transactions in open-end fund shares, within three business days
after the trade date. See supra note 21 and accompanying text.
Furthermore, funds' redemption obligations are also governed by any
disclosure to shareholders that a fund has made about the time
within which it will meet redemption requests, as disclosures by
open-end funds are subject to the antifraud provisions of the
federal securities laws. See supra note 77 and accompanying text.
    \110\ See infra section IV.C.1.
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1. Proposed Program Elements
    Proposed rule 22e-4 would require each fund to adopt and implement
a written liquidity risk management program that is designed to assess
and manage the fund's liquidity risk.\111\ Under the proposed rule,
liquidity risk would be defined as the risk that a fund could not meet
requests to redeem shares issued by the fund that are expected under
normal conditions, or are reasonably foreseeable under stressed
conditions, without materially affecting the fund's net asset
value.\112\ Proposed rule 22e-4 specifies that a fund's liquidity risk
management program shall include the following required program
elements: (i) classification, and ongoing review of the classification,
of the liquidity of each of the fund's positions in a portfolio asset
(or portions of a position in a particular asset); (ii) assessment and
periodic review of the fund's liquidity risk; and (iii) management of
the fund's liquidity risk, including the investment of a set minimum
portion of net assets in assets that the fund believes are convertible
to cash within three business days at a price that does not materially
affect the value of that asset immediately prior to sale.\113\ Proposed
rule 22e-4 incorporates specific requirements for each of these program
elements, and these requirements are discussed in detail below. A fund
may, as it determines appropriate, expand its liquidity risk management
procedures and related disclosure concerning liquidity risk beyond the
required program elements, and should consider doing so whenever it
would be necessary to ensure effective liquidity management. A fund
would be required to set and invest a prescribed minimum portion of net
assets in assets that are cash or that the fund believes are
convertible to cash within three business days at a price that does not
materially affect the value of that asset immediately prior to the
sale, and also would be required to classify the liquidity of the
fund's portfolio positions. In other respects, the proposed program
requirements are more principles-based and would permit each fund to
tailor its liquidity risk management program to the fund's particular
risks and circumstances.
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    \111\ Proposed rule 22e-4(b)(1).
    \112\ Proposed rule 22e-4(a)(7). This definition is similar to
the definition of ``liquidity risk'' that the Commission has used in
other contexts, modified as appropriate to apply to the specific
liquidity needs of investment companies. See Financial
Responsibility Rules for Broker-Dealers, Exchange Act Release No.
70072 (July 30, 2013) [78 FR 51823 (Aug. 21, 2013)], at n.291
(``Generally, funding liquidity risk is the risk that a firm will
not be able to meet cash demands as they become due and asset
liquidity risk is the risk that an asset will not be able to be sold
quickly at its market value.'').
     This proposed definition contemplates that a fund consider both
expected requests to redeem, as well as requests to redeem that may
not be expected, but are reasonably foreseeable. See infra section
III.C.
    \113\ Proposed rule 22e-4(b)(1), (2).
---------------------------------------------------------------------------

    The requirements of proposed rule 22e-4, including the liquidity
risk assessment requirements, are applicable to all open-end funds,
which term is defined to include each separate series of a registered
open-end investment company.\114\ Therefore, each series of a fund
would be responsible for developing a liquidity risk management program
tailored to its own liquidity risk in order to comply with the proposed
rule. We anticipate that liquidity risk could differ--sometimes
significantly--among the series of an investment company, based on
variations in each of the proposed liquidity risk assessment factors
required to be considered. Under these circumstances, it would be
appropriate for each series' liquidity risk management program to
incorporate risk assessment and risk management elements that are
distinct from other series' programs. However, to the extent that the
series of an investment company are substantially similar in terms of
cash flow patterns, investment strategy, portfolio liquidity, and the
other factors a fund would be required to consider in assessing its
liquidity risk,\115\ it may be appropriate for each series to adopt the
same or a similar liquidity risk management program.
---------------------------------------------------------------------------

    \114\ See proposed rule 22e-4(a)(5).
    \115\ See infra section III.C.1.
---------------------------------------------------------------------------

    Proposed rule 22e-4 includes board oversight provisions related to
the liquidity risk management program requirement. Specifically, a
fund's board would be required to approve the fund's liquidity risk
management program, any material changes to the program, and the fund's
designation of the fund's investment adviser or officers as responsible
for administering the fund's liquidity risk management program (which
cannot be solely portfolio managers of the fund).\116\ A fund also
would be required to disclose certain information about its liquidity
risk and risk management in its registration statement,\117\ as well as
on proposed Forms N-CEN and N-PORT.\118\
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    \116\ Proposed rule 22e-4(b)(3).
    \117\ Proposed Items 11(c)(7)-(8) of Form N-1A.
    \118\ Proposed Items B.7, C.7, and C.13 of proposed Form N-PORT;
proposed Item 44 of proposed Form N-CEN.
---------------------------------------------------------------------------

2. Scope of Proposed Rule 22e-4 and Related Disclosure and Reporting
Requirements
    Proposed rule 22e-4, as well as the related disclosure and
reporting requirements, would apply to all registered open-end funds
(including

open-end ETFs) other than money market funds. The liquidity risk
management program required under proposed rule 22e-4 would reduce the
risk that funds would be unable to meet shareholder redemptions in
light of their statutory and regulatory requirements for meeting
redemption requests, as well as any disclosure made to investors
regarding payment of redemption proceeds, without materially affecting
the fund's NAV.\119\
---------------------------------------------------------------------------

    \119\ See supra notes 18-22 and accompanying text (discussing
funds' redemption obligations under section 22(e) of the Investment
Company Act (requiring funds to make payment to shareholders for
securities tendered for redemption within seven days of their
tender), as well as circumstances in which funds must satisfy
redemption requests within a period shorter than seven days (because
they are sold through broker dealers, which are subject to rule
15c6-1 under the Exchange Act (establishing a three-business day
(T+3) settlement period for security trades effected by a broker or
a dealer), and/or because they have disclosed to investors that they
will meet redemption requests within a period shorter than seven
days).
---------------------------------------------------------------------------

    Although we recognize that various fund characteristics, such as a
fund's investment strategy, ownership concentration, redemption
policies, and other similar factors, could make a fund relatively more
prone to liquidity risk,\120\ we believe that all registered open-end
funds (other than money market funds), not only those whose investment
strategies create greater liquidity risk, should fall within the scope
of proposed rule 22e-4. While we are not proposing different liquidity
risk management program requirements for different types of funds, the
proposed rule is designed to result in robust liquidity risk management
programs whose scope, and related costs and burdens, are adequately
tailored to manage the liquidity risk faced by a particular fund. The
proposed rule requires each fund to assess its liquidity risk
periodically, after consideration of certain enumerated factors, and to
adopt policies and procedures for managing its liquidity risk based on
this assessment.\121\ For example, a fund whose ownership is relatively
concentrated, and that has an investment strategy requiring it to hold
a significant portion of unlisted securities that do not trade
frequently, would likely establish a different liquidity risk
management program than a fund whose portfolio assets consist mostly of
exchange-traded securities with a very high average daily trading
volume.\122\
---------------------------------------------------------------------------

    \120\ See infra section III.C.1.
    \121\ Proposed rule 22e-4(b)(2)(iii)-(iv).
    \122\ See infra section III.C.1.
---------------------------------------------------------------------------

    We are not proposing to exclude any particular subset of open-end
management investment companies other than money market funds from the
scope of proposed rule 22e-4, because even funds with investment
strategies that historically have entailed relatively little liquidity
risk could experience liquidity stresses in certain environments. For
example, although most equity securities are generally understood to be
more liquid than fixed income securities, investments in certain types
of equities involve some degree of liquidity risk.\123\ Also,
unexpected market events could cause the liquidity of assets that
typically are more liquid to decrease.\124\ Furthermore, different
types of funds within the same broad investment strategy may
demonstrate different levels of liquidity (and thus, presumably,
different levels of liquidity risk).\125\ We are also not proposing to
provide different liquidity requirements for relatively small funds
because, as discussed in the Economic Analysis section below, smaller
funds tend to demonstrate relatively high flow volatility (and thus
possibly greater liquidity risk).\126\
---------------------------------------------------------------------------

    \123\ For example, certain foreign securities (equities as well
as fixed income securities) may entail very long settlement times
and trading limitations. See infra note 197. Also, certain equity
securities, such as microcap equity securities, trade relatively
infrequently, which in turn could diminish their liquidity. See
Securities and Exchange Commission, Office of Investor Education and
Advocacy, ``Microcap Stock: A Guide for Investors'', available at
http://www.sec.gov/investor/pubs/microcapstock.htm.
    \124\ For example, during the ``Flash Crash'' of October 15,
2014, one of the most volatile trading days since 2008, yield
decreases on 10-year Treasuries resulted in certain fixed income
market participants turning off automatic pricing on electronic
trading platforms on account of fears that the market was moving too
quickly for automatic prices to keep up with the market. This, in
turn, slowed the pace of trading in U.S. Treasuries, temporarily
decreasing their liquidity. See, e.g., Joint Staff Report: The U.S.
Treasury Market on October 15, 2014 (July 13, 2015), available at
http://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf (``Flash Crash Staff
Report'') (report of staff findings from the U.S. Department of the
Treasury, the Board of Governors of the Federal Reserve System, the
Federal Reserve Bank of New York, the U.S. Securities and Exchange
Commission, and the U.S. Commodity Futures Trading Commission
discussing in depth, among other things, the strains in liquidity
conditions during the events of October 15).
    \125\ See infra note 627 and accompanying text.
    \126\ See infra note 727 and accompanying text.
---------------------------------------------------------------------------

    Like traditional open-end funds, the Commission believes that open-
end ETFs could experience liquidity risk, and thus proposes to include
open-end ETFs within the scope of rule 22e-4.\127\ As discussed above,
the liquidity of an ETF's portfolio securities is a factor that
contributes to the effective functioning of the ETF's arbitrage
mechanism and the ETF shares trading at a price that is at or close to
the NAV of the ETF.\128\ In addition, ETFs that permit authorized
participants to redeem in cash, rather than in kind, and ETFs that
typically redeem in cash, like traditional mutual funds, would need to
ensure that they have sufficient portfolio liquidity (in conjunction
with any other liquidity sources) to meet shareholder redemptions in
cash.\129\ And especially in times of declining market liquidity, the
liquidity of an ETF may be limited by the liquidity of the market for
the ETF's underlying securities.\130\ As discussed below, we believe
that the liquidity-related concerns relevant to ETFs structured as unit
investment trusts (``UITs'') are different from those relevant to open-
end ETFs, and thus we are proposing not to include ETFs structured as
UITs within the scope of proposed rule 22e-4.\131\
---------------------------------------------------------------------------

    \127\ See supra notes 23-30 and accompanying text.
    \128\ See supra notes 25-29 and accompanying text. The
Commission's 2015 Request for Comment on Exchange-Traded Products
requests comment on the effectiveness and efficiency of the
arbitrage mechanism for exchange-traded products (including ETFs)
whose portfolio securities are relatively less liquid. See 2015 ETP
Request for Comment, supra note 11, at Question #15.
    \129\ See supra note 30 and accompanying text. Based on the same
consideration, we propose to include ETMFs within the scope of rule
22e-4. See supra note 31 and accompanying text.
    \130\ See supra note 24 and accompanying text.
    \131\ See infra note 144 and accompanying paragraph. We note
that the vast majority of ETFs are organized as open-end funds. See
ETF Proposing Release, supra note 9.
---------------------------------------------------------------------------

    The scope of proposed rule 22e-4 does not include closed-end
investment companies (``closed-end funds''). Closed-end funds do not
issue redeemable securities and are not subject to section 22(e) of the
Investment Company Act.\132\ Closed-end funds' liquidity needs are
consequently different from those of open-end funds. This has been
acknowledged previously by the Commission; for example, the 15%
guideline is applicable only to open-end funds and not closed-end
funds.\133\ Closed-end funds that elect to repurchase their shares at
periodic intervals under Investment Company Act rule 23c-3 (``closed-
end interval funds'') are subject to certain liquidity standards in
order to ensure that they can complete repurchase offers, and must
adopt written procedures reasonably designed to ensure that their
portfolio assets are sufficiently liquid to

comply with their fundamental policies on repurchases.\134\ However,
other closed-end funds are subject to no explicit liquidity
requirements under the 1940 Act.\135\ Because closed-end funds, with
the exception of closed-end interval funds, are not subject to specific
statutory or regulatory liquidity requirements, we are not proposing to
include closed-end funds within the scope of rule 22e-4. Although
closed-end interval funds do have to comply with certain liquidity
standards and therefore must manage their liquidity risk, we believe
that the written liquidity procedures they are required to adopt under
rule 23c-3(b)(10)(iii) are adequate given these funds' more limited
liquidity needs. Also, because closed-end interval funds do not permit
shareholders to redeem their shares each day, they may be better able
to structure their portfolios to anticipate their liquidity needs than
open-end funds. For these reasons, we are not including these funds
within the proposed scope of rule 22e-4.
---------------------------------------------------------------------------

    \132\ See sections 22(e), 2(a)(32) (defining ``redeemable
security'') and 5(a)(1)-(2) (defining ``open-end company'' and
``closed-end company'') of the Act.
    \133\ See Guidelines Release, supra note 4; see also Repurchase
Offers by Closed-End Management Investment Companies, Investment
Company Act Release No. 19399 (Apr. 7, 1993) [58 FR 19330 (Apr. 14,
1993)] (``Repurchase Offers Release''), at n.7 and accompanying
text.
    \134\ Specifically, rule 23c-3 requires that: (i) A specified
percentage of the investment company's portfolio consists of assets
that can be sold or disposed of in the ordinary course of business,
at approximately the price at which the investment company has
valued the investment, within the period within which the investment
company pays repurchase proceeds; and (ii) the investment company's
board of directors adopts written procedures reasonably designed,
taking into account current market conditions and the company's
investment objectives, to ensure that the company's portfolio assets
are sufficiently liquid so that the company can comply with its
fundamental policy on repurchases. See rule 23c-3(b)(10)(i), (iii).
     Based on staff analysis, there were 26 closed-end interval
funds, representing approximately $5.7 billion in assets, in 2014.
    \135\ See Interval Fund Proposing Release, supra note 83, at
text following n.35 (``Closed-end companies are not subject to a
liquidity standard.'').
---------------------------------------------------------------------------

    UITs, including ETFs structured as UITs, also would not be covered
within the scope of proposed rule 22e-4. A UIT issues redeemable
securities, like a traditional open-end fund, which represent undivided
interests in an essentially fixed portfolio of securities.\136\ As
units of a UIT series\137\ are redeemable, UITs are subject to the
requirements of section 22(e).\138\
---------------------------------------------------------------------------

    \136\ Securities and Exchange Commission, Office of Investor
Education and Advocacy, Unit Investment Trusts (UITs), available at
http://www.sec.gov/answers/uit.htm (``UIT Answers'').
    \137\ UITs typically consist of a number of consecutive series,
with each series representing units in a specific, separate
portfolio of securities. Unlike traditional open-end investment
companies, UITs have no corporate management structure, and their
portfolios are not managed.
    \138\ With respect to UITs that are not ETFs, and that do not
serve as separate account vehicles that are used to fund variable
annuity and variable life insurance products, sponsors have
historically maintained a secondary market in UIT units, rather than
having the series liquidate portfolio securities to meet
redemptions, because a large number of redemptions could necessitate
premature termination of the series. See Form N-7 for Registration
of Unit Investment Trusts under the Securities Act of 1933 and the
Investment Company Act of 1940, Investment Company Act Release No.
15612 (Mar. 9, 1987) [52 FR 8268 (Mar. 17, 1987)] (``Form N-7 Re-
Proposing Release''), at text following n.1; see also UIT Answers,
supra note 136.
     At present, however, the majority of UIT assets are
attributable to separate account vehicles that are used to fund
variable annuity and variable life insurance products, and the
sponsors of these UITs do not typically maintain a secondary market
in UIT units. See infra note 139 and accompanying text.
---------------------------------------------------------------------------

    We are not proposing to include UITs within the scope of the
proposed rule for a number of reasons. First, we understand based on
staff analysis that approximately 75% of the assets held in UITs
currently serve as separate account vehicles that are used to fund
variable annuity and variable life insurance products.\139\ These UITs
essentially function as pass-through vehicles, investing principally in
securities of one or more open-end investment companies, which as
discussed above would be subject to the scope of proposed rule 22e-
4.\140\ Thus, we believe that the liquidity risk of these UITs would be
even more limited if proposed rule 22e-4 were adopted, because their
underlying holdings are funds that would be required to adopt their own
liquidity risk management programs under the proposed rule.
---------------------------------------------------------------------------

    \139\ Based on data as of December 2014.
    \140\ Jeffrey K. Dellinger, The Handbook of Variable Income
Annuities 448-450 (2006).
---------------------------------------------------------------------------

    Second, UITs are not actively managed, and their portfolios are not
actively traded. A UIT buys a relatively fixed portfolio of securities,
and generally holds them with little change for the life of the
UIT.\141\ A UIT does not have a board of directors, corporate officers,
or an investment adviser to render advice during the life of the
trust.\142\ Accordingly, the provisions of proposed rule 22e-4, which
require a fund's board to approve and oversee a liquidity risk
management program and the fund's adviser or officers to administer the
program, are thus inapposite to the management structure of a UIT.\143\
---------------------------------------------------------------------------

    \141\ See UIT Answers, supra note 136.
    \142\ See id. Because of this lack of management, some UIT trust
documents provide that its administrator must redeem a pro rata
share of the trust's holdings when an investor redeems from a UIT,
subject to practical constraints such as securities with transfer
restrictions.
    \143\ See infra section III.D.
---------------------------------------------------------------------------

    Finally, we also are not including UIT ETFs within the scope of
proposed rule 22e-4 because UIT ETFs generally track established and
widely recognized indices.\144\ Moreover, they fully replicate their
underlying indices including with respect to their basket assets.
Therefore, we do not view a liquidity risk management program as
necessary or beneficial for UIT ETFs.
---------------------------------------------------------------------------

    \144\ Based on information from Morningstar as of July 22, 2015,
the following ETFs are structured as UITs, and each ETF tracks the
index in its name unless otherwise noted: SPDR Dow Jones Industrial
Average ETF Trust, SPDR S&P 500 ETF Trust, SPDR S&P Midcap 400 ETF
Trust, Invesco Powershares QQQ Trust Series 1 (which tracks the
NASDAQ 100 Index), and the Invesco BLDRS Index Funds Trust (which
has ETFs tracking the BNY Mellon Asia 50 ADR Index, the BNY Mellon
Developed Markets 100 ADR Index, the BNY Mellon Emerging Markets 50
ADR Index, and the BNY Mellon Europe Select ADR Index).
---------------------------------------------------------------------------

    We also propose to exclude from the scope of rule 22e-4 all money
market funds subject to the requirements of rule 2a-7 under the
Investment Company Act. Money market funds are subject to extensive
requirements concerning the liquidity of their portfolio assets. As
described below, these requirements are more stringent than the
liquidity-related requirements applicable to funds that are not money
market funds (and that would be applicable to funds that are not money
market funds under proposed rule 22e-4), on account of the historical
redemption patterns of money market fund investors and the assets held
by money market funds.\145\ Rule 2a-7 includes a general portfolio
liquidity standard, which requires that each money market fund hold
securities that are sufficiently liquid to meet reasonably foreseeable
shareholder redemptions in light of its obligations under section 22(e)
of the Act and any commitments the fund has made to shareholders.\146\
Money market funds are also subject to a specific limitation on the
acquisition of illiquid securities. Namely, a money market fund cannot
acquire illiquid securities if, immediately after the acquisition, the
fund would have invested more than 5% of its total assets in illiquid
securities.\147\ This limit on illiquid asset holdings is more
stringent than the corollary 15% guideline for open-end funds that are
not money market funds, which as discussed above, limits a fund's
aggregate holdings of illiquid assets to 15% of the fund's net
assets.\148\ In addition to the 5% limit on money market funds'
illiquid asset holdings, all taxable money market funds must invest at
least 10% of their total assets in ``daily liquid assets,'' \149\ and
all money

market funds must invest at least 30% of their total assets in ``weekly
liquid assets.'' \150\ There is no current or proposed corollary
requirement for open-end funds that are not money market funds to
invest certain portions of their assets in daily liquid assets or
weekly liquid assets.
---------------------------------------------------------------------------

    \145\ See infra notes 722-725 and accompanying text.
    \146\ Rule 2a-7(d)(4).
    \147\ Rule 2a-7(d)(4)(i).
    \148\ See supra section II.D.2.
    \149\ Rule 2a-7(d)(4)(ii).
    \150\ Rule 2a-7(d)(4)(iii).
---------------------------------------------------------------------------

    Money market funds are also subject to liquidity-related disclosure
and reporting requirements.\151\ These disclosure and reporting
requirements do not currently extend to funds that are not money market
funds, although under the proposed amendments to Form N-PORT, funds
that are not money market funds would be required to report information
about each portfolio asset's liquidity classification under rule 22e-4
and whether it is a 15% standard asset.\152\
---------------------------------------------------------------------------

    \151\ On the compliance date for the disclosure-related money
market fund reforms adopted in 2014 (Apr. 14, 2016), money market
funds will be required to disclose each day the percentage of their
total assets invested in daily liquid assets and weekly liquid
assets on their Web sites. See rule 2a-7(h)(10)(ii) (a money market
fund must maintain a schedule, chart, graph, or other depiction on
its Web site showing historical information about its investments in
daily liquid assets and weekly liquid assets for the previous six
months, and must update this historical information each business
day, as of the end of the preceding business day). As of the
compliance date, they also will be required to report information
about the liquidity of their portfolio securities on Form N-MFP. See
Form N-MFP Items C.21, C.22, and C.23.
    \152\ See infra section III.G.2; proposed Item C.7 of proposed
Form N-PORT (requiring a fund to disclose whether a portfolio
investment is a 15% Standard Asset); Form N-MFP Item 44 (requiring a
money market fund to disclose whether each portfolio security is an
illiquid security).
---------------------------------------------------------------------------

    Money market funds also have certain tools at their disposal to
manage heavy redemptions that are not available to other open-end
funds.\153\ A money market fund is permitted to impose a liquidity fee
on redemptions or temporarily suspend redemptions if its weekly liquid
assets fall below 30% of its total assets and the fund's board
determines that imposing a fee or gate is in the fund's best interests;
if a fund's weekly liquid asset falls below 10% of total assets, the
fund is required to impose a liquidity fee on redemptions unless the
fund's board determines that imposing such a fee would not be in the
fund's best interests.\154\ Additionally, rule 22e-3 permits a money
market fund to suspend redemptions and postpone payment of redemption
proceeds in an orderly liquidation of the fund if, subject to other
requirements, the fund's board makes certain findings.\155\ Because
money market funds are required to maintain a liquidity risk management
program, we propose that these funds be excluded from the scope of rule
22e-4.
---------------------------------------------------------------------------

    \153\ See infra notes 722-725 and accompanying text for a
discussion of why we are not proposing a liquidity fee regime
similar to that for money market funds for other types of open-end
management investment companies.
    \154\ See rule 2a-7(c)(2); see also 2014 Money Market Fund
Reform Adopting Release, supra note 85, at section III.A. The
compliance date for the amendments to rule 2a-7 related to liquidity
fees and gates is October 14, 2016.
    \155\ See rule 22e-3(a) (permitting a money market fund to
permanently suspend redemptions and liquidate if the fund's level of
weekly liquid assets falls below 10% of its total assets or, in the
case of a fund that is a government money market fund or a retail
money market fund, the fund's board determines that the deviation
between the fund's amortized cost price per share and its market-
based NAV may result in material dilution or other unfair results to
investors or existing shareholders); see also 2014 Money Market Fund
Reform Adopting Release, supra note 85, at section III.A.4
(discussing amendments to rule 22e-3 adopted as part of the 2014
money market fund reforms); Division of Investment Management, 2014
Money Market Fund Reform Frequently Asked Questions (Aug. 4, 2015),
available at http://www.sec.gov/divisions/investment/guidance/2014-money-market-fund-reform-frequently-asked-questions.shtml.
---------------------------------------------------------------------------

3. Request for Comment
    While we request detailed comment on each of the specific elements
of proposed rule 22e-4 below, here we request comment on the general
program requirement of the proposed rule, as well as the extent to
which the proposed program requirement would promote effective
liquidity risk management.
     As proposed, rule 22e-4 would require that a fund's
liquidity risk management program include certain general elements. Do
commenters believe that the general elements of the program would
enhance a fund's ability to assess and manage its liquidity risk? Are
there any elements that should be excluded from the program
requirement, or are there any additional elements that should be
included in the program requirement? Should any of the proposed
elements be modified? Do commenters believe that the program would
enhance funds' management of liquidity risk better than they already do
in practice? Do commenters believe that the program would materially
strengthen a fund's ability to meet its redemption obligations and
would materially reduce potential dilution? Should the rule focus not
just on the liquidity of the fund's assets but also more specifically
and prominently on its liabilities, such as derivatives obligations,
that may affect the liquidity of the fund?
     Should the Commission be more prescriptive in requiring a
fund to adopt certain specific policies and procedures for classifying
and monitoring the liquidity of portfolio assets, assessing and
periodically reviewing liquidity risk, and/or managing the fund's
liquidity risk, beyond the proposed requirements of rule 22e-4? If so,
what other procedures should the Commission require? Are there
operational challenges associated with any of the other procedures the
Commission could require? To what extent do funds currently have
policies and procedures resembling the proposed program requirements?
Have funds' current policies and procedures proven effective at
managing liquidity risk, and how have they evolved in recent years? Are
these policies and procedures primarily overseen by a fund's chief
compliance officer, chief risk officer (if any), or someone else?
    We also request comment on the scope of proposed rule 22e-4.
     Do commenters agree that all open-end funds, including
open-end ETFs but excluding money market funds, should be subject to
the program requirement of the proposed rule? If not, why not? Do
commenters agree that the proposed program requirement gives enough
flexibility for a fund to adopt a program whose scope, and related
costs and benefits, are adequately tailored for that fund to manage its
actual and potential liquidity risk?
     Should certain funds or types of funds be excluded from
the proposed program requirement, or subject to a different or less
stringent requirement, because their investment strategies, ownership
concentrations, redemption policies, or some other factor makes them
less prone to liquidity risk? If so, which funds or types of funds, and
why? Should smaller funds and smaller fund complexes be excluded from
the proposed program requirement, or subject to a different or less
stringent requirement? Why or why not? How should we distinguish
between funds that should be subject to liquidity risk management
program requirements and those that should not? Conversely, are there
particular types of funds (or investment strategies) that are subject
to heightened liquidity risk and should be subject to more prescriptive
or stringent requirements under a liquidity risk management program or
otherwise? If so, what types of funds should be considered to have
higher liquidity risk and why? Can these types of funds be easily
categorized or defined? What enhanced liquidity risk management program
requirements should be considered for such funds and why? Are there any
types of funds (or investment strategies) with such limited liquidity
that we should consider limiting their ability to be structured as
open-end funds?

     Do commenters agree that open-end ETFs and ETMFs should be
included? If not, why not? Do commenters believe that ETFs and/or ETMFs
incur additional liquidity risk if they permit redeeming authorized
participants to receive cash, rather than an in-kind basket of
securities, in exchange for redeemed shares?
     Should any of the requirements of the proposed rule be
modified for ETFs or ETMFs on account of the relief from section 22(e)
some of these funds receive under their exemptive orders? Should any of
the requirements apply differently when an ETF or an ETMF is organized
as a class of an open-end fund or as a feeder fund in a master-feeder
structure where other classes or feeder funds operate as traditional
mutual funds?
    Exemptive orders for ETF relief include provisions that govern the
composition of portfolio deposits and redemption baskets. In general,
portfolio deposits and redemption baskets must represent pro rata
slices of the ETF's portfolio and must be the same for all purchasers
and redeemers that transact with the ETF on the same day. In recent
years, ETF sponsors have requested increased flexibility in determining
the composition of portfolio deposits and redemption baskets.\156\
---------------------------------------------------------------------------

    \156\ See, e.g., Comment Letter of Charles Schwab & Co., Inc. on
the 2015 ETP Request for Comment (Aug. 17, 2015) (``At a minimum, we
believe it is important that ETF managers have the ability to
construct non-pro rata baskets, subject to compliance and board
oversight to help identify and address instances where the use of
such baskets may conflict with the interests of the ETF and its
shareholders.'').
---------------------------------------------------------------------------

     We request comments on whether such flexibility would
result in favorable or unfavorable changes in how ETFs manage the
liquidity of their holdings. For example, would ETFs benefit from
reduced cash drag? Would the flexibility enable or encourage ETFs to
reduce the overall liquidity of their portfolios or to hold a greater
amount of relatively illiquid assets? Does the existing 15% guideline
adequately address any concerns regarding liquidity that could result
from greater basket flexibility? Would the requirements we are
proposing adequately address any concerns regarding liquidity that
could result from greater basket flexibility? If not, could other
requirements adequately address any concerns?
    We request comment on the types of investment products that the
Commission proposes not to include, or to specifically exclude, from
the scope of proposed rule 22e-4.
     Do commenters agree that closed-end funds, including
closed-end interval funds, should not be included within the scope of
the proposed rule? Should we make any changes to the liquidity
requirements for closed-end interval funds?
     Do commenters agree that UITs should not be included
within the proposed rule's scope? Is there any subset of UITs that
should be considered for inclusion, if only for some aspects of the
rule? Is there a significant risk that UITs (or a certain subset of
UITs) may not be able to meet redemption requests? With respect to UITs
that are not ETFs, and that do not serve as separate account vehicles
that are used to fund variable annuity and variable life insurance
products, is it reasonable to expect that UIT sponsors would maintain a
secondary market in UIT units to the same extent and in the same manner
as they have historically?
     Alternatively, should we require UITs to meet certain
minimum liquidity requirements at the time of deposit of the
securities, such as requiring a UIT to maintain a prescribed minimum
portion of its net assets in assets that it believes are convertible to
cash within three business days at a price that does not materially
affect the value of that asset immediately prior to the sale? Why or
why not? What specific requirements of proposed rule 22e-4 should be
modified for UITs to account for the facts that UITs are not actively
managed, UITs' portfolios are not actively traded, and UITs do not have
a board of directors, corporate officers, or an investment adviser to
render advice during the life of the trust?
     Is it appropriate that we include ETFs organized as open-
end funds but not ETFs organized as UITs within the rule? Should we
exclude from the scope of the rule ETFs organized as open-end funds
that, similar to UIT ETFs, fully track established and widely
recognized indices? Why or why not? Do commenters believe that ETFs
organized as open-end funds would reorganize as UITs in response to the
rule? Why or why not?
     Do commenters agree that we should specifically exclude
money market funds from the scope of proposed rule 22e-4? Is there any
subset of money market funds that should be considered for inclusion,
if only for some aspects of the rule?

B. Classifying the Liquidity of a Fund's Portfolio Positions Under
Proposed Rule 22e-4

    We have not updated the liquidity guidelines applicable to funds
and fund portfolio assets in over two decades, and we believe that
developments in the fund industry as well as staff observations of
funds' current liquidity risk management practices warrant proposing
requirements for classifying the liquidity of funds' portfolio
positions.\157\ We are aware based on staff experience that many fund
managers engage in analysis of the liquidity of portfolio assets,
beyond considering whether the fund's portfolio construction is
consistent with the 15% guideline, and we believe that all open-end
funds and their shareholders would benefit from a comprehensive review
of the liquidity of funds' portfolio positions. Staff outreach has
shown that funds today employ notably different procedures for
assessing and classifying the liquidity of their portfolio assets.\158\
Some funds have implemented procedures that analyze multiple aspects
relating to an asset's liquidity, including relevant market, trading,
and asset-specific factors, and monitor whether their initial liquidity
determinations should be amended based on changed conditions. While the
15% guideline requires a binary determination of whether an asset is
liquid or illiquid, funds with relatively comprehensive liquidity
classification procedures tend to view the liquidity of their portfolio
assets in terms of a more-liquid to less-liquid spectrum.\159\ This
``spectrum''-based approach to liquidity can enhance a fund's ability
to construct a portfolio whose liquidity profile is calibrated to
reflect the fund's specific liquidity needs. The staff has observed,
however, that other funds, including some with relatively less liquid
strategies, use liquidity classification practices that are
substantially less thorough, do not take relevant factors into account
when evaluating portfolio assets' liquidity and do not incorporate
ongoing liquidity monitoring. To the extent that these practices result
in a fund holding assets that are insufficiently liquid to meet
redemptions without materially

affecting the fund's NAV (assuming that the fund must sell portfolio
assets to meet redemptions), we believe these practices could adversely
affect fund investors--either by decreasing the price that redeeming
shareholders will receive for their shares and the price of the shares
held by non-redeeming investors, or if the fund sells its most liquid
assets to meet redemptions, by potentially increasing the liquidity
risk of the fund shares held by non-redeeming shareholders.
---------------------------------------------------------------------------

    \157\ See supra section II.D.
    \158\ See 2014 Fixed Income Guidance Update, supra note 62; see
also BlackRock FSOC Notice Comment Letter, supra note 50, at 6
(stating that among several overarching principles that provide the
foundation for a prudent market liquidity risk management framework
for collective investment vehicles is ``[m]easuring or estimating
(a) levels of liquid assets with recognition of tiers of liquidity,
(b) liquidation time frames''); Invesco FSOC Notice Comment letter,
supra note 35, at 11 (stating that their liquidity analysis includes
classifying certain portfolio holdings in liquidity buckets across a
liquidity spectrum, utilizing certain quantitative metrics and
qualitative factors).
    \159\ See, e.g., ICI FSOC Notice Comment Letter, supra note 16,
at 23 (``While the SEC's 85 percent liquidity test requires binary
determinations for each portfolio holding . . ., for broader
liquidity management purposes fund managers think of portfolio
holdings as falling along a liquidity continuum.'').
---------------------------------------------------------------------------

    Due to the foregoing concerns, we are proposing new requirements
for classifying and monitoring the liquidity of funds' portfolio
positions. Under proposed rule 22e-4, a fund would be required to
classify the liquidity of each of the fund's positions in a portfolio
asset (or portions of a position in a particular asset) and review the
liquidity classification of each of the fund's portfolio positions on
an ongoing basis.\160\ In classifying and reviewing the liquidity of
portfolio positions, proposed rule 22e-4 would require a fund to
consider the number of days within which a fund's position in a
portfolio asset (or portions of a position in a particular asset) would
be convertible to cash at a price that does not materially affect the
value of that asset immediately prior to sale.\161\ The proposed rule
would require a fund to consider certain specified factors in
classifying the liquidity of its portfolio positions.\162\
---------------------------------------------------------------------------

    \160\ Proposed rule 22e-4(b)(2)(i).
    \161\ Id.; see also infra section III.B.1.a.
    \162\ See proposed rule 22e-4(b)(2)(ii); see also infra sections
III.B.1.a, III.B.2.
---------------------------------------------------------------------------

    The proposed liquidity categorization process would be in addition
to the existing 15% guideline (which would be retained, as discussed
below \163\) and would require a fund to assess the liquidity of its
portfolio positions individually, as well as the liquidity profile of
the fund as a whole. A fund would be able to use this assessment, in
turn, to establish procedures for managing its liquidity risk and to
determine whether the liquidity of its portfolio reflects its liquidity
needs for meeting shareholder redemptions, thus reducing potential
dilution of non-redeeming shareholders.\164\ As described above, we
understand that, in practice, funds apply the 15% guideline to limit
the funds' exposures to particular types of securities that generally
cannot be sold or sold quickly.\165\ Although the 15% guideline
involves determining whether an asset can be sold or disposed of within
seven days at approximately its stated value, it does not involve a
fund considering whether it can actually receive the proceeds of any
sale within seven days. The 15% guideline also does not involve a fund
taking into account any market or other factors in considering an
asset's liquidity,\166\ or assessing whether the fund's position size
in a particular asset affects the liquidity of that asset. In contrast,
the proposed liquidity categorization approach incorporates each of
these aspects, which, as discussed further below, we believe are
critical to comprehensively assessing the liquidity of a fund's
position in a particular portfolio asset.\167\ We thus have come to
consider the 15% guideline alone to be insufficient to limit a fund's
liquidity risk given the fund's obligations to meet shareholder
redemptions. We believe the principal benefit of the 15% guideline is
to limit the ability of certain highly illiquid strategies, such as
private equity, to operate in an open-end fund form.
---------------------------------------------------------------------------

    \163\ See infra section III.C.4.
    \164\ See generally infra section III.C (discussing the proposed
requirements associated with assessing and managing a fund's
liquidity risk); see also infra section III.C.1 (discussing the
factors a fund would be required to consider in assessing its
liquidity risk, that is, the risk that a fund could not meet
requests to redeem shares issued by the fund that are expected under
normal conditions, or are reasonably foreseeable under stressed
conditions, without materially affecting the fund's net asset
value).
    \165\ See supra notes 94-97 and accompanying text.
    \166\ The Commission has, however, discussed factors that would
be reasonable for a board of directors to take into account in
assessing the liquidity of a rule 144A security (but which would not
necessarily be determinative). See supra notes 96-97 and
accompanying text.
    \167\ In section III.C.4 below, we discuss the interplay between
the 15% guideline as proposed to be codified and the proposed
requirement for a fund to invest a set minimum portion of its net
assets in three-day liquid assets.
---------------------------------------------------------------------------

1. Proposed Relative Liquidity Classification Categories
a. Proposed Classification Requirement
    Proposed rule 22e-4(b)(2)(i) would require a fund to classify each
of the fund's positions in a portfolio asset (or portions of a position
in a particular asset) based on the relative liquidity of the
position.\168\ For purposes of proposed rule 22e-4, a fund would assess
the relative liquidity of each portfolio position based on the number
of days within which it is determined, using information obtained after
reasonable inquiry, that the fund's position in an asset (or a portion
of that asset) would be convertible to cash \169\ at a price that does
not materially affect the value of that asset immediately prior to
sale. That is, the person who classifies the liquidity of each
portfolio position \170\ must determine--using information obtained
after reasonable inquiry--the time period in which the fund would be
able to sell the position, at a price that does not materially affect
the value of that asset immediately prior to sale, and settle the sale
(i.e., receive cash for the sale of the asset). With respect to this
determination, the term ``immediately prior to sale'' is meant to
reflect that the fund must determine whether the sales price the fund
would receive for the asset is reasonably expected to move the price of
the asset in the market, independent of other market forces affecting
the asset's value. The term ``immediately prior to sale'' is not meant
to require a fund to anticipate and determine in advance the precise
current market price or fair value of an asset at the moment before the
fund would sell the asset. As discussed in more detail below, a fund
would be required to consider certain specified market-based, trading,
and asset specific factors in determining how long a particular
portfolio position would take to convert to cash.\171\
---------------------------------------------------------------------------

    \168\ As discussed in detail below, proposed rule 22e-4 would
require a fund to assess and manage its liquidity risk, and these
risk assessment and risk management requirements would be based in
part on the proposed liquidity classification requirement set forth
in proposed rule 22e-4(b)(2)(i) and described in this section. See
infra sections III.C.1, III.C.3. We are also proposing to require
that a fund disclose information regarding the liquidity
classification of each of the fund's portfolio positions, as
determined pursuant to proposed rule 22e-4(b)(2)(i). See infra
section III.G.2.
    \169\ See proposed rule 22e-4(a)(3) (defining ``convertible to
cash'' as ``the ability to be sold, with the sale settled'').
    \170\ See infra section III.D.3 (discussing designation of
administrative responsibilities for the liquidity risk management
program to the fund's adviser or officers).
    \171\ These factors are discussed in detail below. See infra
section III.B.2.
---------------------------------------------------------------------------

    In making this assessment, a fund could determine that different
portions of a position in a particular asset could be converted to cash
within different times. If a fund were to conclude, based on the
liquidity classification factors required to be considered, that it
would take the fund longer to convert its entire position in an asset
to cash than it would to convert only a portion of that position to
cash, it could determine, for example, that 50% of the position could
be converted to cash within 1 day, but the remainder of the position
could take up to 3 days to convert to cash. Staff outreach has shown
that some funds currently consider the liquidity character of their
portfolio holdings--particularly relatively large holdings--to be
tiered in this manner, with a certain percentage of the holding deemed
to be more liquid than the remainder of the holding. Proposed rule 22e-
4 would thus specify that a fund would be

required to adopt policies and procedures for classifying the liquidity
of each of the fund's positions in a portfolio asset, or portions of
the fund's position in a particular asset.\172\ In this release, any
reference to a fund classifying the liquidity of its position in a
particular portfolio asset should be read to also include circumstances
in which the fund would classify the liquidity of portions of a
position in a particular asset.
---------------------------------------------------------------------------

    \172\ See proposed rule 22e-4(b)(2)(i) (emphasis added).
---------------------------------------------------------------------------

    Based on its determination of the number of days within which the
fund could convert its position in an asset to cash under this
standard, the fund would be required to classify each of its positions
in a portfolio asset into one of six liquidity categories:
    [cir] Convertible to cash within 1 business day.
    [cir] Convertible to cash within 2-3 business days.
    [cir] Convertible to cash within 4-7 calendar days.\173\
---------------------------------------------------------------------------

    \173\ See infra text following note 194 (discussing potential
overlaps between the 2-3 business day and 4-7 calendar day liquidity
classification categories).
---------------------------------------------------------------------------

    [cir] Convertible to cash within 8-15 calendar days.
    [cir] Convertible to cash within 16-30 calendar days.
    [cir] Convertible to cash in more than 30 calendar days.
    As discussed below, we anticipate that the proposed liquidity
categorization approach would permit a fund to take a more nuanced
approach to portfolio construction and liquidity risk management than
an approach under which a fund would simply designate portfolio assets
as liquid or illiquid. The proposed approach also would provide the
framework for detailed reporting and disclosure about the liquidity of
funds' portfolio assets in a structured data format, as the six
liquidity categories described above would be incorporated into the
fund's portfolio holdings reporting on proposed Form N-PORT.\174\ In
particular, the structured data format would increase the ability of
Commission staff, investors, and other potential users to aggregate and
analyze the data in a much less labor-intensive manner. This data, in
turn, would assist Commission staff in monitoring risks and trends with
respect to funds' portfolio liquidity (for example, observing whether
portfolio liquidity increases or decreases in response to market
events), and would also permit investors to better evaluate the
liquidity profile of funds' portfolios and better assess the potential
for returns and risks of a particular fund.\175\ In addition, the
proposed categorization requirement also would provide the foundation
for the requirement for a fund to invest a prescribed minimum
percentage of its net assets in ``three-day liquid assets'' (that is,
any cash held by a fund and any position in an asset, or portion
thereof, that the fund believes is convertible to cash within three
business days at a price that does not materially affect the value of
that asset immediately prior to sale).\176\
---------------------------------------------------------------------------

    \174\ See proposed Item C.13 of proposed Form N-PORT; see also
infra section III.G.2.
    \175\ See infra section III.G.2.
    \176\ See proposed rule 22e-4(a)(8); proposed rule 22e-
4(b)(2)(iv)(A)-(C); see also infra section III.C.3.
---------------------------------------------------------------------------

    The proposed approach would require a fund to assess the liquidity
of its entire position in a portfolio asset, or each portion of that
position, as opposed to the liquidity of the normal trading lot for
that asset. It has been argued that because a fund will not likely need
to sell its entire position in a particular asset under normal market
circumstances, liquidity determinations should be based on the sale of
a single trading lot for that asset, except in unusual
circumstances.\177\ We agree that the fact that a fund may not be able
to convert its entire position in an asset to cash at a price that does
not materially affect the value of that asset immediately prior to sale
should not, by itself, be dispositive of a portfolio asset's liquidity.
Nevertheless, assessing liquidity only on the basis of the ability to
sell and receive cash for a single trading lot of a portfolio asset
ignores the fact that a fund needing to sell certain assets in order to
meet redemptions would almost certainly need to sell greater than one
trading lot of a particular asset. In addition, a fund may need to
dispose of an entire position because of deteriorating credit quality
or other portfolio management factors. Similarly, an index fund may
need to sell an entire position in an asset if that asset falls out of
the tracked index. The liquidity of the entire position size thus is
relevant to the liquidity of the overall portfolio, a fund's ability to
meet its stated investment strategy, and a fund's portfolio management.
---------------------------------------------------------------------------

    \177\ See Investment Company Institute, Valuation and Liquidity
Issues for Mutual Funds (Feb. 1997) (``ICI Valuation and Liquidity
Issues White Paper''), at 42.
---------------------------------------------------------------------------

    The proposed categorization approach also is meant to promote more
consistent liquidity classification practices within the fund industry.
Proposed rule 22e-4 would require a fund to consider certain specified
factors, to the extent applicable, with respect to each position in an
asset (or similar asset(s), if data concerning a particular portfolio
asset is not available to the fund). The proposed rule would specify
that this consideration must include certain specified market, trading,
and asset-specific factors (each discussed in more detail below), as
applicable.\178\ We believe that codifying these factors would
contribute to more consistency in the quality and breadth of funds'
analyses of their portfolio positions' liquidity, while recognizing
that funds' portfolios, and the particular assets included within a
portfolio, are diverse and that not every factor will be relevant to
each liquidity determination. We recognize, and anticipate, that
different funds could classify the liquidity of identical portfolio
positions differently, depending on their analysis of the factors
required to be considered under the proposed rule. There could be
multiple appropriate reasons for this, including different information
available to funds at different times, and fund-specific reasons for
classifying the liquidity of a position in a particular way that are
not equally applicable to another fund (for example, in the context of
an asset used for hedging or risk mitigation purposes \179\).
---------------------------------------------------------------------------

    \178\ See proposed rule 22e-4(b)(2)(ii); see also infra section
III.B.2.
    \179\ See infra section III.B.2.i.
---------------------------------------------------------------------------

    Proposed rule 22e-4 does not specify that certain asset classes
fall within particular liquidity categories, because we believe that
individual funds would be more effective in assessing and reviewing
their portfolio positions' liquidity based on an evaluation of market
and asset-specific factors, than the Commission would be in determining
asset classes' liquidity based on a categorical approach. While we
recognize that permitting each fund to determine its own portfolio
positions' liquidity would likely result in less consistency in funds'
portfolio position liquidity classifications than specifying by rule
which asset classes fall into certain liquidity categories, we believe
that the proposed approach is preferable to an approach that involves
Commission-imposed liquidity classifications of certain asset classes.
We are concerned that an approach involving Commission-imposed
liquidity classifications would likely result in certain assets'
liquidity being overestimated and others' liquidity being
underestimated, since we believe that a portfolio position's liquidity
character depends on a range of interrelated factors (as discussed

below).\180\ Also, we are concerned that Commission-imposed liquidity
classifications would be overly rigid and would be difficult to adjust
quickly to reflect changing market conditions.\181\ Thus, we believe
that this approach would be more likely to provide an inaccurate
reflection of an asset's liquidity than the proposed classification
approach.
---------------------------------------------------------------------------

    \180\ See infra section III.B.2.
    \181\ See, e.g., Flash Crash Staff Report, supra note 124
(noting that, while ``[t]he U.S. Treasury market is the deepest and
most liquid government securities market in the world,'' liquidity
conditions in the market for U.S. Treasury securities became
``significantly strained'' during the October 2015 ``Flash Crash'').
---------------------------------------------------------------------------

    Although we are not proposing an approach that presumes that
certain asset classes fall within particular liquidity categories, we
note that if a fund is an outlier with respect to its liquidity
classifications, Commission staff would be able to identify such
outlier classifications based on the fund's position-level liquidity
disclosure on Form N-PORT and determine whether further inquiry is
appropriate.\182\ If Commission staff does determine to examine a
fund's liquidity classifications based on the fund's Form N-PORT
disclosure, it would be able to examine whether the fund considered the
required factors in classifying the liquidity of its portfolio
positions. Thus, while the actual liquidity classifications assigned to
funds' portfolio positions could vary from fund to fund, the proposed
approach provides a regulatory framework that should promote
consistency in funds' liquidity classification practices.
---------------------------------------------------------------------------

    \182\ See infra section III.G.2.
---------------------------------------------------------------------------

    The proposed approach to liquidity classification reflects our
understanding that many funds evaluate assets' liquidity across a
liquidity spectrum, as opposed to making a binary determination of
whether an asset is liquid or illiquid. As discussed above, Commission
staff outreach to funds has shown us that it is common for funds to
treat portfolio assets as relatively liquid or illiquid compared to
other portfolio assets, and some funds ``score'' the liquidity of their
portfolio holdings based on a variety of factors, including the period
of time it takes to convert the holdings to cash, similar to those that
we are proposing. We also understand that some third-party service
providers currently provide data and analyses assessing the relative
liquidity of a fund's portfolio assets.\183\
---------------------------------------------------------------------------

    \183\ See infra note 205 and accompanying paragraph.
---------------------------------------------------------------------------

    A nuanced liquidity classification approach has practical benefits
in terms of managing liquidity to meet anticipated redemptions. Because
we understand based on staff outreach that many funds today consider
very few, if any, of their portfolio assets to be holdings limited by
the 15% guideline, we believe that the proposed spectrum-based approach
to liquidity classification acknowledges the liquidity variation in
funds' portfolio positions better than the current framework, in which
a fund could consider its entire portfolio (or a significant portion of
the portfolio) to be simply ``liquid.'' We believe that this approach
would permit a fund to better plan how it would meet redemptions
occurring in a day, a week, or some other period, by categorizing asset
positions in terms of the respective times in which they could be
converted to cash and constructing the fund's portfolio in order to
manage its expected and reasonably foreseeable redemptions during these
periods. The proposed liquidity classification approach also would
enhance a fund's ability to adjust its portfolio composition in
anticipation of, or in reaction to, adverse events, or to comply with
its investment strategy or mandate.
    The proposed approach would provide the framework for reporting and
disclosure about the liquidity of funds' portfolio assets that would
permit our staff to better monitor liquidity trends and funds'
liquidity risk profiles, and also would help investors and other market
participants assess funds' relative liquidity. As discussed below, we
are proposing amendments to proposed Form N-PORT that would require a
fund to indicate the liquidity classification of each of a fund's
portfolio positions.\184\ Funds are not currently required to disclose
information about the liquidity of their portfolio assets, although
Item C.7 of Form N-PORT, as proposed earlier this year, would require
that each fund report whether each particular portfolio security is an
``illiquid asset'' and defines illiquid assets in terms of current
Commission guidelines.\185\ Requiring a fund to classify the liquidity
of each portfolio position also would facilitate fulsome reporting of a
fund's liquidity profile on Form N-PORT. As discussed below, we believe
that the proposed N-PORT reporting requirements would permit enhanced
Commission monitoring and oversight of the fund industry and would
result in investor protection benefits, because we believe the proposed
requirements would permit investors (particularly institutional
investors), as well as academic researchers, financial analysts, and
economic research firms, to use the liquidity-related data reported on
Form N-PORT to evaluate fund portfolios and related risks.\186\
---------------------------------------------------------------------------

    \184\ See infra section III.G.2.a.
    \185\ See supra note 118 and accompanying text; see also infra
notes 563-565 and accompanying text.
    \186\ See infra sections III.G.2.a; IV.C.3.b.
---------------------------------------------------------------------------

    The time frames associated with the proposed liquidity categories
reflect our understanding of some of the relevant periods that some
funds currently consider in assessing the liquidity of a fund's
portfolio assets.\187\ There are many ways in which identifying
portfolio positions that are convertible to cash in one business day or
two-to-three business days could enhance a fund's ability to calibrate
its liquidity profile in order to manage its expected and reasonably
foreseeable redemptions during these periods.\188\ For example, if a
fund discloses that it will generally pay redemption proceeds within
one business day after receiving a shareholder's redemption request
(although it may delay payment for seven calendar days, as permitted by
section 22(e) of the Investment

Company Act), it would be required to identify portfolio assets that,
if needed, could be converted to cash within one day. Many funds that
do not pay redemption proceeds within a day of receiving a redemption
request nevertheless may pay redemption proceeds within a time period
shorter than the seven days required by section 22(e). For example,
because rule 15c6-1 under the Exchange Act, which became effective in
1995, established three business days as the standard settlement period
for securities trades effected by a broker-dealer, this rule
effectively requires most funds to pay redemption proceeds within three
business days after receiving a redemption request, because a broker or
dealer will be involved in the redemption process.\189\ Market
participants also are exploring further reducing this settlement period
from T+3 to T+2, and possibly eventually to T+1.\190\ Likewise, even
funds that do not disclose that they will pay redemption proceeds
within periods shorter than seven days may find it useful to identify
portfolio positions that may be converted to cash quickly (i.e., within
three business days or shorter) in order to meet unexpected or
unusually high redemption requests, or to rebalance or otherwise adjust
a portfolio's composition quickly.
---------------------------------------------------------------------------

    \187\ We note that Question 32 on Form PF requests information
regarding the percentage of the reporting fund's portfolio capable
of being liquidated within certain time frames. See supra note 70
for additional information about Form PF. However, the time frames
associated with the liquidity categories in proposed rule 22e-4 are
different from those incorporated in Form PF Question 32 on account
of the different redemption obligations of registered funds versus
private funds, as well as, relatedly, the different liquidity
profile of registered funds' portfolio assets (generally) versus
private funds' portfolio assets.
    \188\ With respect to the one-day and two-to-three-day liquidity
categories, we are proposing to incorporate a convertible-to-cash
time period that is based on business days instead of calendar days,
in order to minimize unnecessary re-classifications of portfolio
positions that could affect data analyses of a fund's Form N-PORT
data reporting regarding these positions. If these two liquidity
categories were based on calendar days instead of business days, a
portfolio position reported on a Friday might be considered to be
convertible to cash within three calendar days (because markets
would not be open over the weekend), but the same portfolio position
reported on a different weekday would be considered to be
convertible to cash within one or two calendar days. This could
cause a fund to have to re-classify portfolio positions based on the
reporting date, and this re-classification could skew analyses that
the Commission staff or other parties conduct using Form N-PORT
data. Because the required classification is the most granular in
shortest-term liquidity categories, we believe such reporting
consistency is particularly important. However, after the one-day
and two-to-three-day liquidity categories, we are proposing to
switch to a calendar day framework both to tie to the seven calendar
day requirement for meeting redemptions under section 22(e) of the
Act and because the longer the timeframe is to convert the asset to
cash, the more we recognize the timeframe is likely to be a less
precise estimate and thus the additional precision from the business
day categorization is less likely to be material to the
classification.
    \189\ See Securities Transactions Settlement Release, supra note
74. In 2004, the Commission issued a concept release seeking input
on, among other things, the benefits and costs associated with
implementing a settlement cycle for most broker-dealer transactions
that is shorter than three days. Concept Release: Securities
Transactions Settlement, Investment Company Act Release No. 26384
(Mar. 11, 2004) [69 FR 12922 (Mar. 18, 2004)] (``Securities
Transactions Settlement Concept Release'').
     Several comments from asset managers received in response to
the FSOC Notice noted that, as a practical matter, the three-
business-day settlement requirements of rule 15c6-1 effectively take
most fund investments to a T+3 settlement timeline. See, e.g., SIFMA
IAA FSOC Notice Comment Letter, supra note 16, at n.34; Fidelity
FSOC Notice Comment Letter, supra note 20, at n.20.
    \190\ See supra note 76 and accompanying text.
---------------------------------------------------------------------------

    Along with identifying positions that may be converted to cash
within either one business day or two-to-three business days, we
believe that identifying each ``less liquid asset''--that is, any
position in an asset (or portion of a position in a particular asset)
that is not a three-day liquid asset \191\--would enhance a fund's
ability to determine the portion of the fund's portfolio that the fund
may not be able to rely on selling to meet redemption requests within
the three-day period required by rule 15c6-1 under the Exchange Act, or
within some shorter period.\192\ Among less liquid assets, some may be
convertible to cash in just over three business days, others may not be
convertible to cash for a year or more, and still others may fall in
between these two extremes. To reflect this, we are proposing four
categories of less liquid assets: Positions convertible to cash within
four-to-seven calendar days, eight-to-fifteen calendar days, sixteen-
to-thirty calendar days, and over-thirty calendar days.\193\
---------------------------------------------------------------------------

    \191\ See proposed rule 22e-4(a)(6).
    \192\ See infra notes 333-334 and accompanying text (discussing
common reasons why a fund could be required to meet redemption
requests within three business days, or within some shorter period).
    \193\ See proposed rule 22e-4(b)(2)(i)(C)-(F).
---------------------------------------------------------------------------

    Determining whether a portfolio position is convertible to cash
within four-to-seven calendar days would enhance a fund's ability to
identify those positions that are not immediately or very quickly
convertible to cash (i.e., those positions convertible to cash within
one, two, or three business days), but that nevertheless could be
converted to cash in a time frame that would permit funds to pay
redeeming shareholders within the seven-day period established by
section 22(e). For example, for a fund that typically sells its most
liquid assets to meet redemptions, the four-to-seven day liquidity
category could assist the fund in constructing a second layer of
portfolio liquidity to meet redemptions using liquidity within the fund
even after it has sold or disposed of its most liquid assets.\194\ We
anticipate that funds could determine that a variety of securities
within different asset classes could be converted to cash within four-
to-seven calendar days, depending on facts and circumstances.
---------------------------------------------------------------------------

    \194\ See supra text accompanying and following note 37
(discussing the fact that a fund that sells its most liquid assets
to meet redemptions minimizes the effect of the redemptions on
short-term fund performance for redeeming and remaining investors,
but may leave remaining investors in a potentially less liquid and
riskier fund until the fund rebalances).
---------------------------------------------------------------------------

    We understand that circumstances could arise in which the
settlement period for a particular portfolio position could be viewed
either as two-to-three business days or four-to-seven calendar days.
For example, if a sale were to occur on a Thursday and be settled on a
Monday, the settlement period could be viewed either as two business
days or four calendar days. Because this could cause ambiguity for
reporting purposes,\195\ in situations in which the settlement period
could be viewed either as two-to-three business days or four-to-seven
calendar days, a fund should classify the portfolio position based on
the shorter settlement period (i.e., two-to-three business days, not
four-to-seven calendar days).\196\
---------------------------------------------------------------------------

    \195\ See infra section III.G.2 (discussing proposed Form N-PORT
reporting requirements).
    \196\ See proposed note to proposed rule 22e-4(b)(2)(i); see
also supra note 188.
---------------------------------------------------------------------------

    We believe that the eight-to-fifteen calendar day and sixteen-to-
thirty calendar day categories of less liquid assets would distinguish
a position that is convertible to cash in close to seven calendar days
(i.e., close to the required redemption period established by section
22(e)) from one that takes significantly longer (i.e., close to a
month) to convert to cash. For example, if a fund were to enter into a
period of extended redemptions that it anticipates would last for
multiple days, it could begin trying to liquidate eight-to-fifteen day
assets in order to plan to meet redemptions that would occur more than
a week in the future. The over-thirty calendar day category is meant to
identify those portfolio positions that are the least liquid, including
those that may have very extended settlement periods.
    Assets with settlement periods longer than three business days
would be considered less liquid assets. Assets also should be
classified under the rule based on typical expected settlement periods
for transactions in that asset in the particular jurisdiction, and not
based on the prospect of gaining expedited settlement of the purchase
or sale upon request. Transactions in certain types of securities have
historically entailed lengthy settlement periods. For example,
transactions in certain foreign securities,\197\ agency mortgage-backed
securities (other than secondary market trades),\198\ and U.S.

bank loan participations \199\ typically require settlement periods of
more than three business days. An asset having a shorter settlement
period could also be considered to be a less liquid asset, however, if
a fund were to determine, based on the factors required to be assessed
under the proposed rule, that it could not sell its position in the
asset and settle the sale (at a price that does not materially affect
the value of that asset immediately prior to sale) within three
business days.
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    \197\ See, e.g., Comment Letter of the Global Foreign Exchange
Division to the European Commission and the European Securities and
Markets Authority re: Consistent Regulatory Treatment for Incidental
Foreign Exchange (FX) Transactions Related to Foreign Securities
Settlement--``FX Security Conversions'' (Mar. 25, 2014), available
at http://www.gfma.org/Initiatives/Foreign-Exchange-(FX)/GFMA-
Submits-Comments-to-the-EC-and-the-ESMA-on-Consistent-Regulatory-
Treatment-for-Incidental-Foreign-Exchange-Transactions/
(``Typically, the settlement cycle for most non-EUR denominated
securities is trade date plus three days (`T+3'). Accordingly, the
bank custodian or broker-dealer would enter into a FX transaction on
a T+3 basis as well. In some securities markets, for example in
South Africa, the settlement cycle can take up to seven days
(T+7).'').
    \198\ See, e.g., James Vickery & Joshua Wright, TBA Trading and
Liquidity in the Agency MBS Market, 19 FRBNY Econ. Policy Review 1
(May 2013), available at http://www.newyorkfed.org/research/epr/2013/1212vick.pdf (noting that over ninety percent of agency
mortgage-backed securities trading occurs in the to-be-announced
(``TBA'') forward market, and that the trade date of a TBA trade
will usually precede settlement by between two and sixty days).
    \199\ See, e.g., BlackRock, Viewpoint, Who Owns the Assets,
supra note 79; Michael Mackenzie & Tracy Alloway, Lengthy US loan
settlements prompt liquidity fears, Fin. Times (May 1, 2014)
available at http://www.ft.com/intl/cms/s/0/32181cb6-d096-11e3-9a81-00144feabdc0.html; OppenheimerFunds FSOC Notice Comment Letter,
supra note 79, at 3-4 (stating that ``loans still take longer to
settle than other securities. Median settlement times for buy-side
loan sales are 12 days'' and noting that an ``important tool in
managing settlement times is the establishment of a credit line
dedicated to bank loan funds.'').
---------------------------------------------------------------------------

b. Request for Comment
    We request comment on the proposed requirements for classifying the
relative liquidity of a fund's portfolio positions.
     What procedures or practices do funds currently use to
assess and classify the liquidity of portfolio assets? Have these
procedures proven effective in the past? If not, under what
circumstances were they ineffective, and why? Have funds modified their
procedures for assessing and classifying liquidity in recent years to
account for changes in market structure and the advent of new types of
market participants? If so, how? Who at the fund and/or the adviser is
tasked with assessing the liquidity of the funds' portfolio assets? Are
any third-party service providers used in assessing portfolio assets'
liquidity, and if so, how are such service providers used and what are
the costs associated with their services? Would the proposed
requirements require funds to make systems modifications and what costs
would be associated with any potential system modifications? What would
the associated costs and other burdens be for funds to assess and
classify the liquidity of portfolio assets?
     Do commenters agree that it would be useful for a fund to
consider portfolio positions' liquidity in terms of a spectrum instead
of a binary determination that an asset is liquid or illiquid, and do
funds currently consider the relative liquidity of portfolio assets by
classifying assets (either explicitly or informally) into multiple
liquidity categories? If so, what categories are used, and why?
Alternatively, should we define the term ``illiquid assets?'' Why or
why not? If so, how should we define it?
     Do funds currently consider the period in which a fund's
position in an asset can be converted into cash (that is, sold, with
the sale settled) in assessing and classifying the liquidity of
portfolio assets? Do commenters agree that it would be useful for a
fund to assess the liquidity of its entire position in a portfolio
asset, or portions of a position in a particular asset, as opposed to
the liquidity of a single trading lot of a portfolio asset held by the
fund? Do funds currently consider the ability to sell varying portions
of a fund's position in a portfolio asset (fractions of the position,
as well as the entire position) in assessing that asset's liquidity?
     What assumptions, estimations, and judgments would funds
need to make in order to determine liquidity classifications, and how
would these assumptions, estimations, and judgments affect the
comparability of reporting across funds? Are there concerns, such as
proprietary or liability concerns, associated with reporting liquidity
classifications based on such assumptions, estimations, and judgments?
     The proposed rule would require a fund to determine, using
information obtained after reasonable inquiry, the number of days
within which a fund's position in a portfolio asset (or portion of a
position in a particular asset) would be convertible to cash at a price
that does not materially affect the value of that asset immediately
prior to sale. Do commenters believe that the terms ``information
obtained using reasonably inquiry,'' ``at a price that does not
materially affect the value of that asset,'' and ``immediately prior to
sale'' are sufficiently clear? If not, how could they be made clearer?
     Do the proposed liquidity categories reflect the manner in
which funds currently assess and categorize the liquidity of their
portfolio holdings as part of their portfolio and risk management?
Should we increase or decrease the number of liquidity categories to
which a fund might assign a portfolio position? For example, should we
combine the last three liquidity categories (convertible to cash within
8-15, 16-30, or in more than 30 calendar days) into one liquidity
classification category (e.g., ``convertible to cash in more than 7
calendar days'')? Why or why not? Should we add one or more liquidity
categories outside of the more than 30 calendar day time period (e.g.,
``convertible to cash in more than 90 calendar days'')? Why or why not?
Should we revise the time periods associated with any of the proposed
liquidity categories? Alternatively, should we permit a fund to
classify the liquidity of its portfolio securities based not on
conversion-to-cash time periods specified by the Commission, but
instead based on conversion-to-cash time periods that the fund
determines to be appropriate (taking into account the fund's redemption
obligations)? Would such an approach diminish comparability in funds'
reporting of their liquidity assessment on proposed Form N-PORT,
discussed below?
     Regarding the proposed liquidity categories that would be
associated with less liquid assets, is there any reason why an asset
with a settlement period longer than three business days should not be
deemed to be a less liquid asset? What types of funds would be largely
composed of assets that would be considered less liquid assets under
proposed rule 22e-4?
     To what extent do commenters anticipate that assets in the
eight-to-fifteen calendar days, sixteen-to-thirty calendar days, and
over-thirty calendar days classification categories under the proposed
rule overlap with assets that funds currently consider to be limited by
the 15% guideline?
     Are the proposed liquidity categories appropriate for ETFs
and ETMFs? Should ETFs and ETMFs that transact primarily in kind be
permitted to have different liquidity categories? If so, what
categories and why?
     Should smaller funds or funds pursuing particular types of
investment strategies be permitted to have different liquidity
categories? If so, how should we define those subsets of funds?
     Should we use business days or calendar days for all the
liquidity classification categories, rather than using business days in
the shorter categories, but calendar days for the longer categories? If
we used calendar days for all the categories, how could we avoid
changes in asset classification based on whether the asset was held
near a weekend? In addition, if we used calendar days, how could we
obtain information on which assets could be converted to cash within
the three business day requirement in rule 15c6-1? If we used business
days for all categories, how could we obtain information on which
assets could be converted to cash within the seven calendar day (as
opposed to business day) requirement for payment of redemption proceeds
under section 22(e) of the Act?
2. Factors To Consider in Classifying the Liquidity of a Portfolio
Position
    Staff outreach to the fund industry has highlighted certain common
factors

that some funds use in evaluating portfolio assets' liquidity.
Specifically, the most comprehensive liquidity analyses take into
account relevant market-based, trading, and asset-specific factors in
assessing a fund's ability to convert a position in a portfolio asset
(or portions of a position in a particular asset) to cash at
approximately its stated value during current market conditions. The
Commission has previously provided examples of factors that would be
reasonable for a board of directors to consider in assessing the
liquidity of a rule 144A security,\200\ and outreach has shown that
certain funds reference these factors when considering the liquidity of
all portfolio assets (not just rule 144A securities). Other funds,
however, classify the liquidity of their portfolio assets using
substantially less thorough practices (e.g., assuming, without
individualized analysis, that certain asset classes are always liquid
or always illiquid). As discussed above, we believe that a nuanced
classification approach may have practical benefits in improving how
funds manage liquidity to meet anticipated redemptions.\201\
---------------------------------------------------------------------------

    \200\ See supra note 96 and accompanying text.
    \201\ See supra paragraphs accompanying note 178 and following
note 183.
---------------------------------------------------------------------------

    Proposed rule 22e-4(b)(2)(ii) would require a fund to take the
following factors into account, to the extent applicable, when
classifying the liquidity of each portfolio position in a particular
asset:
     Existence of an active market for the asset, including
whether the asset is listed on an exchange, as well as the number,
diversity, and quality of market participants;
     Frequency of trades or quotes for the asset and average
daily trading volume of the asset (regardless of whether the asset is a
security traded on an exchange);
     Volatility of trading prices for the asset;
     Bid-ask spreads for the asset;
     Whether the asset has a relatively standardized and simple
structure;
     For fixed income securities, maturity and date of issue;
     Restrictions on trading of the asset and limitations on
transfer of the asset;
     The size of the fund's position in the asset relative to
the asset's average daily trading volume and, as applicable, the number
of units of the asset outstanding; and
     Relationship of the asset to another portfolio asset.
    These factors are based on those certain investment advisers
consider when systematically evaluating the liquidity of portfolio
assets.\202\ We are proposing to require that all funds take into
account these factors, as applicable, to encourage effective liquidity
assessment across the fund industry. This list is not meant to be
exhaustive. We recognize that the specific factors appropriate for
consideration could vary depending on the issuer and the particular
asset, and therefore an evaluation of a particular portfolio position's
liquidity could focus more heavily on certain factors and less on
others. In evaluating the liquidity of its portfolio positions, a fund
could also take into account other pertinent factors in addition to
those set forth in proposed rule 22e-4(b)(2)(ii). However, a fund would
be required to consider, as applicable, the proposed rule 22e-
4(b)(2)(ii) factors as a minimum set of considerations to be used in
classifying the liquidity of each portfolio position.
---------------------------------------------------------------------------

    \202\ See, e.g., ICI FSOC Notice Comment Letter, supra note 16,
at 23 (``Specific information that may contribute further to the
manager's view of an asset's liquidity may include: (i) assessments
of bid-ask spreads, volumes, depth of secondary market for the
asset, information from pricing vendors, and other data; (ii)
deliberations among portfolio managers and traders regarding
valuation and liquidity; (iii) analysis of the capital structure and
credit quality of the asset/holding; (iv) the ``newness'' of a bond
issue (newer issues tend to be more liquid); and (v) liquidity data
provided by third parties. Some fund managers assign ``liquidity
scores'' to particular holdings based on these types of factors.'').
---------------------------------------------------------------------------

    If a fund lacks pertinent information about a portfolio asset, the
fund would be required to consider the proposed rule 22e-4(b)(2)(ii)
factors as applied to similar assets (for purposes of this release,
``comparable assets'').\203\ For example, if a fund has never before
invested in a particular asset--particularly, an asset that does not
trade frequently and for which market data is not generally available
or is of low quality--the fund could estimate the time it would take to
convert the asset to cash if better market data were available for
comparable assets (for example, as applicable, assets that are similar
in terms of duration, credit quality, bid-ask spread, and/or maturity).
Under these circumstances, a fund would be required to evaluate all
applicable 22e-4(b)(2)(ii) factors with respect to the comparable
assets. If data concerning a portfolio asset (as opposed to the
comparable assets) were to become available to a fund, we would expect
that a fund would assess, as part of its ongoing review of the
liquidity classifications assigned to each portfolio position, whether
the liquidity classification given to the portfolio asset is
appropriate in light of newly available data.\204\
---------------------------------------------------------------------------

    \203\ See proposed rule 22e-4(b)(2)(ii).
    \204\ See infra section III.B.3.a.
---------------------------------------------------------------------------

    We understand that some third-party service providers currently
provide data and analyses assessing the relative liquidity of a fund's
portfolio assets,\205\ and we believe that a fund could also
appropriately use this type of data to inform or supplement its
consideration of the proposed liquidity classification factors.
However, before doing so, a fund should consider having the person(s)
at the fund or investment adviser tasked with administering the fund's
liquidity risk management program review the quality of the data
received from third parties, as well as the particular methodologies
used and metrics analyzed by third parties, to determine whether this
data would effectively inform or supplement the fund's consideration of
the proposed liquidity classification factors. This review could
include an assessment of whether modifications to an ``off-the-shelf''
product are necessary to accurately reflect the liquidity
characteristics of the fund's portfolio holdings.
---------------------------------------------------------------------------

    \205\ These third-party vendors may, for example, create
liquidity scores for a fund's portfolio assets based on factors such
as duration, rating, bid-ask spreads, and instrument maturity, and
provide models that reflect how an asset's liquidity may be affected
by different market conditions.
---------------------------------------------------------------------------

    In the following sections, we discuss each of the proposed
liquidity classification factors and provide guidance on specific
issues associated with each of these factors that a fund may wish to
consider in evaluating the liquidity of its portfolio positions.
a. Existence of Active Market, Including Whether the Asset Is Listed on
an Exchange, and the Number, Diversity, and Quality of Market
Participants
    Under proposed rule 22e-4(b)(2)(ii)(A), a fund would be required to
consider, to the extent applicable, the existence of an active market
for the asset, including whether the asset is listed on an exchange, as
well as the number, diversity, and quality of market participants.
    The manner in which a fund may sell a particular portfolio asset,
including whether an asset is listed on an exchange, can affect that
asset's liquidity. While in general, being listed on a developed and
recognized exchange increases an asset's liquidity,\206\ the fact that
an asset is

exchange-traded does not necessarily mean that a fund would be able to
convert that asset to cash within a relatively short period. For
example, a small-cap equity stock might be listed on an exchange but
trade quite infrequently, which would tend to decrease its relative
liquidity. Conversely, certain securities that are traditionally traded
in over-the-counter (``OTC'') markets, such as corporate bonds, could
be considered more liquid if, for instance, they are frequently traded
and there are generally a substantial number of bids to purchase the
security. As an extreme example, short-term securities issued (or
guaranteed as to principal and interest) by the U.S. government do not
trade on exchanges, but are typically considered to be quite
liquid.\207\
---------------------------------------------------------------------------

    \206\ See, e.g., Basel Committee on Banking Supervision, Basel
III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring
Tools (Jan. 2013), at part 1, section II.A.1, available at http://www.bis.org/publ/bcbs238.pdf; see also Nuveen FSOC Notice Comment
Letter, supra note 45, at 9 (``While securities that trade on
exchanges. . . or in deep principal/over-the-counter (``OTC'')
markets (e.g., U.S. Treasuries) are generally liquid even in
stressed markets, other securities that trade on an OTC basis. . .
have faced increasing liquidity challenges in normal markets and can
be subject to insufficient quality bids in times of stress as market
makers pull back their capital. This can make it not only more
difficult to sell these securities, but also to accurately value
those assets that are retained.'').
    \207\ See rule 15c3-1(c)(2)(vi)(A)(1) under the Exchange Act
(describing securities haircuts for securities issued or guaranteed
as to principal or interest by the United States or any agency
thereof); see also Liquidity Coverage Ratio: Liquidity Risk
Measurement Standards (Sept. 9, 2014) [79 FR 61440 (Oct. 10, 2014)]
(``Liquidity Coverage Ratio Release'') (in liquidity coverage ratio
rule adopted by the Office of the Comptroller of the Currency, Board
of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation, ``Level 1 Liquid Assets'' are described as
securities issued or unconditionally guaranteed as to timely payment
of principal and interest by the U.S. Department of the Treasury,
and liquid and readily-marketable securities issued or
unconditionally guaranteed as to the timely payment of principal and
interest by any other U.S. government agency (provided that its
obligations are fully and explicitly guaranteed by the full faith
and credit of the U.S. government)). But see Flash Crash Staff
Report, supra note 124 (noting that, while ``[t]he U.S. Treasury
market is the deepest and most liquid government securities market
in the world,'' liquidity conditions in the market for U.S. Treasury
securities became ``significantly strained'' during the October 2015
``Flash Crash'').
---------------------------------------------------------------------------

    The means of trading a portfolio asset can affect its liquidity
regardless of whether the asset is a security traded on an exchange.
For example, whether an asset is traded in a bilateral transaction with
a single dealer, or through an electronic auction mechanism whereby a
trader can simultaneously contact multiple counterparties, can have
different effects on that asset's liquidity.\208\ The choice of trading
mechanism may have different liquidity effects depending on the asset
being traded and other market conditions, and therefore it is difficult
to make general statements regarding the correlation between a
particular trading mechanism and the liquidity of the asset being
traded. However, a fund should consider past experience in using
different trading mechanisms to sell a particular asset (or similar
assets), when assessing the liquidity of a portfolio position in that
asset.
---------------------------------------------------------------------------

    \208\ See, e.g., Terrence Hendershott & Ananth Madhavan, Click
or Call? Auction versus Search in the Over-the-Counter Market (Mar.
19, 2012), available at http://people.stern.nyu.edu/jhasbrou/SternMicroMtg/SternMicroMtg2012/Accepted/ClickOrCall13.pdf.
---------------------------------------------------------------------------

    In addition, there are multiple considerations that a fund could
assess in evaluating the diversity and quality of market participants
for a particular asset. A fund may wish to consider the number of
market makers on both the buying and selling sides of transactions. A
fund also may consider the quality of market participants who purchase
and sell units of a particular portfolio asset, and may wish to assess,
in particular: The market participant's capitalization; the reliability
of the market participant's trading platform(s); and the market
participant's experience and reputation transacting in various types of
assets. We believe that the diversity and quality of market
participants are meaningful in assessing a portfolio position's
liquidity because the most liquid assets tend to have active sale or
repurchase markets at all times with diverse market participants.\209\
The presence of multiple market makers may be a sign that a market is
liquid.\210\ Diversity of market participants, on both the buying and
selling sides of transactions, is also an important factor for a fund
to consider because it tends to reduce market concentration and may
facilitate a market remaining liquid during periods of stress.\211\
---------------------------------------------------------------------------

    \209\ See, e.g., Abdourahmane Sarr & Tonny Lybek, Measuring
Liquidity in Financial Markets, IMF Working Paper (Dec. 2002),
available at http://www.imf.org/external/pubs/ft/wp/2002/wp02232.pdf
(``Liquid markets tend to exhibit five characteristics: (i)
tightness (ii) immediacy, (iii) depth, (iv) breadth, and (v)
resiliency.'').
    \210\ See, e.g., Sunil Wahal, Entry, Exit, Market Makers, and
the Bid-Ask Spread, 10 Rev. of Fin. Stud. 871 (1997), available at
http://www.acsu.buffalo.edu/~keechung/MGF743/Readings/H1.pdf
(``Large-scale entry (exit) is associated with substantial declines
(increases) in quoted end-of-day inside spreads, even after
controlling for the effects of changes in volume and volatility. The
spread changes are larger in magnitude for issues with few market
makers; however, even for issues with a large number of market
makers, substantial changes in quoted spreads take place.'').
    \211\ See, e.g., Amir Rubin, Ownership Level, Ownership
Concentration, and Liquidity, 10 J. Fin. Markets 219 (Aug. 2007),
available at http://www.sfu.ca/~arubin/JFM_2006074.pdf (``We examine
the link between the liquidity of a firm's stock and its ownership
structure, specifically, how much of the firm's stock is owned by
insiders and institutions, and how concentrated is their ownership.
We find that the liquidity-ownership relation is mostly driven by
institutional ownership rather than insider ownership. Importantly,
liquidity is positively related to total institutional holdings but
negatively related to institutional block holdings.'').
---------------------------------------------------------------------------

b. Frequency of Trades or Quotes and Average Daily Trading Volume
    Proposed rule 22e-4(b)(2)(ii)(B) would require a fund to consider
the frequency of trades and quotes for a particular asset in evaluating
the liquidity of a portfolio position in that asset, as well as the
asset's average daily trading volume, regardless of whether the asset
is a security traded on an exchange.
    In general, the greater the frequency of trades for an asset (and,
relatedly, the greater the frequency of bid and ask quotes for that
asset), the more liquid that asset is. However, this is not a perfect
or complete measure, and trade size also should be considered in
assessing the relationship between trade frequency and liquidity. For
example, 100 trades at $100 might or might not signify greater
liquidity than 50 trades at $200, although they are likely to suggest
better liquidity than one trade at $10,000.\212\ In evaluating the
frequency of trades (and bid and ask quotes) for an asset, a fund
should generally consider, among other relevant factors, the number of
dealers quoting prices for that asset, the number of other potential
purchasers and sellers, and dealer undertakings to make a market in the
asset.
---------------------------------------------------------------------------

    \212\ See Erik Banks, Liquidity Risk: Managing Funding and Asset
Risk (2nd ed. 2013), at 169.
---------------------------------------------------------------------------

    High average trading volume also tends to be correlated with
greater liquidity. In general, the greater the average daily trading
volume for a particular portfolio asset, the deeper the market, and the
more likely it is that a fund would be able to convert its position to
cash at a price that does not materially affect the value of that asset
immediately prior to sale.\213\ A fund

may wish to particularly consider the number of days a particular asset
has shown zero trading volume during the prior month, year, or other
relevant period, as this could indicate particularly limited liquidity.
High trading volume is not always indicative of available liquidity for
a particular asset, however. For example, high trading volumes might be
associated with high selling pressure on the asset and trades at that
time may have a high price impact.\214\
---------------------------------------------------------------------------

    \213\ See id. at 168; see also MarketWatch, Fitch: Bond Trade
Frequency Strongly Linked to Issue Size (Jan. 29, 2015), available
at http://www.marketwatch.com/story/fitch-bond-trade-frequency-strongly-linked-to-issue-size-2015-01-29 (discussing Fitch Ratings
study findings showing that smaller investment-grade corporate bond
issues, under $500 million, trade materially less frequently than
larger issue bonds); Fidelity FSOC Notice Comment Letter, supra note
20, at 21 (``Liquidity management is linked to portfolio managers'
attention to market risks indicated by . . . shrinking transaction
volumes which exacerbate the impact cost for additional trading'').
     We note that double-counting of trades is a potential issue to
consider when assessing average trading volume. Double-counting
occurs because of differences between dealer and auction markets. In
a dealer market, trades are ``double-counted'' because the dealer
buys from person A and then sells to person B. In an auction market,
person A and B trade directly. See, e.g., Anne M. Anderson & Edward
A. Dyl, Trading Volume: NASDAQ and the NYSE, 63 Fin. Analysts J. 79
(May/June 2007), available at http://www.cfapubs.org/doi/abs/10.2469/faj.v63.n3.4693.
    \214\ See, e.g., Jennifer Huang & Jiang Wang, Liquidity and
Market Crashes, 22 Rev. of Fin. Stud. 2607 (2009), available at
http://rfs.oxfordjournals.org/content/22/7/2607.full (discussing how
there can be high selling pressure (and high volume) along with low
liquidity and how this can create market crashes); Mark Carlson, A
Brief History of the 1987 Stock Market Crash with a Discussion of
the Federal Reserve Response, Federal Reserve Board Working Paper
2007-13 (Nov. 2006), available at http://www.federalreserve.gov/pubs/feds/2007/200713/200713pap.pdf (discussing how the 1987 stock
market crash had both high volume and low liquidity).
---------------------------------------------------------------------------

    Assets that are components of widely followed market indices tend
to have relatively high trading volume, and therefore relatively high
liquidity compared to other assets. If a security is included in such
an index, market participants are likely to invest in the security in
order to replicate the index. This, in turn, will increase demand and
trading volume for the security, therefore increasing the security's
liquidity compared to securities not in such an index.\215\
Additionally, index components are selected, with a goal of promoting
replicability of the index, based on multiple factors including
liquidity screens, which in turn may be based on an asset's trading
volume.\216\ A security's inclusion in a widely followed market index
therefore suggests relatively high trading volume, and thus a greater
level of liquidity relative to similar securities that were not chosen
to be part of such an index (e.g., a high-yield corporate bond included
in a widely followed market index would likely be more liquid than an
otherwise similar high-yield corporate bond that is not a component of
such an index).
---------------------------------------------------------------------------

    \215\ See, e.g., Shantaram P. Hegde & John B. McDermott, The
Liquidity Effects of Revisions to the S&P 500 Index: An Empirical
Analysis, 6 J. Fin. Markets 413 (2003) (``Using a recent sample of
S&P 500 additions, we find a sustained increase in the liquidity of
the added stocks.'').
    \216\ See, e.g., Stock Index Liquidity Screen patent application
(Owner: Frank Russell Company) (Mar. 19, 2009), available at http://appft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=1&f=G&l=50&co1=AND&d=PG01&s1=%22stock+index+liquidity+screen%22&OS=``stock+index+liquidity+screen''&RS=``stock+index+liquidity
+screen'' (describing various methods that index providers use to
identify securities with inadequate liquidity and exclude them from
indices).
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c. Volatility of Trading Prices
    Under proposed rule 22e-4(b)(2)(ii)(C), a fund would be required to
consider the volatility of trading prices for a particular portfolio
asset when evaluating the liquidity of a position in that asset. In
general, there is an inverse relationship between liquidity and
volatility,\217\ as lack of liquidity in a particular asset tends to
amplify price volatility for that asset.\218\ Additionally, Commission
staff understands that certain funds and fund groups have historically
experienced liquidity disruptions during periods of extreme market
volatility, such as the June 2013 ``taper tantrum.''\219\ For these
reasons, we believe that trading price volatility is potentially a
valuable metric to consider in determining an asset's liquidity.
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    \217\ See, e.g., Tarun Chordia, Asani Sarkar & Avanidhar
Subrahmanyam, An Empirical Analysis of Stock and Bond Market
Liquidity, Federal Reserve Bank of New York Staff Reports, no. 164
(Mar. 2003), available at http://www.newyorkfed.org/research/staff_reports/sr164.pdf (finding that unexpected liquidity and
volatility shocks are positively and significantly correlated across
stock and bond markets).
    \218\ See, e.g., Prachi Deuskar, Extrapolative Expectation:
Implications for Volatility and Liquidity (Aug. 2007), available at
https://business.illinois.edu/pdeuskar/Deuskar_Extrapolative_Liquidity_Volatility.pdf (``Illiquidity
amplifies supply shocks, increasing realized volatility of prices,
which feeds into subsequent volatility forecasts.''); see also
Fidelity FSOC Notice Comment Letter, supra note 20, at 21
(``Liquidity management is linked to portfolio managers' attention
to market risks indicated by . . . increasing market- and security-
specific volatility.'').
    \219\ In May 2013, Ben Bernanke, then Chairman of the Federal
Reserve Board, announced that the Federal Reserve may start scaling
back its asset purchase program--in which the Federal Reserve
purchased approximately $85 billion worth of bonds and mortgage-
backed securities each month--sooner than investors expected. This
caused interests rates on fixed income products to spike, and bond
prices to fall dramatically. This market dislocation came to be
known as the ``taper tantrum.'' See Condon & Kearns, Fed Worried
About Triggering Another `Taper Tantrum,' BloombergBusiness (Oct. 8,
2014), available at http://www.bloomberg.com/news/articles/2014-10-08/fed-worried-about-triggering-another-taper-tantrum-.
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d. Bid-Ask Spreads
    Bid-ask spreads--the difference between bid and offer prices for a
particular asset--have historically been viewed as a useful measure for
assessing the liquidity of assets that trade in the OTC markets.\220\ A
fund would thus be required, under proposed rule 22e-4(b)(2)(ii)(D), to
consider a portfolio asset's bid-ask spreads in evaluating the
liquidity of a position in that asset. The bid-ask spread of a
particular fixed income asset is related to the riskiness of that
asset, as well as the length of time that a broker-dealer believes it
will have to hold the asset before selling it.\221\ In general, high
bid-ask spreads for a particular asset correlate with a lack of
liquidity in that asset. For example, when liquidity was significantly
constricted during the 2007-2009 financial crisis, bid-ask spreads on
U.S. investment grade bonds were notably elevated.\222\ However, bid-
ask spreads alone do not necessarily provide a comprehensive
understanding of an asset's liquidity. For instance, bid-ask spreads
are often constrained by the increments in which prices are
quoted.\223\
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    \220\ See, e.g., Michael J. Fleming, Measuring Treasury Market
Liquidity, Federal Reserve Bank of New York Policy Review (Sept.
2003), available at http://www.newyorkfed.org/research/epr/03v09n3/0309flem.pdf (providing a literature review of studies analyzing
bid-ask spreads in relation to Treasury market liquidity); see also
Fidelity FSOC Notice Comment Letter, supra note 20, at 21
(``Liquidity management is linked to portfolio managers' attention
to market risks indicated by. . .heightened market impact costs (as
indicated by widening bid/ask spreads)'').
    \221\ See MarketAxess, The MarketAxess Bid-Ask Spread Index
(BASI)TM: A More Informed Picture of Market Liquidity in
the U.S. Corporate Bond Market (2013), available at http://www.marketaxess.com/pdfs/research/marketaxess-bid-ask-spread-index-BASI.pdf (discussing methodology for developing an index that tracks
bid-ask spreads of U.S. corporate bonds).
    \222\ See, e.g., BlackRock Investment Institute, Got Liquidity?
(Sept. 2012), available at http://www.blackrock.com/investing/literature/whitepaper/got-liquidity-us-version.pdf, at p.7; see also
Oppenheimer, Diminished Liquidity in the Corporate Bond Market:
Implications for Fixed Income Investors (Mar. 16, 2015), available
at https://www.opco.com/redirect/bond-liquidity-report-3-15.aspx, at
p.1.
    \223\ See, e.g., Michael A. Goldstein & Kenneth A. Kavajecz,
Eighths, Sixteenths, and Market Depth: Changes in Tick Size and
Liquidity Provision on the NYSE, 56 J. Fin. Econ. 125 (2000),
available at http://www.acsu.buffalo.edu/~keechung/MGF743/Readings/
G5.pdf (``Using limit order data provided by the NYSE, we
investigate the impact of reducing the minimum tick size on the
liquidity of the market. While both spreads and depths (quoted and
on the limit order book) declined after the NYSE's change from
eighths to sixteenths, depth declined throughout the entire limit
order book as well. The combined effect of smaller spreads and
reduced cumulative limit order book depth has made liquidity
demanders trading small orders better off; however, traders who
submitted larger orders in lower volume stocks did not benefit,
especially if those stocks were low priced.''); Hendrik
Bessembinder, Tick Size, Spreads, and Liquidity: An Analysis of
Nasdaq Securities Trading Near Ten Dollars, 9 J. of Fin.
Intermediation 213 (July 2000), available at http://
www.acsu.buffalo.edu/~keechung/MGF743/Readings/G4.pdf (``There is no
evidence of a reduction in liquidity with the smaller tick size. The
largest spread reductions occur for stocks whose market makers avoid
odd-eighth quotes. This finding provides support for models implying
that changes in the tick size can affect equilibrium spreads on a
dealer market and indicates that the relation between tick size and
market quality is more complex than the imposition of a constraint
on minimum spread widths.'').

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e. Standardization and Simplicity of Structure
    Proposed rule 22e-4(b)(2)(ii)(E) would require a fund to consider
whether a portfolio asset has a relatively standardized and simple
structure in evaluating the liquidity of a position in that asset.
Assets that trade OTC with terms set at issuance such as sizes,
maturities, coupons, and payment dates tend to be relatively more
liquid compared to similarly situated assets without standardized
terms. The issue of standardization is particularly significant with
respect to the corporate bond market, since corporate issuers commonly
have large numbers of bonds outstanding, and trading can be fragmented
among that universe of bonds. For example, while each of the top ten
largest issuers in the United States had one common equity security
outstanding as of April 2014, these issuers collectively had more than
9,000 bonds outstanding.\224\ Conversely, some types of OTC-traded
securities exhibit a relatively high level of standardization, such as
government and agency bonds, futures contracts, and certain swap
contracts. Central clearing of certain OTC-traded securities, which
generally requires the terms of these securities to be highly
standardized, has been associated with an increase in these assets'
liquidity, as measured by factors such as the bid-ask spreads for these
assets and the number of dealers providing quotes for these
assets.\225\ While standardization of a particular security contract
alone is not indicative of that security's liquidity, standardization
can increase liquidity by simplifying the ability to quote and trade
securities, enhancing operational efficiency to execute and settle
trades, and improving secondary market transparency.
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    \224\ See BlackRock, Viewpoint, Corporate Bond Market Structure:
The Time for Reform Is Now (Sept. 2014), at p.7, available at http://www.blackrock.com/corporate/en-ae/literature/whitepaper/viewpoint-corporate-bond-market-structure-september-2014.pdf.
    \225\ See, e.g., Yee Cheng Loon & Zhaodong (Ken) Zhong, The
impact of central clearing on counterparty risk, liquidity, and
trading: Evidence from the credit default swap market, 112 J. of
Fin. Econ. 91 (Apr. 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2176561 (analyzing the impact of central
clearing on credit default swaps and finding that cleared reference
entities experience an improvement in both liquidity and trading
activity relative to noncleared entities); Joshua Slive, Jonathan
Witmer & Elizabeth Woodman, Liquidity and Central Clearing: Evidence
from the CDS Market, Bank of Canada Working Paper 2012-38 (Dec.
2012), available at http://www.bankofcanada.ca/wp-content/uploads/2012/12/wp2012-38.pdf (analyzing ``the relationship between
liquidity and central clearing using information on credit default
swap clearing at ICE Trust and ICE Clear Europe,'' and finding that
``the introduction of central clearing is associated with a slight
increase in the liquidity of a contract'' (but noting that the
effects of central clearing on liquidity must be viewed in light of
the fact that the central counterparty chooses the most liquid
contracts for central clearing, consistent with liquidity
characteristics being important in determining the safety and
efficiency of clearing)). But see Manmohan Singh, Collateral,
Netting and Systemic Risk in the OTC Derivatives Market, IMF Working
Paper 10/99 (Apr. 1, 2010), available at https://www.imf.org/external/pubs/cat/longres.cfm?sk=23741.0 (arguing that large
increases in collateral posted for the centrally cleared trades
negatively affect market liquidity given that most large banks will
be reluctant to offload their positions to central counterparties).
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f. Maturity and Date of Issue
    With respect to fixed income assets, proposed rule 22e-
4(b)(2)(ii)(F) would require a fund to consider the maturity of a
particular asset, as well as when the asset was issued, in assessing
the liquidity of the fund's position in that asset. In general, a fixed
income asset trades most frequently in the time directly following
issuance, and its trading volume decreases in the asset's remaining
time to maturity.\226\ Thus ``on-the-run'' securities (that is, bonds
or notes of a particular maturity that were most recently issued) tend
to trade significantly more frequently than their ``off-the-run''
counterparts (that is, bonds or notes issued before the most recently
issued bond or note of a particular maturity).\227\ Because high
trading volume generally suggests relatively higher liquidity,\228\ a
fixed income asset's date of issuance and maturity (which in turn are
generally correlated with the trading volume of a fixed income asset)
together are important liquidity indicators. We understand, based on
staff outreach and industry knowledge, that remaining time to maturity
is a key factor that fixed income funds commonly consider in assessing
the liquidity of their portfolio positions.
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    \226\ See, e.g., Sugato Chakravarty & Asani Sarkar, Liquidity in
U.S. Fixed Income Markets: A Comparison of the Bid-Ask Spread in
Corporate, Government and Municipal Bond Markets, Federal Reserve
Board of New York Staff Report No. 73 (Mar. 1999), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=163139.
    \227\ The on-the-run phenomenon refers to the fact that, in
fixed income markets, securities with nearly identical cash flows
trade at different yields and with different liquidity. In
particular, most recently issued (i.e., on-the-run) government bonds
of a certain maturity are generally more liquid than previously
issued (i.e., off-the-run or old) bonds maturing on similar dates.
See, e.g., Paolo Pasquariello & Clara Vega, The on-the-run liquidity
phenomenon, 92 J. of Fin. Econ. 1 (Apr. 2009), available at http://webuser.bus.umich.edu/ppasquar/onofftherun.pdf (analyzing the
liquidity differentials of on-the-run and off-the-run U.S. Treasury
bonds and finding, among other things, that on-the-run and off-the-
run liquidity differentials are economically and statistically
significant--showing that on-the-run bonds tend to be more liquid
than their off-the-run counterparts--even after controlling for
certain intrinsic characteristics of the bonds); Michael Barclay,
Terrence Hendershott & Kenneth Kotz, Automation versus
Intermediation: Evidence from Treasuries Going Off the Run, 61 J.
Fin. 2395 (Oct. 2006), available at http://faculty.haas.berkeley.edu/hender/on-off.pdf (discussing how ``when
Treasury securities go `off the run' their trading volume drops by
more than 90%'').
    \228\ See supra section III.B.2.b.
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g. Restrictions on Trading and Limitations on Transfer
    Proposed rule 22e-4(b)(2)(ii)(G) would require a fund to consider
any restrictions on trading a particular asset, and limitations on
transfers of that asset, in evaluating the liquidity of a portfolio
position in that asset. We previously stated that the liquidity of rule
144A securities is ``a question of fact for the board of directors [of
the fund] to determine based upon the trading markets for the specific
security.''\229\ We also stated that a fund's board may find it
reasonable to consider certain factors when evaluating the liquidity of
a rule 144A security, including: (i) the frequency of trades and quotes
for the security; (ii) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (iii)
dealer undertakings to make a market in the security; and (iv) the
nature of the security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer).\230\ These guidance factors are
consistent with certain of the proposed rule 22e-4(b)(2)(ii)
factors,\231\ and a fund is required to consider the proposed rule

22e-4(b)(2)(ii) factors in evaluating the liquidity of a 144A security.
---------------------------------------------------------------------------

    \229\ See Rule 144A Release, supra note 86. As discussed below,
the Commission has stated that an investment company's board of
directors may delegate day-to-day responsibility for such
determinations to the investment company's investment adviser,
provided that the board retains sufficient oversight. See infra
section III.D.3; see also Rule 144A Release at n.61.
    \230\ See Rule 144A Release, supra note 86, at text following
n.62.
    \231\ ``The frequency of trades and quotes for the security'' is
consistent with proposed rule 22e-4(b)(2)(ii)(B). ``The number of
dealers willing to purchase or sell the security and the number of
other potential purchasers'' and ``dealer undertakings to make a
market in the security,'' are reflected in proposed rule 22e-
4(b)(2)(ii)(A). ``The nature of the security and the nature of the
marketplace trades'' is a very general factor, and we believe that
many of the proposed rule 22e-4(b)(2)(ii) factors (in particular,
those reflected in proposed rule 22e-4(b)(2)(ii)(A), (B), (C), (D),
(E), (F), (G), and (H)) indicate the nature of the security and the
nature of marketplace trades.
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    Regardless of whether a portfolio asset is a restricted security,
it may nevertheless be subject to other limitations on transfer. For
example, for securities that are traded in certain foreign markets,
government approval may be required for the repatriation of investment
income, capital, or the proceeds of sales of securities by foreign
investors.\232\ Portfolio assets furthermore may be subject to certain
contractual limitations on transfer.\233\ Securities subject to
transfer limitations in general are less liquid than securities without
such limitations.
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    \232\ See, e.g., HSBC, Emerging Markets FX: Regulatory
understanding a priority, HSBC's Emerging Markets Currency Guide
2012 (Dec. 2011), available at http://www.hsbcnet.com/gbm/attachments/rise-of-the-rmb/currency-guide-2012.pdf?WT.ac=CIBM_gbm_pro_rmbrise_pbx01_On; see also Liquidity
Coverage Ratio Release, supra note 207, at section II.B.3.iv
(discouraging banking entities from holding a disproportionate
amount of their eligible highly qualified liquid assets in locations
outside the United States where unforeseen impediments may prevent
timely repatriation of such assets during a liquidity crisis).
    \233\ See, e.g., Stephen H. Bier, Julien Bourgeois & Joseph
McClain, Mutual Funds and Loan Investments, The Investment Lawyer
(Mar. 2015), at 2, available at http://www.dechert.com/files/Uploads/Documents/FSG/Mutual%20Funds%20and%20Loan%20Investments%20-%20The%20Investment%20Lawyer.pdf (``[M]any loans and assignment
trades remain bespoke transactions that require consents from
borrowers or key syndicate members, and loan documents are still
negotiated written documents that require human review. As a result.
. .the mechanics of loan trades and certain trade settlement times