SEC headquarters in Washington. (Photo: National Law Journal)

The Securities and Exchange Commission has released updated guidance on liquidity risk management programs, with a specific focus on subadvised funds, in-kind ETFs, and funds’ use of Form N-Port.

“The liquidity rule FAQs are welcome and provide needed clarity for all mutual funds and ETFs, including those that are subadvised and those that provide in-kind redemptions,” an ICI spokesperson told ThinkAdvisor on Monday. “ICI and its members continue to analyze these complex FAQs so that we may address any remaining questions with the SEC.”

The FAQ includes updated responses the IM division prepared related to the investment company liquidity risk management (“LRM”) program requirements adopted in October 2016. IM said it expects to update the document from time to time to include responses to additional questions.

The most recent update, for instance, includes a question on whether an advisor (including a subadvisor) has an independent obligation to adopt and implement a liquidity risk management program.

Answer: No. The rule requires funds — not advisers — to adopt and implement LRM programs. However, the staff believes that the rule and Adopting Release clearly contemplate a role for advisers and their personnel in handling responsibilities under funds’ LRM programs. For example, this role could take the form of administering funds’ LRM programs or handling specific program responsibilities delegated by the program administrator.

Another question asks if an ETF, including an ETF with little or no operating history, should consider factors other than its redemption history in determining whether it qualifies as an in-kind ETF.

Answer: Although the staff believes that an ETF’s backward-looking redemption history is ordinarily relevant in determining whether it qualifies as an in-kind ETF, it is not, by itself, dispositive. The staff believes that an ETF’s “in-kind” analysis also may have a forward-looking component. For example, the staff believes that a new ETF could conclude that it qualifies as an in-kind ETF based on an analysis of its policies and procedures and its expected redemption practices.

The updated FAQ also answers questions on how a fund should report its investment’s liquidity classification on Form N-PORT.

The SEC voted on Feb. 22 to extend by six months the deadline for open-end funds’ compliance with provisions of the Commission’s liquidity risk management program rule.

Funds now have more time to implement the final rule’s classification requirement, along with specified other elements that are tied to the classification requirement.

The compliance date for implementing the classification and classification-related elements of the liquidity rule is June 1, 2019, for larger fund groups, and Dec. 1, 2019, for smaller fund groups.