
or net redemptions.
    (i) If the fund has net redemptions, the good faith estimates must 
include, for selling the pro rata amount of each investment in the 
fund's portfolio:
    (A) Spread costs;
    (B) Brokerage commissions, custody fees, and any other charges, 
fees, and taxes associated with portfolio investment sales; and
    (C) If the amount of the fund's net redemptions exceeds the market 
impact threshold, the market impact, as described in paragraph 
(b)(2)(iii) of this section.
    (ii) If the amount of the fund's net purchases exceeds the inflow 
swing threshold, the good faith estimates must include, for purchasing 
the pro rata amount of each investment in the fund's portfolio:
    (A) Spread costs;
    (B) Brokerage commissions, custody fees, and any other charges, 
fees, and taxes associated with portfolio investment purchases; and
    (C) The market impact, as described in paragraph (b)(2)(iii) of 
this section.
    (iii) A fund must determine market impact by:
    (A) Establishing a market impact factor for each investment, which 
is an estimate of the percentage change in the value of the investment 
if it were purchased or sold, per dollar of the amount of the 
investment that would be purchased or sold; and
    (B) Multiplying the market impact factor for each investment by the 
dollar amount of the investment that would be

[[Page 77289]]

purchased or sold if the fund purchased or sold a pro rata amount of 
each investment in its portfolio to invest the net purchases or meet 
the net redemptions.
    (iv) The swing pricing administrator may estimate costs and market 
impact factors for each type of investment with the same or 
substantially similar characteristics and apply those estimates to all 
investments of that type rather than analyze each investment 
separately.
    (3) The fund's board of directors, including a majority of 
directors who are not interested persons of the fund, must:
    (i) Approve the fund's swing pricing policies and procedures;
    (ii) Designate the fund's swing pricing administrator. The 
administration of swing pricing must be reasonably segregated from 
portfolio management of the fund and may not include portfolio 
managers; and
    (iii) Review, no less frequently than annually, a written report 
prepared by the swing pricing administrator that describes:
    (A) The swing pricing administrator's review of the adequacy of the 
fund's swing pricing policies and procedures and the effectiveness of 
their implementation, including their effectiveness at mitigating 
dilution;
    (B) Any material changes to the fund's swing pricing policies and 
procedures since the date of the last report; and
    (C) The swing pricing administrator's review and assessment of the 
fund's swing factors, considering the requirements of paragraph (b)(2) 
of this section, including the information and data supporting the 
determination of the swing factors and, if the swing pricing 
administrator implements either an inflow swing threshold lower than 2 
percent of the fund's net assets or a market impact threshold lower 
than 1 percent of the fund's net assets, the information and data 
supporting the determination of such threshold.
    (4) The fund must maintain the policies and procedures adopted by 
the fund under this paragraph (b) that are in effect, or at any time 
within the past six years were in effect, in an easily accessible 
place, and must maintain a written copy of the report provided to the 
board under paragraph (b)(3)(iii) of this section for six years, the 
first two in an easily accessible place.
    (5) Any fund (a ``feeder fund'') that invests, pursuant to section 
12(d)(1)(E) of the Act (15 U.S.C. 80a-12(d)(1)(E)), in another fund (a 
``master fund'') may not use swing pricing to adjust the feeder fund's 
net asset value per share; however, a master fund must use swing 
pricing to adjust the master fund's net asset value per share, pursuant 
to the requirements set forth in this paragraph (b).
    (6) Notwithstanding section 18(f)(1) of the Act (15 U.S.C. 80a-
18(f)(1)), a fund with a share class that is an exchange-traded fund is 
subject to the swing pricing requirement only with respect to any share 
classes that are not exchange-traded funds.
    (c) Exceptions permitted. Notwithstanding paragraph (a) of this 
section:
    (1) Secondary market transactions. A sponsor of a unit investment 
trust (``trust'') engaged exclusively in the business of investing in 
eligible trust securities (as defined in Sec.  270.14a-3(b)) may sell 
or repurchase trust units in a secondary market at a price based on the 
offering side evaluation of the eligible trust securities in the 
trust's portfolio, determined at any time on the last business day of 
each week, effective for all sales made during the following week, if 
on the days that such sales or repurchases are made the sponsor 
receives a letter from a qualified evaluator stating, in its opinion, 
that:
    (i) In the case of repurchases, the current bid price is not higher 
than the offering side evaluation, computed on the last business day of 
the previous week; and
    (ii) In the case of resales, the offering side evaluation, computed 
as of the last business day of the previous week, is not more than one-
half of one percent ($5.00 on a unit representing $1,000 principal 
amount of eligible trust securities) greater than the current offering 
price.
    (2) Notwithstanding the provisions above, any registered separate 
account offering variable annuity contracts, any person designated in 
such account's prospectus as authorized to consummate transactions in 
such contracts, and any principal underwriter of or dealer in such 
contracts must be permitted to apply the initial purchase payment for 
any such contract at a price based on the current net asset value of 
such contract which is next computed:
    (i) Not later than two business days after receipt of the direction 
to purchase by the insurance company sponsoring the separate account 
(``insurer''), if the contract application and other information 
necessary for processing the direction to purchase (collectively, 
``application'') are complete upon receipt; or
    (ii) Not later than two business days after an application which is 
incomplete upon receipt by the insurer is made complete, provided that, 
if an incomplete application is not made complete within five business 
days after receipt,
    (A) The prospective purchaser is informed of the reasons for the 
delay; and
    (B) The initial purchase payment is returned immediately and in 
full, unless the prospective purchaser specifically consents to the 
insurer retaining the purchase payment until the application is made 
complete.
    (3) This paragraph does not prevent any registered investment 
company from adjusting the price of its redeemable securities sold 
pursuant to a merger, consolidation or purchase of substantially all of 
the assets of a company that meets the conditions specified in Sec.  
270.17a-8.
    (d) Definitions. For the purposes of this section:
    Designated transfer agent means a registered transfer agent (as 
defined in section 3(a)(25) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(25))) that is designated in the fund's registration 
statement filed with the Commission.
    Eligible order means a direction, which is irrevocable as of the 
next pricing time after receipt, to:
    (i) Purchase or redeem a specific number of fund shares or an 
indeterminate number of fund shares of a specific value; or
    (ii) Purchase the fund's shares using the proceeds of a 
contemporaneous order to redeem a specific number of shares of another 
registered investment company (an exchange).
    Exchange-traded fund means an open-end management investment 
company (or series or class thereof), the shares of which are listed 
and traded on a national securities exchange, and that has formed and 
operates under an exemptive order under the Act granted by the 
Commission or in reliance on Sec.  270.6c-11.
    Inflow swing threshold means an amount of net purchases equal to 2 
percent of a fund's net assets, or such smaller amount of net purchases 
as the swing pricing administrator determines is appropriate to 
mitigate dilution.
    Initial purchase payment means the first purchase payment submitted 
to the insurer by, or on behalf of, a prospective purchaser.
    Investor flow information means information about the fund 
investors' daily purchase and redemption activity, which may consist of 
individual, aggregated, or netted eligible orders, and which excludes 
any purchases or redemptions that are made in kind and not in cash.
    Market impact threshold means an amount of net redemptions equal to 
1

[[Page 77290]]

percent of a fund's net assets, or such smaller amount of net 
redemptions as the swing pricing administrator determines is 
appropriate to mitigate dilution.
    Pricing time means the time or times of day as of which the 
investment company calculates the current net asset value of its 
redeemable securities pursuant to paragraph (a) of this section.
    Prospective purchaser means either an individual contract owner or 
an individual participant in a group contract.
    Qualified evaluator means any evaluator that represents it is in a 
position to determine, on the basis of an informal evaluation of the 
eligible trust securities held in a unit investment trust's portfolio, 
whether:
    (i) The current bid price is higher than the offering side 
evaluation, computed on the last business day of the previous week; and
    (ii) The offering side evaluation, computed as of the last business 
day of the previous week, is more than one-half of one percent ($5.00 
on a unit representing $1,000 principal amount of eligible trust 
securities) greater than the current offering price.
    Swing factor means the amount, expressed as a percentage of the 
fund's net asset value and determined pursuant to the fund's swing 
pricing policies and procedures, by which a fund adjusts its net asset 
value per share.
    Swing pricing means the process of adjusting a fund's current net 
asset value per share to mitigate dilution of the value of its 
outstanding redeemable securities as a result of shareholder purchase 
and redemption activity, pursuant to the requirements set forth in 
paragraph (b) of this section.
    Swing pricing administrator means the fund's investment adviser, 
officer, or officers responsible for administering the swing pricing 
policies and procedures. The swing pricing administrator may consist of 
a group of persons.
0
3. Amend Sec.  270.22e-4 by:
0
a. Removing paragraphs (a)(3) and (10);
0
b. Removing the designations for paragraphs (a)(1) and (2) and (a)(4) 
through (14) and placing in alphabetical order;
0
c. Adding, in alphabetical order, a definition for ``Convertible to 
U.S. dollars'';
0
d. Revising the definitions for ``Exchange-traded fund'', ``Highly 
liquid investment'', ``Illiquid investment'', ``In-Kind Exchange Traded 
Fund or In-Kind ETF'', ``Liquidity risk'', ``Moderately liquid 
investment'', and ``Person(s) designated to administer the program'';
0
e. Adding, in alphabetical order, a definition for ``Significantly 
changing the market value of an investment''; and
0
f. Revising paragraphs (b)(1)(i)(C), (b)(1)(ii) and (iii), (b)(1)(iv) 
introductory text, and (b)(3)(iii).
    The revisions read as follows:


Sec.  270.22e-4  Liquidity risk management programs.

    (a) * * *
    Convertible to U.S. dollars means the ability to be sold or 
disposed of, with the sale or disposition settled in U.S. dollars.
    Exchange-traded fund or ETF means an open-end management investment 
company (or series or class thereof), the shares of which are listed 
and traded on a national securities exchange, and that has formed and 
operates under an exemptive order under the Act granted by the 
Commission or in reliance on Sec.  270.6c-11.
* * * * *
    Highly liquid investment means any U.S. dollars held by a fund and 
any investment that the fund reasonably expects to be convertible to 
U.S. dollars in current market conditions in three business days or 
less without significantly changing the market value of the investment, 
as determined pursuant to the provisions of paragraph (b)(1)(ii) of 
this section.
* * * * *
    Illiquid investment means any investment that the fund reasonably 
expects not to be convertible to U.S. dollars in current market 
conditions in seven calendar days or less without significantly 
changing the market value of the investment, as determined pursuant to 
the provisions of paragraph (b)(1)(ii) of this section. Any investment 
whose fair value is measured using an unobservable input that is 
significant to the overall measurement is an illiquid investment.
    In-Kind Exchange Traded Fund or In-Kind ETF means an ETF that meets 
redemptions through in-kind transfers of securities, positions, and 
assets other than a de minimis amount of U.S. dollars and that 
publishes its portfolio holdings daily.
    Liquidity risk means the risk that the fund could not meet requests 
to redeem shares issued by the fund without significant dilution of 
remaining investors' interests in the fund.
    Moderately liquid investment means any investment that is neither a 
highly liquid investment nor an illiquid investment.
    Person(s) designated to administer the program means the fund or 
In-Kind ETF's investment adviser, officer, or officers (which may not 
be solely portfolio managers of the fund or In-Kind ETF) responsible 
for administering the program and its policies and procedures pursuant 
to paragraph (b)(2)(ii) of this section.
    Significantly changing the market value of an investment means:
    (i) For shares listed on a national securities exchange or a 
foreign exchange, any sale or disposition of more than 20% of the 
average daily trading volume of those shares, as measured over the 
preceding 20 business days.
    (ii) For any other investment, any sale or disposition that the 
fund reasonably expects would result in a decrease in sale price of 
more than 1%.
* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (C) Holdings of U.S. dollars and cash equivalents, as well as 
borrowing arrangements and other funding sources; and
* * * * *
    (ii) Classification. Each fund must, using information obtained 
after reasonable inquiry and taking into account relevant market, 
trading, and investment-specific considerations, classify daily each of 
the fund's portfolio investments (including each of the fund's 
derivatives transactions) as a highly liquid investment, moderately 
liquid investment, or illiquid investment. To determine the liquidity 
classification of each investment, the fund must:
    (A) Measure the number of days in which the investment is 
reasonably expected to be convertible to U.S. dollars without 
significantly changing the market value of the investment, and include 
the day on which the liquidity classification is made in that 
measurement; and
    (B) Assume the sale of 10% of the fund's net assets by reducing 
each investment by 10%.
    (iii) Highly liquid investment minimum. A fund must determine and 
maintain a highly liquid investment minimum that is equal to or higher 
than 10% of the fund's net assets.
    (A) When determining a highly liquid investment minimum, a fund 
must consider the factors specified in paragraphs (b)(1)(i)(A) through 
(D) of this section, as applicable (but considering those factors 
specified in paragraphs (b)(1)(i)(A) and (B) only as they apply during 
normal conditions, and during stressed conditions only to the extent 
they are reasonably foreseeable during the period until the next review 
of the highly liquid investment minimum).

[[Page 77291]]

    (B) For purposes of determining compliance with its highly liquid 
investment minimum, the fund must reduce the value of its highly liquid 
investments that are assets otherwise eligible to meet the fund's 
highly liquid investment minimum by an amount equal to:
    (1) The value of any highly liquid investments that are assets 
posted as margin or collateral in connection with any derivatives 
transaction that the fund has classified as a moderately liquid 
investment or illiquid investment; and

    Note 1 to paragraph (b)(1)(iii)(B)(1):
     A fund that has posted highly liquid investments and non-highly 
liquid investments as margin or collateral in connection with 
derivatives transactions classified as moderately liquid or illiquid 
investments first should apply posted assets that are highly liquid 
investments in connection with these transactions, unless it has 
specifically identified non-highly liquid investments as margin or 
collateral in connection with such derivatives transactions.

    (2) Any fund liabilities.
    (C) The highly liquid investment minimum determined pursuant to 
paragraph (b)(1)(iii) of this section may not be changed during any 
period of time that a fund's assets that are highly liquid investments 
are below the determined minimum without approval from the fund's board 
of directors, including a majority of directors who are not interested 
persons of the fund;
    (D) A fund must periodically review, no less frequently than 
annually, the highly liquid investment minimum; and
    (E) A fund must adopt and implement policies and procedures for 
responding to a shortfall of the fund's highly liquid investments below 
its highly liquid investment minimum, which must include requiring the 
person(s) designated to administer the program to report to the fund's 
board of directors no later than its next regularly scheduled meeting 
with a brief explanation of the causes of the shortfall, the extent of 
the shortfall, and any actions taken in response, and if the shortfall 
lasts more than 7 consecutive calendar days, must include requiring the 
person(s) designated to administer the program to report to the board 
within one business day thereafter with an explanation of how the fund 
plans to restore its minimum within a reasonable period of time.
    (iv) Illiquid investments. No fund or In-Kind ETF may acquire any 
illiquid investment if, immediately after the acquisition, the fund or 
In-Kind ETF would have invested more than 15% of its net assets in 
illiquid investments that are assets. In determining its compliance 
with this paragraph, in addition to the value of a fund's illiquid 
investments that are assets, where a fund has posted margin or 
collateral in connection with a derivatives transaction that is 
classified as an illiquid investment, the fund also must include as 
illiquid investments that are assets the value of margin or collateral 
posted in connection with the derivatives transaction that the fund 
would receive if it exited the transaction. If a fund or In-Kind ETF 
holds more than 15% of its net assets in illiquid investments that are 
assets:
* * * * *
    (3) * * *
    (iii) If applicable, a written record of the policies and 
procedures related to how the highly liquid investment minimum, and any 
adjustments thereto, were determined, including assessment of the 
factors incorporated in paragraph (b)(1)(iii)(A) of this section and 
any materials provided to the board pursuant to paragraph 
(b)(1)(iii)(E) of this section, for a period of not less than five 
years (the first two years in an easily accessible place) following the 
determination of, and each change to, the highly liquid investment 
minimum.
* * * * *
0
4. Amend Sec.  270.30b1-9 by revising it to read as follows:


Sec.  270.30b1-9  Monthly report.

    Each registered management investment company or exchange-traded 
fund organized as a unit investment trust, or series thereof, other 
than a registered open-end management investment company that is 
regulated as a money market fund under Sec.  270.2a-7 or a small 
business investment company registered on Form N-5 (Sec. Sec.  239.24 
and 274.5 of this chapter), must file a monthly report of portfolio 
holdings on Form N-PORT (Sec.  274.150 of this chapter), current as of 
the last business day, or last calendar day, of the month. A registered 
investment company that has filed a registration statement with the 
Commission registering an offering of its securities for the first time 
under the Securities Act of 1933 is relieved of this reporting 
obligation with respect to any reporting period or portion thereof 
prior to the date on which that registration statement becomes 
effective or is withdrawn. Reports on Form N-PORT must be filed with 
the Commission no later than 30 days after the end of each month.
0
5. Amend Sec.  270.31a-2 by revising paragraph (a)(2) to read as 
follows:


Sec.  270.31a-2  Records to be preserved by registered investment 
companies, certain majority-owned subsidiaries thereof, and other 
persons having transactions with registered investment companies.

    (a) * * *
    (2) Preserve for a period not less than six years from the end of 
the fiscal year in which any transactions occurred, the first two years 
in an easily accessible place, all books and records required to be 
made pursuant to paragraphs (b)(5) through (12) of Sec.  270.31a-1 and 
all vouchers, memoranda, correspondence, checkbooks, bank statements, 
cancelled checks, cash reconciliations, cancelled stock certificates, 
and all schedules evidencing and supporting each computation of net 
asset value of the investment company shares, including schedules 
evidencing and supporting each computation of an adjustment to net 
asset value of the investment company shares based on swing pricing 
policies and procedures established and implemented pursuant to Sec.  
270.22c-1(b), and other documents required to be maintained by Sec.  
270.31a-1(a) and not enumerated in Sec.  270.31a-1(b).
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
6. The general authority citation for part 274 continues to read as 
follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and 80a-37, unless 
otherwise noted.
* * * * *
0
7. Amend Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) by 
revising Item 6(d) and Item 11(a)(2). The revisions read as follows:

    Note:  The text of Form N-1A does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 6. Purchase and Sale of Fund Shares

* * * * *
    (d) If the Fund uses swing pricing, explain the Fund's use of swing 
pricing; including what swing pricing is, the circumstances under which 
the Fund will use it, and the effects of swing pricing on the Fund and 
investors. With respect to any portion of a Fund's assets that is 
invested in one or more open-end management investment companies that 
are registered under the Investment Company Act, the Fund shall include 
a statement that the Fund's net asset value is calculated based upon 
the net asset

[[Page 77292]]

values of the registered open-end management companies in which the 
Fund invests, and, if applicable, state that the prospectuses for those 
companies explain the circumstances under which they will use swing 
pricing and the effects of using swing pricing.
* * * * *

Item 11. Shareholder Information

    (a) * * *
    (2) A statement as to when calculations of net asset value are made 
and that the price at which a purchase or redemption is effected is 
based on the next calculation of net asset value after the order is 
placed. If applicable, explain that if an investor places an order with 
a financial intermediary, the financial intermediary may require the 
investor to submit its order earlier to receive the next calculated net 
asset value.
* * * * *
0
8. Amend Sec.  274.150(a) by revising it to read as follows:


Sec.  274.150  Form N-PORT, Monthly portfolios holdings report.

    (a) Except as provided in paragraph (b) of this section, this form 
shall be used by registered management investment companies or 
exchange-traded funds organized as unit investment trusts, or series 
thereof, to file reports pursuant to Sec.  270.30b1-9 of this chapter 
not later than 30 days after the end of each month.
* * * * *
0
9. Amend Form N-PORT (referenced in Sec.  274.150) by:
0
a. Revising General Instructions A, E, and F and Items B.4, B.5, B.6, 
B.7, B.8, C.1, C.7, C.10, C.11, Part D, and Part F; and
0
b. Adding Items B.11 and B.12.
    The revisions and addition read as follows:

    Note: The text of Form N-PORT does not, and these amendments 
will not, appear in the Code of Federal Regulations.

Form N-PORT

* * * * *

General Instructions

A. Rule as to Use of Form N-PORT

    Form N-PORT is the reporting form that is to be used for monthly 
reports of Funds other than money market funds and SBICs under section 
30(b) of the Act, as required by rule 30b1-9 under the Act (17 CFR 
270.30b1-9). Funds must report information about their portfolios and 
each of their portfolio holdings as of the last business day, or last 
calendar day, of each month. A registered investment company that has 
filed a registration statement with the Commission registering its 
securities for the first time under the Securities Act of 1933 is 
relieved of this reporting obligation with respect to any reporting 
period or portion thereof prior to the date on which that registration 
statement becomes effective or is withdrawn.
    Reports on Form N-PORT must disclose portfolio information as 
calculated by the fund for the reporting period's ending net asset 
value (commonly, and as permitted by rule 2a-4, the first business day 
following the trade date). Reports on Form N-PORT for each month must 
be filed with the Commission no later than 30 days after the end of 
such month. If the due date falls on a weekend or holiday, the filing 
deadline will be the next business day.
    A Fund may file an amendment to a previously filed report at any 
time, including an amendment to correct a mistake or error in a 
previously filed report. A Fund that files an amendment to a previously 
filed report must provide information in response to all items of Form 
N-PORT, regardless of why the amendment is filed.
* * * * *

E. Definitions

    References to sections and rules in this Form N-PORT are to the 
Act, unless otherwise indicated. Terms used in this Form N-PORT have 
the same meanings as in the Act or related rules (including rule 18f-4 
solely for Items B.9 and 10 of the Form), unless otherwise indicated.
    As used in this Form N-PORT, the terms set out below have the 
following meanings:
    ``Absolute VaR Test'' has the meaning defined in rule 18f-4(a) [17 
CFR 270.18f-4(a)].
    ``Class'' means a class of shares issued by a Fund that has more 
than one class that represents interests in the same portfolio of 
securities under rule 18f-3 [17 CFR 270.18f-3] or under an order 
exempting the Fund from provisions of section 18 of the Act [15 U.S.C. 
80a-18].
    ``Controlled Foreign Corporation'' has the meaning provided in 
section 957 of the Internal Revenue Code [26 U.S.C. 957].
    ``Derivatives Exposure'' has the meaning defined in rule 18f-4(a) 
[17 CFR 270.18f-4(a)].
    ``Designated Index'' has the meaning defined in rule 18f-4(a) [17 
CFR 270.18f-4(a)].
    ``Designated Reference Portfolio'' has the meaning defined in rule 
18f-4(a) [17 CFR 270.18f-4(a)]
    ``Exchange-Traded Fund'' means an open-end management investment 
company (or Series or Class thereof) or unit investment trust (or 
series thereof), the shares of which are listed and traded on a 
national securities exchange at market prices, and that has formed and 
operates under an exemptive order under the Act granted by the 
Commission or in reliance on rule 6c-11 [17 CFR 270.6c-11].
    ``Fund'' means the Registrant or a separate Series of the 
Registrant. When an item of Form N-PORT specifically applies to a 
Registrant or a Series, those terms will be used.
    ``Highly Liquid Investment Minimum'' has the meaning defined in 
rule 22e-4 [17 CFR 270.22e-4].
    ``Illiquid Investment'' has the meaning defined in rule 22e-4 [17 
CFR 270.22e-4].
    ``ISIN'' means, with respect to any security, the ``international 
securities identification number'' assigned by a national numbering 
agency, partner, or substitute agency that is coordinated by the 
Association of National Numbering Agencies.
    ``LEI'' means, with respect to any company, the ``legal entity 
identifier'' as assigned by a utility endorsed by the Global LEI 
Regulatory Oversight Committee or accredited by the Global LEI 
Foundation.
    ``Multiple Class Fund'' means a Fund that has more than one Class.
    ``Registrant'' means a management investment company, or an 
Exchange-Traded Fund organized as a unit investment trust, registered 
under the Act.
    ``Relative VaR Test'' has the meaning defined in rule 18f-4(a) [17 
CFR 270.18f-4(a)].
    ``Restricted Security'' has the meaning defined in rule 144(a)(3) 
under the Securities Act of 1933 [17 CFR 230.144(a)(3)].
    ``RSSD ID'' means the identifier assigned by the National 
Information Center of the Board of Governors of the Federal Reserve 
System.
    ``Securities Portfolio'' has the meaning defined in rule 18f-4(a) 
[17 CFR 270.18f-4(a)].
    ``Series'' means shares offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other series of shares for assets specifically 
allocated to that series in accordance with rule 18f-2(a) [17 CFR 
270.18f-2(a)].
    ``Swap'' means either a ``security-based swap'' or a ``swap'' as 
defined in sections 3(a)(68) and (69) of the Securities Exchange Act of 
1934 [15 U.S.C. 78c(a)(68) and (69)] and any

[[Page 77293]]

rules, regulations, or interpretations of the Commission with respect 
to such instruments.
    ``Swing Factor'' has the meaning defined in rule 22c-1 [17 CFR 
270.22c-1].
    ``Value-at-Risk'' or VaR has the meaning defined in rule 18f-4(a) 
[17 CFR 270.18f-4(a)].
    ``VaR Ratio'' means the value of the Fund's portfolio VaR divided 
by the VaR of the Designated Reference Portfolio.

F. Public Availability

    Information reported on Form N-PORT will be made publicly available 
60 days after the end of the reporting period.
    The SEC does not intend to make public the information reported on 
Form N-PORT with respect to a Fund's Highly Liquid Investment Minimum 
(Item B.7), derivatives transactions (Item B.8), Derivatives Exposure 
for limited derivatives users (Item B.9), median daily VaR (Item 
B.10.a), median VaR Ratio (Item B.10.b.iii), VaR backtesting results 
(Item B.10.c), country of risk and economic exposure (Item C.5.b), 
delta (Items C.9.f.v, C.11.c.vii, or C.11.g.iv), liquidity 
classification for individual portfolio investments (Item C.7), or 
miscellaneous securities (Part D), or explanatory notes related to any 
of those topics (Part E) that is identifiable to any particular fund or 
adviser. However, the SEC may use information reported on this Form in 
its regulatory programs, including examinations, investigations, and 
enforcement actions.
* * * * *
    Item B.4. Securities Lending.
    a. * * *
    iii. If the borrower does not have an LEI, provide the borrower's 
RSSD ID, if any.
    iv. Aggregate value of all securities on loan to the borrower.
* * * * *
    Item B.5. Return Information.
a. Total return of the Fund during the reporting period. If the Fund is 
a Multiple Class Fund, report the return for each Class. Such return(s) 
shall be calculated in accordance with the methodologies outlined in 
Item 26(b)(1) of Form N-1A, Instruction 13 to sub-Item 1 of Item 4 of 
Form N-2, or Item 26(b)(i) of Form N-3, as applicable.
* * * * *
    c. Net realized gain (loss) and net change in unrealized 
appreciation (or depreciation) attributable to derivatives for each of 
the following asset categories during the reporting period: commodity 
contracts, credit contracts, equity contracts, foreign exchange 
contracts, interest rate contracts, and other contracts. Within each 
such asset category, further report the same information for each of 
the following types of derivatives instrument: forward, future, option, 
swaption, swap, warrant, and other. Report in U.S. dollars. Losses and 
depreciation shall be reported as negative numbers.
    d. Net realized gain (loss) and net change in unrealized 
appreciation (or depreciation) attributable to investments other than 
derivatives during the reporting period. Report in U.S. dollars. Losses 
and depreciation shall be reported as negative numbers.
    Item B.6. Flow information. Provide the aggregate dollar amounts 
for sales and redemptions/repurchases of Fund shares during the 
reporting period. If shares of the Fund are held in omnibus accounts, 
for purposes of calculating the Fund's sales, redemptions, and 
repurchases, use net sales or redemptions/repurchases from such omnibus 
accounts. The amounts to be reported under this Item should be after 
any front-end sales load has been deducted and before any deferred or 
contingent deferred sales load or charge has been deducted. Shares sold 
shall include shares sold by the Fund to a registered unit investment 
trust. For mergers and other acquisitions, include in the value of 
shares sold any transaction in which the Fund acquired the assets of 
another investment company or of a personal holding company in exchange 
for its own shares. For liquidations, include in the value of shares 
redeemed any transaction in which the Fund liquidated all or part of 
its assets. Exchanges are defined as the redemption or repurchase of 
shares of one Fund or series and the investment of all or part of the 
proceeds in shares of another Fund or series in the same family of 
investment companies.
* * * * *
    Item B.7. Highly Liquid Investment Minimum information.
* * * * *
    b. If applicable, provide the number of days that the eligible 
value of the Fund's holdings in highly liquid investments fell below 
the Fund's Highly Liquid Investment Minimum during the reporting 
period.
* * * * *
    Item B.8. Derivatives Transactions. For portfolio investments of 
open-end management investment companies, provide:
    a. The value of the Fund's highly liquid investments that are 
assets that it has posted as margin or collateral in connection with 
derivatives transactions that are classified as moderately liquid 
investments or illiquid investments under rule 22e-4 [17 CFR 270.22e-
4].
    b. The value of any margin or collateral posted in connection with 
any derivatives transaction that is classified as an illiquid 
investment under rule 22e-4 [17 CFR 270.22e-4] where the fund would 
receive the value of the margin or collateral if it exited the 
derivatives transaction.
* * * * *
    Item B.11. Swing Factor.
    a. Provide the number of times the Fund applied a Swing Factor 
during the reporting period.
    b. For each business day during the reporting period, provide the 
amount of any Swing Factor applied by the Fund. Indicate whether each 
Swing Factor applied is positive (reflecting net purchases) or negative 
(reflecting net redemptions) with the appropriate sign (+ or -). Report 
N/A for any business day on which the fund did not apply a Swing 
Factor.
    Item B.12. Liquidity aggregate classification information. For 
portfolio investments of open-end management investment companies:
    a. Provide the aggregate percentage of investments that are assets 
(excluding any investments that are reflected as liabilities on the 
Fund's balance sheet) compared to total investments that are assets of 
the Fund for each of the following categories as specified in rule 22e-
4:
    1. Highly Liquid Investments.
    2. Moderately Liquid Investments.
    3. Illiquid Investments.
    b. To calculate the aggregate percentages under Item B.12.a, reduce 
the amount of the Fund's assets that are classified as highly liquid 
investments by the amount reported under Item B.8.a and by the amount 
of the fund's liabilities. Increase the amount of the Fund's assets 
that are classified as illiquid investments by the amount reported 
under Item B.8.b. To the extent these adjustments result in the sum of 
the Fund's investments in each category not equaling 100% of the Fund's 
total investments that are assets, the Fund may adjust the percentage 
of investments attributed to the moderately liquid investment category 
so that the sum of the Fund's investments in each category equals 100% 
of the Fund's total investments that are assets.
    Item C.1. Identification of investment.
* * * * *
    c. If the issuer does not have an LEI, provide the issuer's RSSD 
ID, if any.
    d. Title of the issue or description of the investment.
    e. CUSIP (if any).

[[Page 77294]]

    f. At least one of the following other identifiers:
    i. ISIN.
    ii. Ticker (if ISIN is not available).
    iii. Other unique identifier (if ticker and ISIN are not 
available). Indicate the type of identifier used.
* * * * *
    Item C.7. Liquidity classification information.
    a. For portfolio investments of open-end management investment 
companies, provide the liquidity classification(s) for each portfolio 
investment among the following categories as specified in rule 22e-4 
[17 CFR 270.22e-4]. For portfolio investments with multiple liquidity 
classifications, indicate the percentage amount attributable to each 
classification.

i. Highly Liquid Investments
ii. Moderately Liquid Investments
iii. Illiquid Investments
* * * * *
    Instructions to Item C.7. Funds may choose to indicate the 
percentage amount of a holding attributable to multiple classification 
categories only in the following circumstances: (1) if portions of the 
position have differing liquidity features that justify treating the 
portions separately; (2) if a fund has multiple sub-advisers with 
differing liquidity views; or (3) if the fund chooses to classify the 
position through evaluation of how long it would take to liquidate the 
entire position. In (1) and (2), a fund would classify by treating each 
portion of the position as a separate investment to arrive at an 
assumed sale size that is equal to 10% of the fund's net assets by 
reducing each investment by 10%.
* * * * *
    Item C.10. For repurchase and reverse repurchase agreements, also 
provide:
* * * * *
    b. * * *
    iii. If the counterparty does not have an LEI, provide the 
counterparty's RSSD ID, if any.
* * * * *
    Item C.11. For derivatives, also provide:
* * * * *
    b. * * *
    ii. If the counterparty does not have an LEI, provide the 
counterparty's RSSD ID, if any.
* * * * *

Part D: Miscellaneous Securities

    Report miscellaneous securities, if any, using the same Item 
numbers and reporting the same information that would be reported for 
each investment in Part C if it were not a miscellaneous security. 
Information reported in this Item will be nonpublic.
* * * * *

Part F: Exhibits

    Attach no later than 60 days after the end of the reporting period 
the Fund's complete portfolio holdings as of the close of the period 
covered by the report, except for reports covering the last month of 
the Fund's second and fourth fiscal quarters. These portfolio holdings 
must be presented in accordance with the schedules set forth in 
Sec. Sec.  210.12-12--210.12-14 of Regulation S-X [17 CFR 210.12-12--
210.12-14].
* * * * *
0
10. Amend Form N-CEN (referenced in Sec.  274.101) by revising General 
Instruction E and Items B.16, B.17, C.5, C.6, C.9, C.10, C.11, C.12, 
C.13, C.14, C.15, C.16, C.17, C.21, D.12, D.13, D.14, E.2, F.1, F.2, 
F.4, and Instructions to Item G.1 to read as follows:

    Note:  The text of Form N-CEN does not, and these amendments 
will not, appear in the Code of Federal Regulations.

Form N-CEN

* * * * *

General Instructions

* * * * *

E. Definitions

    Except as defined below or where the context clearly indicates the 
contrary, terms used in Form N-CEN have meanings as defined in the Act 
and the rules and regulations thereunder. Unless otherwise indicated, 
all references in the form or its instructions to statutory sections or 
to rules are sections of the Act and the rules and regulations 
thereunder.
    In addition, the following definitions apply:
    ``Class'' means a class of shares issued by a Fund that has more 
than one class that represents interest in the same portfolio of 
securities under rule 18f-3 under the Act (17 CFR 270.18f-3) or under 
an order exempting the Fund from provisions of section 18 of the Act 
(15 U.S.C. 80a-18).
    ``CRD number'' means a central licensing and registration system 
number issued by the Financial Industry Regulatory Authority.
    ``Exchange-Traded Fund'' means an open-end management investment 
company (or Series or Class thereof) or unit investment trust (or 
series thereof), the shares of which are listed and traded on a 
national securities exchange at market prices, and that has formed and 
operates under an exemptive order under the Act granted by the 
Commission or in reliance on rule 6c-11 under the Act (17 CFR 270.6c-
11).
    ``Exchange-Traded Managed Fund'' means an open-end management 
investment company (or Series or Class thereof) or unit investment 
trust (or series thereof), the shares of which are listed and traded on 
a national securities exchange at net asset value-based prices, and 
that has formed and operates under an exemptive order under the Act 
granted by the Commission or in reliance on an exemptive rule under the 
Act adopted by the Commission.
    ``Fund'' means the Registrant or a separate Series of the 
Registrant. When an item of Form N-CEN specifically applies to a 
Registrant or Series, those terms will be used.
    ``LEI'' means, with respect to any company, the ``legal entity 
identifier'' as assigned by a utility endorsed by the Global LEI 
Regulatory Oversight Committee or accredited by the Global LEI 
Foundation.
    ``Money Market Fund'' means an open-end management investment 
company registered under the Act, or Series thereof, that is regulated 
as a money market fund pursuant to rule 2a-7 under the Act (17 CFR 
270.2a-7).
    ``PCAOB number'' means the registration number issued to an 
independent public accountant registered with the Public Company 
Accounting Oversight Board.
    ``Registrant'' means the investment company filing this report or 
on whose behalf the report is filed.
    ``RSSD ID'' means the identifier assigned by the National 
Information Center of the Board of Governors of the Federal Reserve 
System.
    ``SEC File number'' means the number assigned to an entity by the 
Commission when that entity registered with the Commission in the 
capacity in which it is named in Form N-CEN.
    ``Series'' means shares offered by a Registrant that represent 
undivided interests in a portfolio of investments and that are 
preferred over all other Series of shares for assets specifically 
allocated to that Series in accordance with rule 18f-2(a) (17 CFR 
270.18f-2(a)).
* * * * *
    Item B.16. Principal underwriters.
    a. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Is the principal underwriter an affiliated person of the 
Registrant, or its

[[Page 77295]]

investment adviser(s) or depositor? [Y/N]
* * * * *
    Item B.17. Independent public accountant. Provide the following 
information about each independent public accountant:
* * * * *
    d. If no LEI is provided, RSSD ID, if any:__
    e. State, if applicable:__
    f. Foreign country, if applicable:__
    g. Has the independent public accountant changed since the last 
filing? [Y/N]
* * * * *
    Item C.5. Investments in certain foreign corporations.
* * * * *
    b. * * *
    iii. If no LEI is provided, RSSD ID, if any:__
* * * * *
    Item C.6. Securities lending.
* * * * *
    c. * * *
    iii. If no LEI is provided, RSSD ID, if any:__
    iv. Is the securities lending agent an affiliated person, or an 
affiliated person of an affiliated person, of the Fund? [Y/N]
    v. Does the securities lending agent or any other entity indemnify 
the fund against borrower default on loans administered by this agent? 
[Y/N]
    vi. If the entity providing the indemnification is not the 
securities lending agent, provide the following information:
    1. Name of person providing indemnification:__
    2. LEI, if any, of person providing indemnification:__
    3. If no LEI is provided, RSSD ID, if any:__
    vii. Did the Fund exercise its indemnification rights during the 
reporting period? [Y/N]
    d. * * *
    iii. If no LEI is provided, RSSD ID, if any: __
    iv. Is the cash collateral manager an affiliated person, or an 
affiliated person of an affiliated person, of a securities lending 
agent retained by the Fund? [Y/N]
    v. Is the cash collateral manager an affiliated person, or an 
affiliated person of an affiliated person, of the Fund? [Y/N]
* * * * *
    Item C.9. Investment advisers.
    a. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Was the investment adviser hired during the reporting period? 
[Y/N]
    1. If the investment adviser was hired during the reporting period, 
indicate the investment adviser's start date: __
    b. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Termination date:__
    c. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Is the sub-adviser an affiliated person of the Fund's 
investment adviser(s)? [Y/N]
    ix. Was the sub-adviser hired during the reporting period? [Y/N]
    1. If the sub-adviser was hired during the reporting period, 
indicate the sub-adviser's start date:__
    d. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Termination date:
    Item C.10. Transfer agents.
    a. * * *
    iv. If no LEI is provided, RSSD ID, if any:__
    v. State, if applicable:__
    vi. Foreign country, if applicable:__
    vii. Is the transfer agent an affiliated person of the Fund or its 
investment adviser(s)? [Y/N]
    viii. Is the transfer agent a sub-transfer agent? [Y/N]
* * * * *
    Item C.11. Pricing services.
    a. * * *
    ii. LEI, if any, or RSSD ID, if any, or provide and describe other 
identifying number:__
* * * * *
    Item C.12. Custodians.
    a. * * *
    iii. If no LEI is provided, RSSD ID, if any:__
    iv. State, if applicable:__
    v. Foreign country, if applicable:__
    vi. Is the custodian an affiliated person of the Fund or its 
investment adviser(s)? [Y/N]
    vii. Is the custodian a sub-custodian? [Y/N]
    viii. With respect to the custodian, check below to indicate the 
type of custody:
    1. Bank--section 17(f)(1) (15 U.S.C. 80a-17(f)(1)):__
    2. Member national securities exchange--rule 17f-1 (17 CFR 270.17f-
1):__
    3. Self--rule 17f-2 (17 CFR 270.17f-2):__
    4. Securities depository--rule 17f-4 (17 CFR 270.17f-4):__
    5. Foreign custodian--rule 17f-5 (17 CFR 270.17f-5):__
    6. Futures commission merchants and commodity clearing 
organizations--rule 17f-6 (17 CFR 270.17f-6):__
    7. Foreign securities depository--rule 17f-7 (17 CFR 270.17f-7):__
    8. Insurance company sponsor--rule 26a-2 (17 CFR 270.26a-2):__
    9. Other:__ . If other, describe:__.
* * * * *
    Item C.13. Shareholder servicing agents.
    a. * * *
    ii. LEI, if any, or RSSD ID, if any, or provide and describe other 
identifying number:__
* * * * *
    Item C.14. Administrators.
    a. * * *
    ii. LEI, if any, or RSSD ID, if any, or provide and describe other 
identifying number:__
* * * * *
    Item C.15. Affiliated broker-dealers. Provide the following 
information about each affiliated broker-dealer:
* * * * *
    e. If no LEI is provided, RSSD ID, if any:__
    f. State, if applicable:__
    g. Foreign country, if applicable:__
    h. Total commissions paid to the affiliated broker-dealer for the 
reporting period:__
    Item C.16. Brokers.
    a. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Gross commissions paid by the Fund for the reporting 
period:__
* * * * *
    Item C.17. Principal transactions.
    a. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Total value of purchases and sales (excluding maturing 
securities) with Fund:__
* * * * *
    Item C.21. Liquidity classification services. For open-end 
management investment companies subject to rule 22e-4 (17 CFR 270.22e-
4), respond to the following:
    a. Provide the following information about each person that 
provided liquidity classification services to the Fund during the 
reporting period:

[[Page 77296]]

    i. Full name:__
    ii. LEI, if any, or RSSD ID, if any, or provide and describe other 
identifying number:__
    iii. State, if applicable:__
    iv. Foreign country, if applicable:__
    v. Is the liquidity classification service an affiliated person of 
the Fund or its investment adviser(s)? [Y/N]
    vi. Asset class(es) for which liquidity classification services 
were provided to the Fund:__
    b. Was a liquidity classification service hired or terminated 
during the reporting period? [Y/N]
* * * * *
    Item D.12. Investment advisers (small business investment companies 
only).
    a. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Was the investment adviser hired during the reporting period? 
[Y/N]
    1. If the investment adviser was hired during the reporting period, 
indicate the investment adviser's start date:__
    b. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Termination date:__
    c. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Is the sub-adviser an affiliated person of the Fund's 
investment adviser(s)? [Y/N]
    ix. Was the sub-adviser hired during the reporting period? [Y/N]
    1. If the sub-adviser was hired during the reporting period, 
indicate the sub-adviser's start date:__
    d. * * *
    v. If no LEI is provided, RSSD ID, if any:__
    vi. State, if applicable:__
    vii. Foreign country, if applicable:__
    viii. Termination date:__
    Item D.13. Transfer agents (small business investment companies 
only).
    a. * * *
    iv. If no LEI is provided, RSSD ID, if any:__
    v. State, if applicable:__
    vi. Foreign country, if applicable:__
    vii. Is the transfer agent an affiliated person of the Fund or its 
investment adviser(s)? [Y/N]
    viii. Is the transfer agent a sub-transfer agent? [Y/N]
* * * * *
    Item D.14. Custodians (small business investment companies only).
    a. * * *
    iii. If no LEI is provided, RSSD ID, if any:__
    iv. State, if applicable:__
    v. Foreign country, if applicable:__
    vi. Is the custodian an affiliated person of the Fund or its 
investment adviser(s)? [Y/N]
    vii. Is the custodian a sub-custodian? [Y/N]
    viii. With respect to the custodian, check below to indicate the 
type of custody:
    1. Bank--section 17(f)(1) (15 U.S.C. 80a-17(f)(1)):__
    2. Member national securities exchange--rule 17f-1 (17 CFR 270.17f-
1):__
    3. Self--rule 17f-2 (17 CFR 270.17f-2):__
    4. Securities depository--rule 17f-4 (17 CFR 270.17f-4):__
    5. Foreign custodian--rule 17f-5 (17 CFR 270.17f-5):__
    6. Futures commission merchants and commodity clearing 
organizations--rule 17f-6 (17 CFR 270.17f-6):__
    7. Foreign securities depository--rule 17f-7 (17 CFR 270.17f-7):__
    8. Insurance company sponsor--rule 26a-2 (17 CFR 270.26a-2): __
    9. Other:__. If other, describe:__.
* * * * *
    Item E.2. Authorized participants. For each authorized participant 
of the Fund, provide the following information:
* * * * *
    b. SEC file number:__
    c. CRD number:__
    d. LEI, if any:__
    e. If no LEI is provided, RSSD ID, if any:__
    f. The dollar value of the Fund shares the authorized participant 
purchased from the Fund during the reporting period:__
    g. The dollar value of the Fund shares the authorized participant 
redeemed during the reporting period:__
    h. Did the Fund require that an authorized participant post 
collateral to the Fund or any of its designated service providers in 
connection with the purchase or redemption of Fund shares during the 
reporting period? [Y/N]
    Instruction. The term ``authorized participant'' means a member or 
participant of a clearing agency registered with the Commission, which 
has a written agreement with the Exchange-Traded Fund or Exchange-
Traded Managed Fund or one of its service providers that allows the 
authorized participant to place orders for the purchase and redemption 
of creation units.
* * * * *
    Item F.1. Depositor. Provide the following information about each 
depositor:
* * * * *
    d. If no LEI is provided, RSSD ID, if any:__
    e. State, if applicable:__
    f. Foreign country, if applicable:__
    g. Full name of ultimate parent of depositor:__
    Item F.2. Administrators.
    a. * * *
    ii. LEI, if any, or RSSD ID, if any, or provide and describe other 
identifying number:__
* * * * *
    Item F.4. Sponsor. Provide the following information about each 
sponsor:
* * * * *
    d. If no LEI is provided, RSSD ID, if any:__
    e. State, if applicable:__
    f. Foreign country, if applicable:__
* * * * *
    Item G.1. Attachments.
* * * * *
    Instructions.
* * * * *
    2. * * *
    (f) Security supported (if applicable). Disclose the full name of 
the issuer, the title of the issue (including coupon or yield, if 
applicable) and at least two identifiers, if available (e.g., CIK, 
CUSIP, ISIN, LEI, RSSD ID).
* * * * *

    By the Commission.

    Dated: November 2, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-24376 Filed 12-15-22; 8:45 am]
BILLING CODE 8011-01-P