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BlackRock Poised for ETF Regulatory Win in Fund Liquidity Rule

BlackRock Poised for ETF Regulatory Win in Fund Liquidity Rule

(Bloomberg) -- Many exchange-traded funds are poised to avoid some aspects of sweeping new U.S. regulations meant to ensure that asset managers can easily meet investors’ redemption demands.

The Securities and Exchange Commission had originally lumped ETFs in with mutual funds when proposing the rules, which try to make sure that firms can more easily sell assets to meet demands from investors who want to cash out during market downturns. ETF providers had pushed back on the inclusion, with BlackRock Inc., the world’s largest asset manager, arguing that the structure of many ETFs makes them more liquid than mutual funds.

Under the revised rules that SEC commissioners will vote on Thursday, ETF managers that qualify as so-called in-kind ETFs, or those that provide securities rather than cash as redemptions, would be exempted from some requirements.

The new SEC regulations follow warnings from the Federal Reserve and International Monetary Fund that some funds with riskier holdings could struggle to return cash to investors during a surge in redemption demands.

Managing Liquidity

“It is imperative that open-end funds manage their liquidity carefully, both to ensure that redemptions can be fulfilled in a timely manner and to minimize the impact of redemptions on remaining investors,” SEC Chair Mary Jo White said in prepared remarks. “The recommendation before us today includes all of the essential elements of the proposal, centered on a requirement for funds to establish a liquidity risk management program overseen by the fund’s board of directors.”

The SEC will vote on whether to require mutual funds to “assess, manage, and periodically review their liquidity risk, based on specified factors,” according to a statement from the agency released Thursday. Specifically, funds will have to classify each investment in their portfolios based on how many days asset managers believe they would need to convert them to cash. The SEC outlined four classifications, ranging from “highly liquid” to “illiquid.”

Funds would also have to determine a minimum percentage of its net assets that must be invested in highly liquid investments and face limits on the illiquid investments it could hold.

The rule also allows open-ended funds, not money market funds or ETFs, to use swing pricing, effectively letting asset managers pass on trading costs to investors who redeem. The change permits funds to cash out investors at less favorable pricing during periods of market stress, potentially slowing withdrawals. The SEC says the mechanism aims to keep fund shareholders from being diluted by purchases and redemptions.

--With assistance from Robert Schmidt. To contact the reporter on this story: Ben Bain in Washintgon at [email protected] To contact the editors responsible for this story: Jesse Westbrook at [email protected] Alexis Leondis

TAGS: Mutual Funds
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