1 15 U.S.C. 80a–1 et seq. Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act are to title 17, part 270 of the Code of Federal Regulations [17 CFR part 270]. 2 15 U.S.C. 77a et seq. SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 270 and 274 [Release Nos. 33–11130; IC–34746; File No. S7–26–22] RIN 3235–AM98 Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N–PORT Reporting AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (‘‘Commission’’) is proposing amendments to its current rules for open-end management investment companies (‘‘open-end funds’’) regarding liquidity risk management programs and swing pricing. The proposed amendments are designed to improve liquidity risk management programs to better prepare funds for stressed conditions and improve transparency in liquidity classifications. The amendments are also designed to mitigate dilution of shareholders’ interests in a fund by requiring any open-end fund, other than a money market fund or exchangetraded fund, to use swing pricing to adjust a fund’s net asset value (‘‘NAV’’) per share to pass on costs stemming from shareholder purchase or redemption activity to the shareholders engaged in that activity. In addition, to help operationalize the proposed swing pricing requirement, and to improve order processing more generally, the Commission is proposing a ‘‘hard close’’ requirement for these funds. Under this requirement, an order to purchase or redeem a fund’s shares would be executed at the current day’s price only if the fund, its designated transfer agent, or a registered securities clearing agency receives the order before the pricing time as of which the fund calculates its NAV. The Commission also is proposing amendments to reporting and disclosure requirements on Forms N–PORT, N–1A, and N–CEN that apply to certain registered investment companies, including registered open-end funds (other than money market funds), registered closed-end funds, and unit investment trusts. The proposed amendments would require more frequent reporting of monthly portfolio holdings and related information to the Commission and the public, amend certain reported identifiers, and make other amendments to require additional information about funds’ liquidity risk management and use of swing pricing. DATES: Comments should be received on or before February 14, 2023. ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/ rules/submitcomments.htm); or
• Send an email to rule-comments@
sec.gov. Please include File Number S7– 26–22 on the subject line. Paper Comments
• Send paper comments to Vanessa
A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–26–22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission’s website (https:// www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s Public Reference Room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT:
Mykaila DeLesDernier, Y. Rachel Kuo, James Maclean, Nathan R. Schuur, Senior Counsels; Angela Mokodean, Branch Chief; Brian M. Johnson, Assistant Director, at (202) 551–6792 or IM-Rules@sec.gov, Investment Company Regulation Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–8549. SUPPLEMENTARY INFORMATION: The Commission is proposing to amend the following rules and forms:
Commission reference CFR citation (17 CFR) Investment Company Act of 1940 (‘‘Act’’ or ‘‘Investment Company Act’’): 1 Rule 22c–1 ............................................................................................................................... § 270.22c–1. Rule 22e–4 ............................................................................................................................... § 270.22e–4. Rule 30b1–9 ............................................................................................................................. § 270.30b1–9. Rule 31a–2 ............................................................................................................................... § 270.31a–2. Form N–PORT ......................................................................................................................... § 274.150. Form N–CEN ........................................................................................................................... § 274.101. Securities Act of 1933 (‘‘Securities Act’’) 2 and Investment Company Act:
Form N–1A ............................................................................................................................... §§ 239.15A and 274.11A.
Table of Contents
I. Introduction
A. Open-End Funds and Existing Regulatory Framework

Liquidity Risk Management
Swing Pricing
B. March 2020 Market Events
C. Rulemaking Overview
II. Discussion
A. Amendments Concerning Funds’ Liquidity Risk Management Programs

3See Investment Trusts and Investment Companies: Hearings on S. 3580 before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. (1940), at 37, 137–145 (stating that among the abuses that served as a backdrop for the Act were practices that resulted in substantial dilution of investors’ interests, including backward pricing by fund insiders to increase investment in the fund and thus enhance management fees, but causing dilution of existing investors in the fund) (statements of Commissioner Healy and Mr. Bane). 4See Investment Trusts and Investment Companies: Letter from the Acting Chairman of the SEC, A Report on Abuses and Deficiencies in the Organization and Operation of Investment Trusts and Investment Companies (1939), at n.206 (‘‘[T]he salient characteristic of the open-end investment company. . .was that the investor was given a right of redemption so that he could liquidate his investment at or about asset value at any time that he was dissatisfied with the management or for any other reason.’’). An open-end investment company is required to redeem its securities on demand from shareholders at a price approximating their proportionate share of the fund’s net asset value (‘‘NAV’’) next calculated by the fund after receipt of such redemption request. See section 22 of the Act; rule 22c–1. 5Section 22(c) of the Act authorizes the Commission to make rules and regulations applicable to registered investment companies and to principal underwriters of, and dealers in, the redeemable securities of any registered investment company related to the method of computing purchase and redemption prices of redeemable securities for the purpose of eliminating or reducing so far as reasonably practicable any dilution of the value of other outstanding securities of the fund or any other result of the purchase or redemption that is unfair to investors in the fund’s other outstanding securities. See also section 22(a) of the Act (authorizing a securities association registered under section 15A of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) similarly to prescribe the prices at which a member may purchase or redeem an investment company’s redeemable securities for the purposes of addressing dilution). 6Section 22(e) of the Act provides, in part, that no registered investment company shall suspend the right of redemption or postpone the date of payment upon redemption of any redeemable security in accordance with its terms for more than seven days after tender of the security absent specified unusual circumstances. 7For purposes of this release, the term ‘‘fund’’ or ‘‘open-end fund’’ generally refers to an open-end management investment company registered on Form N–1A or a series thereof, excluding money market funds, unless otherwise specified. Mutual funds and most exchange-traded funds (‘‘ETFs’’) are open-end management companies registered on Form N–1A. An open-end management investment company is an investment company,
other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer. See sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a–4 and 80a–5(a)(1)]. While a money market fund is an open-end management investment company, money market funds generally are not subject to the amendments we are proposing and thus are not included when we refer to ‘‘funds’’ or ‘‘open-end funds’’ in this release except where specified. Although unit investment trusts, like open-end funds, issue redeemable securities, they are not included when we refer to open-end funds in this release, unless otherwise specified. 8The $26 trillion figure is based on Form N–CEN filing data as of Dec. 2021. Of the $26 trillion in assets, ETFs had $5.1 trillion in assets. See Investment Company Liquidity Risk Management Programs, Investment Company Act Release No. 32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 2016)] (‘‘Liquidity Rule Adopting Release’’), at text accompanying n.1046 (estimating open-end fund assets of approximately $15 trillion at the end of 2015). 9See Investment Company Institute, 2022 Investment Company Fact Book (2022) (‘‘2022 ICI Fact Book’’), at 44, available at https:// www.icifactbook.org/; Investment Company Institute, 2016 Investment Company Fact Book (2016), at 110, available at https://www.ici.org/factbook. Retail investors hold the vast majority of mutual fund net assets. See 2022 ICI Fact Book, at 48 (estimating that retail investors held 88% of mutual fund assets at year end 2021). An estimated
13.9 million U.S. households held ETFs in 2021, in
addition to many institutional investors. See id. at 83.
1. Amendments to the Classification
Framework
2. Highly Liquid Investment Minimums
3. Limit on Illiquid Investments
B. Swing Pricing
1. Proposed Swing Pricing Requirement
2. Amendments to Swing Threshold
Framework
3. Determining Flows
4. Swing Factors
C. Hard Close
1. Purpose and Background
2. Pricing Requirements
3. Effects on Order Processing,
Intermediaries and Investors, and Certain Transaction Types
4. Other Proposed Amendments to Rule
22c–1
5. Amendments to Form N–1A
D. Alternatives to Swing Pricing and a Hard Close Requirement
1. Alternatives to Swing Pricing
2. Alternatives to a Hard Close
3. Additional Illustrative Examples
E. Reporting Requirements
1. Amendments to Form N–PORT
2. Amendments to Form N–CEN
F. Technical and Conforming Amendments G. Exemptive Order Rescission and Withdrawal of Commission Staff Statements H. Transition Periods
III. Economic Analysis
A. Introduction
B. Baseline
1. Regulatory Baseline
2. Overview of Certain Industry Order
Management Practices
3. Liquidity Externalities in the Mutual
Fund Sector
4. Affected Entities
C. Benefits and Costs of the Proposed
Amendments
1. Liquidity Risk Management Program
2. Swing Pricing
3. Hard Close Requirement
4. Commission Reporting and Public
Disclosure
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Alternatives
1. Liquidity Risk Management
2. Swing Pricing
3. Hard Close Requirement
4. Commission Reporting and Public
Disclosure
F. Request for Comment
IV. Paperwork Reduction Act
A. Introduction
B. Rule 22e–4
C. Rule 22c–1
D. Form N–PORT
E. Form N–1A
F. Form N–CEN
G. Request for Comment
V. Initial Regulatory Flexibility Analysis
A. Reasons for and Objectives of the Proposed Actions B. Legal Basis
C. Small Entities Subject to the
Amendments
D. Projected Reporting, Recordkeeping, and Other Compliance Requirements
1. Liquidity Risk Management Programs
2. Swing Pricing
3. Hard Close
4. Reporting Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives G. General Request for Comment
VI. Consideration of Impact on the Economy
Statutory Authority
I. Introduction
When the Investment Company Act was enacted, a primary concern was the potential for dilution of shareholders’ interests in open-end investment companies.3 In addition, the ability of shareholders to redeem their shares in an investment company on demand is a defining feature of open-end investment funds.4 Section 22 of the Act reflects these concerns and priorities. For example, section 22(c) gives the Commission broad powers to regulate the pricing of redeemable securities for the purpose of eliminating or reducing so far as reasonably practicable any dilution of the value of outstanding fund shares.5 Section 22(e) of the Act establishes a shareholder right of prompt redemption in open-end funds by requiring such funds to make payments on shareholder redemption requests within seven days of receiving the request.6 The open-end fund industry has grown significantly over the last six years as more Americans rely on funds to gain exposure to financial markets while having the ability to quickly redeem their investments.7 At the end of 2021, assets in open-end funds (excluding money market funds) were approximately $26 trillion, having grown from about $15 trillion at the end of 2015.8 An estimated 102.6 million Americans owned mutual funds at the end of 2021, up from an estimated 91 million individual investors at the end of 2015.9 Open-end funds continue to be an important part of the financial markets, and as those markets have grown more complex, some funds are pursuing more complex investment strategies, including fixed income and

10Based on Morningstar data. Unless otherwise indicated, data discussed throughout this section is based on Morningstar data. Bond funds include funds that invest in taxable bonds (approximately $5.5 trillion in assets) and funds that invest in municipal bonds (approximately $1 trillion in assets). alternative investment strategies focused on less liquid asset classes. For example, as of December 2021, bond funds had assets of more than $6 trillion, funds with alternative investment strategies had about $15 billion in assets, and bank loan funds had around $12 billion in assets.10
Figure 1 below shows the amount of
assets held by different types of openend funds. EP16DE22.000</GPH>
Figure 1: Open-End Fund Assets by Fund Type
Open-End Fund Assets -December 2015 ($Trillions,% of Total Open-End Fund Assets) Bank Loan, $0.1, 1 o/o --.,. Commodities, $0.1, 1 o/o Al . $ ----.--·-·•, .. ~Ilscella eous, $0.0,_~o/~--- ___ Noutradltlonal Equity, Municipal Bond, $0.6, ......... .!•• native, O.l, 1 Vo -· .. ,-....... :::::::.. -······· $0.0, 0% 4% .... --.. ·····--·----..... _.,, __ Source: Morningstar •US Eqttlty . Allocation •Al'tt..'l"native 1111 Miscelhmeou,;
• Taxable Bond (Minus Bank Loans)
"Sector Equity
• Bank Loan
• Nonll'nditi<mal e11uity
• lntemntionnl Equity
" M1.micipal Bond m Commodities

11See Liquidity Rule Adopting Release, supra note 8; Investment Company Swing Pricing, Investment Company Act Release No. 32316 (Oct. 13, 2016) [81 FR 82084 (Nov. 18, 2016)] (‘‘Swing Pricing Adopting Release’’). 12See infra section I.B for a discussion of the fund flows for different types of open-end funds during the Mar. 2020 period. 13See infra section I.B discussing the events of Mar. 2020. 14The review consisted of outreach with funds, advisers, and liquidity vendors that funds use to help classify the liquidity of their investments. In addition, staff reviewed data provided on Form N– PORT, Form N–CEN, and Form-RN. Without effective liquidity risk management, a fund may not be able to make timely payment on shareholder redemptions, and sales of portfolio investments to satisfy redemptions may result in the dilution of outstanding fund shares. Moreover, even when a fund is managing its liquidity effectively, the transaction costs associated with meeting redemption requests or investing the proceeds of subscriptions can create dilution for fund shareholders. These concerns are particularly heightened in times of stress or in funds invested in less liquid investments. To that end, the ability of funds to meet investor redemptions, while mitigating the impact of this redemption activity on remaining shareholders, is an important aspect of the regulatory regime for open-end funds. Commission rules currently provide open-end funds with several tools to mitigate dilution from shareholder purchase or redemption activity and facilitate a fund’s ability to meet shareholder redemptions in a timely manner. These tools include a fund’s liquidity risk management program, the option to use swing pricing for certain funds, the ability to impose purchase or redemption fees, and/or the ability to redeem in kind.11 In March 2020, in connection with the economic shock from the onset of the COVID–19 pandemic, U.S. open-end funds faced a significant volume of investor redemptions.12 As investors sought to redeem fund investments to free up cash during a time of market uncertainty, open-end funds faced significant redemptions and liquidity concerns.13 In light of these events, we have reviewed the effectiveness of funds’ current tools for managing liquidity and limiting dilution, including through staff outreach and review of information funds are required to report to the Commission.14 We have identified weaknesses in funds’ liquidity risk management programs that can cause delays in identifying liquidity issues in stressed periods and cause funds to over-estimate the liquidity of their investments, as well as limited use of tools such as redemption fees or swing pricing that are designed to limit dilution resulting from a fund’s trading of portfolio investments in response to shareholder redemptions or purchases. As a result, we are proposing amendments to enhance funds’ liquidity risk management to help better prepare them for stressed market conditions and to
require the use of swing pricing for certain funds in certain circumstances to limit dilution. We believe the proposed amendments would enhance open-end fund resilience in periods of market stress by promoting funds’ ability to meet redemptions in a timely manner while limiting dilution of remaining shareholders’ interests in the fund. A. Open-End Funds and Existing Regulatory Framework Open-end funds are a popular investment choice for investors seeking to gain professionally managed, diversified exposure to the capital EP16DE22.001</GPH> Open-End Fund Assets -December 2021 ($Trillions,% of Total Open-End Fund Assets) Commodities, S0.2, 1 % ---Alte1"Batlve, $0.1, 1 % Molllclpal Bond, _ ----- Nontraditional ~~',!,.11:2L----Eqolty, $0.0,0% $1.1,4% Source: Morningstar USEquity -:Allocation
• Commodities
•BankLoan
• Taxable Bond {Minus Bank Loans) • International F.quity
• Sector Equity • Municipal Bood
• Alternative • M;scellaneous
• Nontraditional F.quity

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

Liquidity Risk Management
In 2016, the Commission adopted rule 22e–4 under the Act (the ‘‘liquidity rule’’) to require open-end funds to adopt and implement liquidity risk management programs. Rule 22e–4 was designed to address concerns that openend funds investing in less liquid securities may have difficulty meeting redemption requests without significant dilution of remaining investors’ interests in the fund.20 Rule 22e–4 requires: (1) assessment, management, and periodic review of a fund’s liquidity risk; (2) classification of the liquidity of each of a fund’s portfolio investments into one of four prescribed categories— ranging from highly liquid investments to illiquid investments—including atleast-monthly reviews of these classifications; (3) determination and periodic review of a highly liquid investment minimum for certain funds; (4) limitation on illiquid investments; and (5) board oversight. Funds are also subject to related reporting requirements. For example, funds must report the liquidity classifications of their holdings confidentially to the Commission on Form N–PORT. A fund also must immediately report to the Commission on Form N–RN and to the fund’s board if its portfolio becomes more than 15% illiquid, as well as if the fund breaches a highly liquid investment minimum

21Form N–RN was previously titled Form N– LIQUID. See Use of Derivatives by Registered Investment Companies and Business Development Companies, Investment Company Act Release No. 34084 (Nov. 2, 2020) [85 FR 83162 (Dec. 21, 2020)] (‘‘Derivatives Adopting Release’’). 22Small entities were required to be in compliance with the reporting requirements under Form N–PORT by Mar. 1, 2020. See Investment Company Liquidity Disclosure, Investment Company Act Release No. 33142 (June 28, 2018) [83 FR 31859 (July 10, 2018)] (‘‘2018 Liquidity Disclosure Adopting Release’’). 23 Id. 24The Commission also adopted amendments to Form N–PORT to allow funds classifying the liquidity of their investments pursuant to their liquidity risk management programs to report multiple liquidity classification categories for a single position under specified circumstances. See 2018 Liquidity Disclosure Adopting Release, supra note 22. 25See infra notes 303 to 305 and accompanying text (discussing these comments in more detail). 26See Tailored Shareholder Reports for Mutual Funds and Exchange-Traded Funds; Fee Information in Investment Company Advertisements, Investment Company Act Release No. 34731 (Oct. 26, 2022) (‘‘Tailored Shareholder Reports Adopting Release’’) at nn.462–472 and accompanying text. 27See 2018 Liquidity Disclosure Adopting Release, supra note 22, at paragraph accompanying n.125. 28See infra sections I.B and II.A. 29Swing Pricing Adopting Release, supra note 11; rule 22c–1(a)(3). 30See Swing Pricing Adopting Release, supra note 11, at section II.A.1. 31See Comment Letter of BlackRock on Open-End Fund Liquidity Risk Management Programs; Swing Pricing; Re-Opening of Comment Period for Investment Company Reporting Modernization Release, Investment Company Act File No. 31835 (Sep. 22, 2015) [80 FR 62274 (Oct. 15, 2015)] (‘‘2015 Proposing Release’’), File No. S7–16–15; Comment Letter of Dodge & Cox on 2015 Proposing Release, File No. S7–16–15; Comment Letter of Pacific Investment Management Company LLC on 2015 Proposing Release, File No. S7–16–15; Comment Letter of Securities Industry and Financial Markets Association on 2015 Proposing Release, File No. S7–16–15. The comment file for the 2015 Proposing Release, where these comment letters can be accessed, is available at https://www.sec.gov/ comments/s7-16-15/s71615.shtml. 32See Swing Pricing Adopting Release, supra note 11, at section II.A.1. 33After the Commission adopted the current swing pricing rule, the industry formed working Continued established as part of its liquidity risk management program for seven consecutive days.21 While the compliance dates for specific provisions of rule 22e–4 varied, most funds were required to be in compliance with all requirements of the rule in 2019.22 In 2018, the Commission adopted amendments designed to improve the reporting and disclosures of liquidity information by open-end funds.23 These amendments modified certain aspects of the liquidity framework by requiring funds to
disclose information about the operation and effectiveness of their liquidity risk management program in their shareholder reports instead of requiring funds to disclose aggregate liquidity classifications publicly in Form N–PORT.24 Since that time, some individual investors have stated that they care about being able to redeem but do not need narrative information about how a fund manages its liquidity, while some other commenters have suggested that aggregate liquidity classifications would be more helpful than narrative shareholder report disclosure.25 We recently removed the narrative disclosure requirement because, in practice, it did not meaningfully augment other information already available to shareholders.26 When the Commission adopted the 2018 amendments, it stated that Commission staff would continue to monitor and solicit feedback on the implementation of the liquidity framework and inform the Commission what steps, if any, the staff recommends in light of this monitoring.27 The Commission stated its expectation that this evaluation would take into account at least one full year’s worth of liquidity classification data from large and small entities to allow funds and the Commission to gain experience with the classification process and to allow analysis of its benefits and costs based on actual practice. As discussed below, we have had the opportunity since the adoption of these amendments to evaluate the liquidity framework while taking into account the data available to us regarding funds’ liquidity risk management programs.28 We discuss our evaluation of the current liquidity framework throughout this release.
2. Swing Pricing
In 2016, the Commission adopted a rule permitting registered open-end funds (except money market funds or ETFs), under certain circumstances, to use swing pricing, which is the process of adjusting the price above or below a fund’s NAV per share to effectively pass on the costs stemming from shareholder purchase or redemption activity to the shareholders associated with that activity.29 When a shareholder purchases or redeems fund shares, the price of those shares does not typically account for the transactions costs, including trading costs and changes in market prices, that may arise when the fund buys portfolio investments to invest proceeds from purchasing shareholders or sells portfolio investments to meet shareholder redemptions.30 Swing pricing is an investor protection tool currently available to funds to mitigate potential dilution and manage fund liquidity as a result of investor redemption and purchase activity. The 2016 swing pricing rule requires that, for funds choosing to use swing pricing, the fund’s NAV is adjusted by a specified amount (the ‘‘swing factor’’) once the level of net purchases into or net redemptions from the fund has exceeded a specified percentage of the fund’s NAV (the ‘‘swing threshold’’). A fund’s swing factor is permitted to take into account only the near-term costs expected to be incurred by the fund as a result of net purchases or net redemptions on that day and may not exceed an upper limit of 2% of the NAV per share. The rule also requires a fund that uses swing pricing to adopt swing pricing policies and procedures that specify the process for determining the fund’s swing factor and swing threshold. The fund’s board must approve the fund’s swing pricing policies and procedures, the fund’s swing factor upper limit, and the swing threshold. The board also must review a written report on the adequacy and effectiveness of the fund’s swing pricing policies and procedures at least annually. In the time since the adoption of the rule, no U.S. funds have implemented swing pricing. While swing pricing has been a commonly employed antidilution tool in Europe, including among U.S.-based fund managers that also operate funds in Europe, U.S. funds face unique operational obstacles in its implementation. When considering the adoption of the 2016 swing pricing rule, the Commission received comment letters articulating the operational issues that funds may encounter if they implemented swing pricing.31 In response to the concerns raised by commenters, the Commission adopted an extended effective date to allow for the creation of industry-wide operational solutions to facilitate the implementation of swing pricing more effectively. In that release, the Commission stated that it had directed Commission staff to review, two years after the rule’s effective date, market practices associated with funds’ use of swing pricing to mitigate dilution and to provide the Commission with the results of its review.32 Since that time,
we have evaluated market practices associated with funds’ lack of use of swing pricing, and this release reflects that evaluation. Despite over five years passing since adoption, the industry has not developed an operational solution to facilitate implementation of swing pricing, nor have individual market participants.33

groups to explore potential operational solutions to facilitate funds’ ability to implement swing pricing. See Evaluating Swing Pricing: Operational Considerations, Addendum (June 2017), available at https://www.ici.org/system/files/attachments/ ppr_17_swing_pricing_summary.pdf (‘‘2017 ICI Swing Pricing White Paper’’). 34 In 2021, an estimated 18% of U.S. households owning mutual funds purchased them directly from the mutual fund company. See 2022 ICI Fact Book, supra note 9, at Figure 7.8. 35NSCC currently is the only registered clearing agency for fund shares. A significant portion of mutual fund orders are processed through NSCC’s Fund/SERV platform. See Depositary Trust and Clearing Corporation 2021 Annual Report, available at https://www.dtcc.com/annuals/2021/ performance/dashboard (stating that the value of transactions Fund/SERV processed in 2021 was $8.5 trillion and the volume for this period was 261 million transactions). A part of the platform, referred to as Defined Contribution Clearance & Settlement, focuses on purchase, redemption, and exchange transactions in defined contribution and other retirement plans. This service handled a volume of nearly 154 million transactions in 2021. See id. 36We understand based on staff outreach that the time by which a fund receives flow information varies to some extent based on the fund’s investor base. For example, funds with large investments by retirement plans generally receive a larger portion of their flow information after 6 p.m. ET than other funds. 37See 2017 ICI Swing Pricing White Paper, supra note 33 (stating that, for instance, intermediaries trading via traditional Fund/SERV, such as traditional brokerage and managed account activity, transmit orders to the fund by 7 p.m. ET but, with system and procedural enhancements, processing and submission of orders as actual trades might be able to occur prior to 6 p.m. ET). This paper also suggested that 90% to 100% of trade flow (actual or estimated) is required to apply swing pricing between 4 p.m. and 6 p.m. ET. 38See SEC Staff Report on U.S. Credit Markets Interconnectedness and the Effects of the COVID– 19 Economic Shock (Oct. 2020) (‘‘SEC Staff Interconnectedness Report’’), at 17 to 18, available at https://www.sec.gov/files/US-Credit-Markets_ COVID-19_Report.pdf. Staff reports and other staff documents (including those cited herein) represent the views of Commission staff and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of these documents and, like all staff statements, they have no legal force or effect, do not alter or amend applicable law, and create no new or additional obligations for any person. 39See id., at 3 and 6 to 8 (discussing that the market structure of certain segments of the credit market contributed to market stress in Mar. 2020, including reduced dealer inventories and reluctance to accommodate customer demand in some cases). On Apr. 1,
2020, the Board of Governors of the Federal Reserve System (‘‘Federal Reserve’’) made a temporary change to its supplementary leverage ratio rule to allow banking organizations to expand their balance sheets as appropriate to continue to serve as financial intermediaries, stating that the rule’s regulatory restrictions may constrain the firms’ ability to continue to serve as financial intermediaries and to provide credit to households and businesses in the face of rapid deteriorations in Treasury market liquidity conditions and significant inflows of customer deposits and increased reserve levels. See Federal Reserve Board Announces Temporary Changes to its Supplementary Leverage Ratio Rule to Ease Strains in the Treasury Market Resulting from the Coronavirus and Increase Banking Organizations’ Ability to Provide Credit to Households and Businesses (Apr. 1, 2020), available at https://www.federalreserve.gov/ newsevents/pressreleases/bcreg20200401a.htm. 40We do not have specific data about the dilution fund shareholders experienced in Mar. 2020 because funds do not report information about their trading activity and the prices at which they purchase and sell each instrument. However, European funds experienced similar market conditions as U.S. funds and, to mitigate dilution during this period, many European funds increased their use of swing pricing and the size of their swing factors. See infra paragraph accompanying note 60. European funds are subject to regulatory regimes that differ in some respects from the U.S. regime for open-end funds. We are not aware, however, of differences between the regimes that would have significantly reduced dilution for U.S. funds relative to European funds during this period, such that European funds needed to use swing pricing to mitigate dilution that U.S. funds were not experiencing due to regulatory or other differences. 41Of this amount, ETFs had assets of $4.4 trillion and other open-end funds had assets of $16.4 trillion. Money market funds and funds of funds are excluded from calculations relating to the size and redemptions of open-end funds. 42Fixed-income funds, excluding ETFs, had assets of $4.5 trillion, and fixed-income ETFs had assets of $800 billion. We understand that the industry has been unable to develop an operational solution to implement swing pricing largely because funds currently are unable to obtain sufficient fund flow information before they finalizes their NAVs, a necessary precursor to determining whether a fund needs to use swing pricing on any particular day. Generating fund flow information involves a broad network of market participants with multiple layers of systems, including, among others, funds, transfer agents, broker-dealers, retirement plan recordkeepers, banks, and the National Securities Clearing Corporation (‘‘NSCC’’). In general, many mutual funds use prices as of 4 p.m. ET (or the ‘‘pricing time’’) to value the funds’ underlying holdings for purposes of computing
their NAVs for the current day. This time is established by the fund’s board of directors. Typically, investors may place orders to purchase or redeem mutual fund shares with the fund’s transfer agent or with intermediaries as late as 3:59 p.m. ET for execution at that day’s NAV. When the transfer agent or an intermediary receives an order before the pricing time, that order typically receives that day’s price. An investor who submits an order after the pricing time must receive the next day’s price. While some investors may place orders by opening an account directly with the fund’s transfer agent, we understand that the majority of mutual fund orders are placed with intermediaries, such as broker-dealers, banks, and retirement plan recordkeepers.34 Some intermediaries do not transmit flow details to the fund’s transfer agent or the clearing agency until after the fund has finalized its NAV calculation and disseminated the NAV to pricing vendors, media, and intermediaries (‘‘NAV dissemination’’). NAV dissemination tends to occur between 6 p.m. ET and 8 p.m. ET. Indeed, the fund’s transfer agent or the clearing agency often do not receive a significant portion of orders until after midnight—i.e., the next day.35 This contributes to a mismatch between the extent of flow information funds require to implement swing pricing and the flow information funds currently have before the pricing time. For example, based on staff outreach, we understand that some funds receive only around half of their daily volume by 6 p.m. ET.36 We are also aware of a separate review of funds’ receipt of flow data for a quarter in 2016, which found that only 70% of actual and estimated trade flow could be delivered by 6 p.m. ET.37 Without sufficient actual or estimated flow information before the fund finalizes its NAV, funds cannot implement swing pricing because the determination of whether to swing the fund’s NAV depends on the size of net flows. B. March 2020 Market Events In March 2020, at the onset of the COVID–19 pandemic in the United States, most segments of the open-end fund market witnessed large-scale investor outflows. Investors’ concerns about the potential impact of the COVID–19 pandemic led investors to reallocate their assets into cash and short-dated, near-cash investments.38 The resulting outflows from many openend funds placed pressure on these funds to generate liquidity quickly in order to meet investor redemptions. Equity and debt security prices fell as yields rose. Uncertainty throughout the U.S. economy and asset-price volatility rose, and credit spreads and bid-ask spreads widened.39 The large outflows open-end funds faced during March 2020, combined with the widening bidask spreads funds encountered when purchasing or selling portfolio investments at that time, likely contributed to dilution of the value of funds’ shares for remaining investors.40 Open-end funds are a large and important component of U.S. markets. At the end of 2019, assets in
open-end funds totaled $21 trillion.41 Fixedincome funds accounted for $5.3 trillion, or 25% of total open-end fund assets.42 Bank loan assets were nearly $100 billion, or less than 2% of total fixed-income fund assets. At the end of March 2020, following the height of the COVID–19 related market stress, assets in open-end funds (including ETFs) fell

43Fixed-income funds, excluding ETFs, had assets of approximately $4.1 trillion, while fixedincome ETFs’ assets increased slightly from Dec. 2019 levels to $830 billion. 17% ($3.6 trillion) from $20.8 trillion in December 2019 to a total of $17.2 trillion. Assets of open-end funds excluding ETFs fell 18% ($2.9 trillion) from $16.4 trillion to $13.5 trillion, and ETF assets fell 17% (approximately $760 billion) from $4.4 trillion to $3.7 trillion. Of this amount, fixed-income mutual fund assets fell 5.5%, although fixed-income ETFs’ assets increased slightly.43 In addition, bank loan fund assets fell by 30% in March 2020, or from $100 billion to $70 billion, compared to the level of assets reported in December 2019. EP16DE22.002</GPH>
Figure 2: Trends in Open-End Fund Assets
Open-End Fund (Excluding ETF) Assets -Equity -•n,""W• Bond -All,x:ation -Mu11idJ>'•I ll<md Im Alternative llllllll!Commoditie, !l!ll!Jll!i,cdl•n<ou. 0 n-End excludin ET Assets :l).------------'----"'-----------t 25 Source: Morningstar j~ !;., ~ < .I:• 1 "' ETF Assets -f!quity -1lix•blc ll<>11cl -Q·>tnll\odit::ics -~faniei1>lll llt>nd ETF Assets IIIIIIIIMi,cd""'®u. 11111111AJ!ocation -I All:crnntivc. m----------------------1 8 6 4 2 Source: Morningstar Open-End Fixed-Income Fund (Excluding ETF Assets -Other 1,,""bk -OthcrM11nl -tlltrash.,,t and Short-term 81111High Yidd 1111!1111111 ~1rid and Hmc.rging Markct. Ila Government -!Bank L,,.n Fixt-.:! Income O en-FMld excludin E1 Assets 7.0 ..----------------....... ----i
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44Open-end funds also experienced heightened outflows in other stressed periods, such as the last quarter of 2008, but outflows in March 2020 surpassed those witnessed in these other periods. For example, during the last quarter of 2008, investors withdrew $65 billion from bond funds. Total outflows for bond funds during this period never exceeded 1.5% of total net assets. See ICI, 2009 Investment Company Fact Book, Figure 2.10 and accompanying text, available at https:// www.ici.org/system/files/attachments/2009_ factbook.pdf (calculating net flows as a three-month moving average of net flows as a percentage of previous month-end assets, and excluding high yield bond funds). 45Open-end funds (excluding ETFs) had average net flows of approximately $4.8 billion (or 0.04% per month). ETFs had average net flows of approximately $27.7 billion (or 0.7% per month). 46Fixed-income funds (excluding ETFs) had inflows of $28.8 billion (or 0.7% per month on average). Fixed-income ETFs had inflows of $12.5 billion (or 1.7% per month on average). 47Open-end funds (excluding ETFs) had outflows totaling $336.8 billion, or 1.7% of prior period assets. ETFs had inflows totaling $7.3 billion, or 2% of prior period assets. The majority of ETF inflows were for equity ETFs, which had $14.7 billion in inflows. Allocation, alternative, commodity, and miscellaneous/other ETFs had inflows of $13.2 billion. The inflows into some types of ETFs were partially offset by outflows of $20.6 billion from fixed-income ETFs. 48Open-end funds (excluding ETFs) had outflows of approximately $266 billion, and ETFs had outflows of approximately $20.6 billion. 49For open-end funds (excluding ETFs) this included outflows of $223.3 billion (5.9%) for taxable bond funds (of which, bank loan funds had outflows of $11.4 billion (13.6%)). For ETFs this included outflows of $18.4 billion (2.2%) for taxable bond ETFs (of which, bank loan ETFs had outflows of approximately $1 billion (11.2%)) 50For open-end funds (excluding ETFs) this included outflows of $42.6 billion (5%) for municipal bond funds. For ETFs this included outflows of $2.2 billion (4.3%) for municipal bond ETFs. The market disruptions of the March 2020 period included significant redemption activity in open-end funds.44 Throughout 2019, net flows into open-end funds averaged approximately $32.4 billion, or 0.2% per month.45 During this same period, fixed-income funds experienced a steady inflow of approximately $41.7 billion, or 0.9% per month on average.46 In March 2020, however, open-end funds had outflows totaling $329.4 billion, or 1.7% of prior period assets.47 The majority of these outflows were from fixed-income funds, which had $286.6 billion in outflows.48 Taxable bond funds had outflows of $241.7 billion (or 5.2% of prior period assets), of which, bank loan funds had outflows of $12.4 billion (or 13.4% of prior period assets in these funds).49 Municipal bond funds had $44.9 billion in outflows (or 4.9% of prior period
assets).50

51See SEC Staff Interconnectedness Report, supra note 38, at 37. 52The decline in the price of corporate bonds is measured by the BBG U.S. Corporate Bond Index. 53The decline in the price of leveraged loans was measured by the S&P Leveraged Loan Price Index. 54The decline in the price of U.S. small cap equities was measured by the Russell 2000 Total Return Index. During the period of market turmoil, bid-ask spreads spiked by as much as 100 basis points for high-yield bonds and 150–200 basis points for investment-grade bonds.51 In general, the bond market and bank loan market experienced significant price declines in March 2020. The price for 10 year U.S. Treasuries increased by roughly 4.6%. The price of corporate bonds declined by 7%.52 The price of leveraged loans decreased by roughly 13%.53 The heightened volatility and demand for liquidity drove stress throughout the market, particularly in the bond fund and bank loan fund markets. Price declines were not limited to these markets, however. For example, the price for U.S. small cap equities decreased by roughly 24%.54 EP16DE22.003</GPH>
Figure 3: Open-End Fund and Fixed Income Fund Flows
Open-End Fund (Excluding ETF) Flows Of"'n-End (cxdm:llng ET!') Fh,w,

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55See, e.g., Press Release, Federal Reserve Announces Extensive New Measures to Support the Economy (Mar. 23, 2020), available at https:// www.federalreserve.gov/newsevents/pressreleases/ monetary20200323b.htm; https:// www.federalreserve.gov/monetarypolicy/smccf.htm (describing the Secondary Market Corporate Credit Facility in particular). 56From Apr. to Dec. 2020, fixed-income funds averaged $75 billion in inflows, or 1.4% per month. Ultrashort and short-term bond funds experienced average monthly inflows of $16 billion and 2% of assets over this period. 57See Order Under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) and 38(b) of the Investment Company Act of 1940 and Rule 17d-1 Thereunder Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder, Investment Company Act Release No. 33821 (Mar. 23, 2020), available at https:// www.sec.gov/rules/other/2020/ic-33821.pdf. Although the Commission provided this relief for a period of time, we understand funds generally did not use it. 58ETFs typically externalize the costs associated with purchases and redemptions of shares by redeeming in kind and by charging a fixed and/or variable fee to authorized participants to offset both transfer and other transaction costs that an ETF (or its service provider) may incur, as well as brokerage, tax-related, foreign exchange, execution, market impact, and other costs and expenses related to the execution of trades resulting from such transaction. The amount of these fixed and variable fees typically depends on whether the authorized participant effects transactions in kind or with cash and is related to the costs and expenses associated with transactions effected in kind versus in cash. For example, when an authorized participants redeems ETF shares by selling a creation unit to the ETF, the fees that the ETF imposes defray the costs of liquidity the redeeming authorized participant receives. This, in turn, mitigates the risk of diluting non-redeeming authorized participants when an ETF redeems its shares. 59Funds in countries such as Luxembourg, Ireland, the United Kingdom, and the Netherlands had implemented swing pricing and it was wellestablished market practice. In Mar. 2020, funds in some countries, such as France, Spain, and Germany, had more recently begun to employ swing pricing as an anti-dilution method. See Lessons from COVID–19: Liquidity Risk Management and Open-Ended Funds, BlackRock ViewPoint (Jan. 2021), available at https://www.blackrock.com/ corporate/literature/whitepaper/viewpointaddendum-lessons-from-covid-liquidity-riskmanagement-is-central-to-open-ended-fundsjanuary-2021.pdf. 60See Liquidity management in UK open-ended funds: Report based on a joint Bank of England and Financial Conduct Authority survey (Mar. 2021), available at https://www.bankofengland.co.uk/ report/2021/liquidity-management-in-uk-openended-funds (‘‘Bank of England Survey’’). The increase in the use of partial and full
swing pricing included the increase in the number of funds using swing pricing as well as the increase in the frequency of its use for funds that already used swing pricing. The survey also found that some funds did not use swing pricing or other tools during the period because, for example, net outflows of certain funds were below levels at which they would consider applying swing pricing or other tools. 61See id. (stating that, out of a total of 202 surveyed funds that were authorized to use swing pricing, 45 funds decided to reduce their swing threshold during this period, including 18 funds that switched temporarily to full swing pricing during the market stress); ICI, Experiences of European Markets, UCITS, and European ETFs During the COVID–19 Crisis (Dec. 2020), available at https://www.ici.org/doc-server/pdf%3A20_rpt_ covid4.pdf (‘‘Respondents reported that some UCITS lowered their partial swing thresholds during March to take into consideration the impact flows could have on investors from increased transaction costs in underlying markets. . . Some UCITS using partial swing pricing lowered their threshold for redemptions to zero in March (which is equivalent to full swing pricing) in response to market volatility that had caused bid-ask spreads to widen on underlying securities.’’); Claessens, Stijn, and Lewrick, Ulf, ‘‘Open-ended bond funds:
systemic risks and policy implications’’ (Dec. 2021) available at https://www.bis.org/publ/qtrpdf/r_ qt2112c.pdf (stating that, in a survey of 57 Luxembourg actively managed bond UCITS based on a supervisory data collection, these funds lowered swing thresholds on average from net outflows of 1% of total net assets before Mar. 2020 to less than 0.5% of total net assets) (‘‘Claessens and Lewrick’’). See also CSSF Working Paper: An Assessment of Investment Funds’ Liquidity Management Tools (June 2022), available at https:// www.cssf.lu/en/2022/06/publication-of-cssfworking-paper-an-assessment-of-investment-fundsliquidity-management-tools/(‘‘CSSF Paper’’). 62See Claessens and Lewrick, supra note 61; CSSF Paper, supra note 61 (stating that ‘‘[t]he Beginning in mid-March 2020, the Federal Reserve, with the approval of the Department of the Treasury, used its emergency powers to intervene by providing timely and sizable interventions in an effort to stabilize the markets. The official sector interventions included, among others, the Secondary Market Corporate Credit Facility, introduced on March 23, 2020. This facility supported market liquidity by purchasing in the secondary market corporate bonds issued by investment grade U.S. companies, as well as U.S.- listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.55 After the Federal Reserve announced that it would be using its emergency powers for official sector interventions, market stress relating to the COVID–19 pandemic began to subside. Assets in open-end funds, including fixed income funds, began to increase. By December 2020, open-end fund assets had increased to $24 trillion, with fixedincome funds (excluding ETFs) reaching $6 trillion in assets, and fixed-income ETFs surpassing $1 trillion in assets.56 Bank loan fund assets remained essentially unchanged, however, from March 2020 levels and remained at $68 billion. Other Observations From March 2020 Beyond data evidencing the liquidity stress funds faced in March 2020, we also observed the stress through staff outreach to the industry. During this period, fund managers discussed their liquidity concerns with Commission staff and the potential need for emergency relief. Fund managers explored various emergency relief actions. For example, some fund managers requested emergency relief that would provide additional flexibility for interfund lending and other shortterm funding to help meet redemptions, which the Commission provided.57 Some managers suggested emergency relief to permit funds to impose redemption fees that exceed 2% to mitigate dilution, including fees that ETFs can charge authorized participants to cover liquidity and transaction costs.58 Some fund managers that have successfully used swing pricing in Europe urged the Commission to explore emergency actions to facilitate funds’ ability to operationalize the Commission’s current swing pricing rule. Some fund managers also
suggested there was a need for Federal Reserve interventions. These discussions indicated that fund managers sought additional means to quickly address liquidity and dilution concerns during this period of financial stress. During these conversations, several fund managers with operations in both the U.S. and Europe discussed their experience with swing pricing in Europe and indicated that swing pricing would have been a useful tool for U.S. funds to have had in March 2020. Swing pricing was widely used in several European jurisdictions during the March 2020 stressed period to reduce dilution from rising transaction costs.59 In these jurisdictions, some funds used partial swing pricing (where a NAV adjustment occurs only if net flows exceed a swing threshold), some funds used full swing pricing (where a NAV adjustment occurs any time a fund has net inflows or net outflows), and some funds did not use swing pricing. Many European funds increased their use of swing pricing and increased the size of their swing factors during the stressed period. For example, a voluntary survey conducted by the Bank of England and Financial Conduct Authority of a subset of fund managers in the United Kingdom (‘‘UK’’) indicated that the use of swing pricing more than doubled from the last quarter of 2019 to the first quarter of 2020.60 Due to increasing transaction costs, several European funds lowered their swing thresholds in March 2020, with some moving to full swing pricing for net redemptions.61 Funds also increased the size of their swing factors to account for the increase in liquidity and transaction costs. For example, a survey of Luxembourg UCITS found that while the average swing factor for the survey sample hovered around zero before the turmoil, it increased by more than 100 basis points on average during the market stress.62 The survey of UK-authorized

average swing factor of the 42 bond funds participating in the CSSF survey increased by more than 100 basis points on average during Mar. 2020 (the median and maximum swing factor were 60 and 350 basis points, respectively)’’). 63See Bank of England Survey, supra note 60 (stating that of the 17 surveyed funds that had a cap on their swing factors, which ranged from 0.25% to 3%, 13 funds temporarily removed the caps in response to heightened outflows and a few managers overrode the caps). We also understand that in response to funds’ requests to use swing factors above their disclosed caps, some jurisdictions provided guidance on when this is permitted. See Commission de Surveillance du Secteur Financier, Swing Pricing Mechanism— FAQ, available at https://www.cssf.lu/en/ Document/cssf-faq-swing-pricing-mechanism/ (providing guidance for increasing the swing factor above the maximum level identified in a fund’s prospectus under certain circumstances, and noting that typical maximum swing factors observed in fund prospectuses are between 1% and 3%). 64See Claessens and Lewrick, supra note 61. 65The Mar. 2020 data collected on Form N–PORT often was not available to the Commission until June or July 2020 because a fund files data covering each month of its fiscal quarter on Form N–PORT no later than 60 days after the end of each fiscal quarter. 66See infra note 128 (discussing that fewer equity funds reported reclassifications of investments held in both Feb. and Mar. 2020 than fixed-income funds). funds similarly found that the size of swing factors increased during this period and that some funds that had capped the size of their swing factors needed to temporarily remove these caps.63 In terms of the effects of using swing pricing during March 2020, one study found that swing pricing allowed surveyed funds to recoup roughly 0.06% of total net assets on average from redeeming investors during three weeks of elevated redemptions in March 2020.64 We also observed funds’ liquidity risk management in March 2020 through funds’ filings with the Commission and other staff outreach. Specifically, during and following the market events of March 2020, Commission staff assessed liquidity-related data reported on Forms N–PORT and N–RN, as well as the development of liquidity risk management programs through staff outreach to funds, advisers, and liquidity classification vendors.65 Based on review of Form N–PORT filings for February and March 2020, approximately two-thirds of funds did not appear to reclassify any investment held in both months despite the market events described above.66 We saw that reclassifications increased from 25% of funds that held the same investment in both January and February 2020 to 33% of funds in March 2020, and stayed elevated for April 2020. We understand that many fund and liquidity vendor classification models use data lookback periods of 30 days or more that made them slowly adjust to changing market conditions, leaving these
firms unable to consider their classifications and reclassify when market conditions changed quickly. In addition, we understand that classification models generally tend to assess liquidity based on relatively small sale sizes that do not necessarily reflect the amount a fund may need to sell to meet heightened levels of redemptions in stress periods, and most models do not automatically adjust to a higher trade size when market conditions change. Moreover, our data indicate that in March 2020 cash levels in the aggregate increased and relatively few funds made use of borrowing to meet redemptions, suggesting that funds generally were selling portfolio assets to meet redemptions and potentially for other purposes, such as to raise cash in anticipation of future redemptions. During March 2020, more than a dozen funds (primarily fixed-income funds) filed reports on Form N–RN. Most of these Form N–RN filings related to breaches of the 15% limit on illiquid investments. Overall, the market events in March 2020 show how liquidity can deteriorate rapidly and significantly. In the face of such rapid market changes, liquidity risk management program features of some funds adjusted slowly, making them less effective during the stress period for managing liquidity risk. Additionally, tools, such as swing pricing, that may have helped open-end funds limit dilution as both transaction costs and redemptions rose were unavailable because of operational challenges, although these tools were used in other jurisdictions during this period.
C. Rulemaking Overview
In March 2020, some open-end funds were not prepared for the sudden market stress that arose after many years of relative calm and, as the market stress and outflows grew, several funds began to explore emergency relief requests or suggest a need for government intervention in an effort to withstand or alleviate liquidity stress, address dilution, and improve overall market conditions. The period of market stress in March 2020 was relatively brief ending upon Federal Reserve interventions, and no funds sought to suspend redemptions during this period. We believe there are meaningful lessons from this period that our rules should reflect, while also recognizing the possibility that future stressed periods—whether specific to certain funds or the markets as a whole—may be more protracted or more severe than March 2020, particularly absent Federal Reserve action. Fundamentally, we believe funds should be better prepared for future stressed conditions, which can occur suddenly and unexpectedly, and should have well-functioning tools for managing through stress without significantly diluting the interests of their shareholders. We are proposing amendments to rules 22e–4 and 22c–1 that are designed to achieve these key objectives and to reflect our experience with the rules since they were adopted, as well as supporting amendments to Form N–PORT and other reporting and disclosure forms. Specifically, recognizing that it can be difficult to predict when market stress will occur, the proposed amendments to rule 22e–4 would require funds to incorporate stress into their liquidity classifications by assuming the sale of a stressed trade size, which would be 10% of each portfolio investment, rather than the rule’s current approach of assuming the sale of a ‘‘reasonably anticipated trade size’’ in current market conditions. Requiring a fund’s classification model to assume the sale of larger-than-typical position sizes may better emulate the potential effects of stress on the fund’s portfolio, similar to an ongoing stress test, and help better prepare a fund for future stress or other periods where the fund faces higher than typical redemptions. The proposal also would establish other minimum standards for classifying the liquidity of an investment, which are designed to improve the quality of classifications by preventing funds from over-estimating the liquidity of their investments and to provide clearer guideposts for liquidity classifications, reflecting the more effective practices we have observed. In addition, we propose to remove the less liquid investment category and to treat these investments as illiquid. The less liquid category consists of investments that can be sold in seven calendar days but that take longer to settle. For example, many bank loans take longer than seven days to settle. The proposed amendment is designed to reduce the mismatch between the receipt of cash upon the sale of assets with longer settlement periods and the payment of
shareholder redemptions. This would better position funds to meet redemptions, including in times of stress. Currently, treating these investments as ‘‘less liquid’’—as opposed to ‘‘illiquid’’—allows funds to invest in these assets beyond the 15% limit on illiquid investments, notwithstanding that ‘‘less liquid’’ investments settle beyond the statutory seven-day period to pay redemptions. We are also proposing to amend the definition of illiquid investment to

67Based on an analysis of fund prospectuses, approximately 551 open-end funds (or around 4.6% of funds) state that they apply redemption fees under certain circumstances for at least one share class of the fund. Approximately 3.3% of fund classes have a redemption fee, or 0.6% of net fund assets. 68 In certain cases, investors consume reported information indirectly through other data users. These other data users can include, for example, regulators such as the Commission, fund analysts, and third-party data providers. Throughout this release, references to consumption of information by investors include indirect consumption by investors enabled by other data users. include investments whose fair value is measured using an unobservable input that is significant to the overall measurement. We understand many funds classify these investments as illiquid today. We also propose to require daily liquidity classifications. We believe this change would promote better monitoring of a fund’s liquidity and an ability to more rapidly understand and respond to changes that affect the liquidity of the fund’s portfolio, including the fund’s compliance with its highly liquid investment minimum and the rule’s limit on illiquid investments. As another means to prepare funds for stressed conditions, we are proposing to amend the highly liquid investment minimum provisions in the rule to require all funds to determine and maintain a minimum amount of highly liquid assets of at least 10% of net assets. This aspect of the proposal is designed to ensure that funds have sufficient liquid investments for managing heightened levels of redemptions. Finally, we are proposing amendments to how the highly liquid investment minimum calculation and the calculation of the 15% limit on illiquid investments take into account the value of assets that are posted as margin or collateral for certain derivatives transactions to reflect that the fund cannot access the value of posted assets to meet redemptions until the fund is able to exit the derivatives transactions. In addition, to reduce shareholder dilution during stress and other periods, we are proposing to amend rule 22c–1 to require all open-end funds, other than ETFs and money market funds, to implement swing pricing. Today, no fund has implemented swing pricing, and funds rarely use redemption fees to address dilution other than in the case of short-term trading of fund shares, meaning shareholders may experience dilution both in normal and stressed conditions, particularly when purchases or redemptions are large or when funds invest in markets with high transaction costs relative to other markets.67 We believe swing pricing is an important and effective tool for dynamically addressing such dilution by recognizing that costs associated with shareholder purchases and redemptions rise as net flows increase and liquidity and transaction costs grow. In addition to proposing mandatory swing pricing, we are proposing to amend
the swing pricing framework in rule 22c–1 to apply lessons learned from March 2020, including information about the European experience with swing pricing during that period. Specifically, we propose to amend both when and how a fund would adjust its NAV, which would vary depending on whether a fund has net purchases or net redemptions. Rather than require funds to determine their own swing thresholds, we propose to specify the amount of net inflows or net outflows that would trigger a pricing adjustment in the rule, informed by an analysis of historical flow amounts. In addition, we propose a specific method of calculating the swing factor price adjustment, which would require a fund to make good faith estimates of the transaction costs of selling or purchasing a pro rata amount of its portfolio investments (or a ‘‘vertical slice’’) to satisfy that day’s redemptions or to invest the proceeds from that day’s purchases. Under the proposal, a fund would be required to apply a swing factor on any day it has net redemptions. When net redemptions exceed 1% of net assets, the swing factor would also account for market impacts of selling a vertical slice of the portfolio to capture the dilutive effect of trading in response to large outflows better. We believe trading in response to small levels of net inflows is less likely to have a dilutive effect than trading in response to net outflows and, as a result, we propose to require a fund to apply a swing factor for net purchases only if net purchases exceed 2% of net assets. In addition, we propose to remove the 2% swing factor upper limit from the current rule because we are proposing a more specific framework for determining swing factors, some European funds used swing factors above 2% in order to mitigate dilution in March 2020, and we received requests for emergency relief in the United States during this period to allow funds to charge redemptions fees exceeding 2% to mitigate dilution. The proposed swing pricing amendments are designed to reduce the dilution of an investor’s interest in a fund that is caused by the redemption or purchase activity of other investors in the fund and to fairly allocate the costs associated with redemption and purchase activity. These amendments also may reduce potential first-mover advantages that might incentivize early redemptions to avoid anticipated trading costs and dilution associated with other investors’ redemptions. To operationalize the proposed swing pricing requirement and provide other benefits, we are also proposing to amend rule 22c–1 to require that the fund, its transfer agent, or a registered clearing agency receive purchase and redemption orders by an established cut-off time to receive a given day’s price (a ‘‘hard close’’). Specifically, for an order to be eligible to receive a day’s price, these designated parties would have to receive the order before the pricing time, which is typically 4 p.m. ET. The proposed hard close would facilitate the
receipt of timely flow information to inform swing pricing decisions. In addition, we believe it would help prevent late trading and reduce operational risk. To promote transparency related to fund liquidity and use of swing pricing, we are proposing amendments to Form N–PORT to require funds to report their aggregate liquidity classifications publicly, as well as the frequency and amount of swing pricing adjustments. With respect to liquidity disclosure, this amendment is designed to provide investors with meaningful information about fund liquidity, taking into account that our proposed amendments to the liquidity classification framework should result in more objective and comparable liquidity classifications across funds.68 As for the proposed swing pricing reporting requirements, we believe the proposed frequency and size information would allow investors to better understand the operation and effects of swing pricing. We also propose broader changes to Form N–PORT to require all registered investment companies that report on the form, which include open-end funds (other than money-market funds), registered closed-end funds, and ETFs registered as unit investment trusts, to file monthly reports with the Commission within 30 days of monthend. These monthly reports would subsequently be publicly available 60 days after month-end. These proposed amendments would require filers to provide the Commission with more timely information and would provide investors with access to monthly rather than quarterly information. We observed in March 2020 that timely and full disclosure can be particularly important

69 In-kind ETFs are included when we refer to ‘‘funds’’ or ‘‘open-end funds’’ throughout this release when discussing rule 22e–4, except in the sections discussing classifying the liquidity of a fund’s investments and the highly liquid investment minimum requirement, from which inkind ETFs are excepted. See proposed rule 22e–4(a) (defining ‘‘in-kind ETF’’ as an ETF that meets redemptions through in-kind transfers of securities, positions, and assets other than a de minimis amount of U.S. dollars and that publishes its portfolio holdings daily); see also rule 22e– 4(b)(1)(ii) and 22e–4(b)(1)(iii). In-kind ETFs do not present the same kind of liquidity risks as other funds because the redeeming shareholder typically bears the direct costs associated with its liquidity needs. See Liquidity Rule Adopting Release, supra note 8, at paragraphs accompanying n.842. 70See rule 22e–4(b)(1)(ii). 71See rule 22e–4(b)(1)(ii)(A). 72See rule 22e–4(b)(1)(ii)(B) (requiring a fund to determine whether trading varying portions of a position in sizes that the fund would reasonably anticipate trading is reasonably expected to significantly affect its liquidity). The definition of each liquidity category sets out the number of days in which a fund reasonably expects to sell, or convert to cash, an investment without significantly changing its market value. See rule 22e–4(a)(6), rule 22e–4(a)(8), rule 22e–4(a)(10), and rule 22e– 4(a)(12). 73See rule 22e–4(b)(1)(ii). 74See rule 22e–4(b)(1)(iii) and rule 22e– 4(b)(1)(iv). 75See Liquidity Rule Adopting Release, supra note 8, at n.163 and accompanying text (stating that the primary goals of the liquidity rule program requirements were to reduce the risk that funds would be unable to meet redemption and other legal obligations, minimize dilution, and elevate the overall quality of liquidity risk management across the fund industry while at the same time providing funds with reasonable flexibility to adopt policies and procedures that would be most appropriate to assess and manage their liquidity risk). during and immediately after stress events. Finally, we propose amendments to Forms N–PORT, N– CEN, and N–1A to, among other things, conform to our other proposed amendments and to improve entity identifiers. Taken together, these proposed amendments are designed to provide investors with increased protection regarding how liquidity in their funds is managed, thereby reducing the risk that funds will be unable to meet redemptions and mitigating dilution of the interests of fund shareholders. These reforms also are intended to give investors information to make more informed investment decisions, and to give the Commission more timely information to conduct comprehensive oversight of an ever-evolving fund industry.
II. Discussion
A. Amendments Concerning Funds’ Liquidity Risk Management Programs

Amendments to the Classification
Framework
Rule 22e–4 currently requires a fund to classify each portfolio investment based on the number of days within which it reasonably expects the investment would be convertible to cash, sold or disposed of, without significantly changing its market value.69 Under this framework, funds must, using information obtained after reasonable inquiry and taking into account relevant market, trading, and investment-specific considerations, classify each portfolio investment into one of four liquidity classifications:
highly liquid, moderately liquid, less liquid, and illiquid.70 A fund may generally classify and review its investments by asset class unless the fund or adviser has information about any market, trading, and investmentspecific considerations that it reasonably expects to significantly affect the liquidity characteristics of an investment compared to the fund’s other portfolio holdings within that asset class.71 In classifying its investments, a fund must analyze the number of days that it reasonably expects it would take to sell, or convert to cash, portions of a position in a particular investment or asset class that the fund would reasonably anticipate trading (the ‘‘reasonably anticipated trade size’’) without significantly changing its market value (‘‘value impact’’).72 A fund must review its liquidity classifications at least monthly in connection with reporting the liquidity classification for each investment on Form N–PORT, and more frequently if changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect one or more of its investments’ classifications.73 The liquidity classifications are integral to rule 22e–4. Among other things, these classifications help a fund monitor its liquidity, including compliance with the fund’s highly liquid investment minimum and the 15% limit on illiquid investments.74 The fund’s classifications also provide liquidity information to the Commission and, under our proposal, to the public. The current rule allows funds considerable discretion in how funds determine the classification of investments.75 Funds may choose which investments to classify individually or by asset class, with the composition of asset classes determined by the fund. Funds also may use different reasonably anticipated trade sizes and have different standards for evaluating value impact. Through staff outreach, we observed that funds had varied approaches in their classifications processes. The proposed amendments to the liquidity classifications are intended to better prepare funds for future stressed conditions. For example, the reasonably expected trade sizes and value impact standards some funds and liquidity classification vendors used tended to over-estimate a fund’s liquidity in March 2020 because they considered relatively smaller trade sizes or used value impact methodologies with longer lookback periods. Based on our observations from March 2020 and our review of funds’ liquidity risk management practices and classifications, we are proposing amendments to the classification framework. The proposed amendments would provide additional standards for making liquidity determinations, amend certain aspects of the liquidity categories, and require more frequent liquidity classifications. Specifically, we propose to provide objective minimum standards that funds would use to classify investments, including by: (1) requiring funds to assume the sale of a set stressed trade
size, rather than the rule’s current approach of assuming the sale of a reasonably anticipated trade size in current market conditions; and (2) defining the value impact standard with more specificity on when a sale or disposition would significantly change the market value of an investment. We also propose to remove classification by asset class. These proposed amendments are designed to improve the quality of classifications by preventing funds from over-estimating the liquidity of their investments, including in times of stress, and to provide classification standards that are consistent with more effective practices the staff has observed. In addition, a more objective and comparable framework for how funds classify the liquidity of their investments would enhance the Commission’s ability to analyze trends across funds’ classifications and establish the groundwork for classification information that investors could use to analyze and compare funds. We also propose to remove the less liquid investment category, which would reduce the number of liquidity categories from four to three, and expand the scope of the illiquid investment category. We believe these changes would reduce the risk of a fund not being able to meet shareholder redemptions. Finally, we propose to require daily classifications, which we believe would promote better monitoring by liquidity risk program administrators of a fund’s liquidity and an ability to more rapidly understand

76See rule 22e–4(a)(13) (defining ‘‘person(s) designated to administer the program’’, in part, as the investment adviser, officer, or officers responsible for administrating the program). 77See rule 22e–4(b)(1)(ii)(B). 78See Liquidity Rule Adopting Release, supra note 8, at paragraphs accompanying n.440 and n.450. 79See SEC staff Investment Company Liquidity Risk Management Programs Frequently Asked Questions (Apr. 10, 2019) (‘‘Liquidity FAQs’’), available at https://www.sec.gov/investment/ investment-company-liquidity-risk-managementprograms-faq for discussion of factors funds may consider in determining reasonably anticipated trading size. The Commission has observed that many funds have set reasonably anticipated trade size values at 3%. Others have set values of below 3% and up to 100%, signifying wide variation. and respond to changes that affect the liquidity of the fund’s portfolio.76
Table 1 sets forth the primary
proposed changes to the rule’s liquidity classification framework, which are described in more detail below.
TABLE 1—PROPOSED CHANGES TO THE LIQUIDITY CLASSIFICATIONS
Liquidity classifications and related terms Current rule 22e–4 Proposed rule 22e–4 Definitions Highly Liquid Investment ...... Any cash held by a fund and any investment that the fund reasonably expects to be convertible into cash in current market conditions in three business days or less without the conversion to cash significantly changing the market value of the investment. Any U.S. dollars held by a fund and any investment that the fund reasonably expects to be convertible to U.S. dollars in current market conditions in three business days or less without significantly changing the market value of the investment. Moderately Liquid Investment. Any investment that the fund reasonably expects to be convertible into cash in current market conditions in more than three calendar days but in seven calendar days or less, without the conversion to cash significantly changing the market value of the investment. Any investment that is neither a highly liquid investment nor an illiquid investment. Less Liquid Investment ........ Any investment that the fund reasonably expects to be able to sell or dispose of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment, but where the sale or disposition is reasonably expected to settle in more than seven calendar days. Removed. Illiquid Investment ................ Any investment that the fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. Any investment that the fund reasonably expects not to be convertible to U.S. dollars in current market conditions in seven calendar days or less without significantly changing the market value of the investment and any investment whose fair value is measured using an unobservable input that is significant to the overall measurement. Convertible to Cash/U.S Dollars. The ability to be sold, with the sale settled .................... The ability to be sold or disposed of, with the sale or disposition settled in U.S. dollars. Related Concepts Assumed Trade Size ........... Sizes that the fund would reasonably anticipate trading 10% of the fund’s net assets by reducing each investment by 10%. Value Impact Standard ........ Significantly changing the market value of the investment. Significantly changing the market value of an investment means:
(1) For shares listed on a national securities exchange or a foreign exchange, any sale or disposition of more than 20% of average daily trading volume of those shares, as measured over the preceding 20 business days. (2) For any other investment, any sale or disposition that the fund reasonably expects would result in a decrease in sale price of more than 1%. a. Stressed Trade Size and Significant Changes in Market Value
i. Replacing Reasonably Anticipated
Trade Size With Stressed Trade Size Currently, when a fund makes liquidity classifications under rule 22e– 4, it must determine whether trading varying portions of a position in a particular portfolio investment or asset class, in sizes that the fund would reasonably anticipate trading, is reasonably expected to significantly affect its liquidity.77 This determination of a reasonably anticipated trade size helps a fund analyze market depth. For example, if a fund anticipates trading a large investment position relative to the market’s total trading volume, the size of the trade might affect liquidity and price.78 Using a small reasonably anticipated trade size to analyze market depth leads to a more liquid classification, as a smaller position can be sold more quickly without significantly affecting the investment’s liquidity than a larger position. In contrast, using a larger reasonably anticipated trade size would often lead to less liquid classifications. Under the current rule, a fund may determine its own reasonably anticipated trade size, and we have observed wide variation in practice.79 From staff outreach, we observed that funds may consider a variety of different factors, such as their flow history, flow trends of other similar funds, and shareholder makeup and concentration,

80The liquidity classifications define the number of days as business days for highly liquid investments or calendar days for illiquid investments. See Table 1. See also rule 22e–4(a)(2) (defining ‘‘business day’’ to exclude customary business holidays). 81See Liquidity Rule Adopting Release, supra note 8, at paragraphs accompanying nn.109 and 110 (stating that staff had observed that some funds with more thorough liquidity risk management practices appeared to be able to better meet periods of higher than typical redemptions without significantly altering their risk profile or materially affecting their performance, while some funds with substantially less rigorous liquidity risk management practices experienced particularly poor performance compared with their benchmark when faced with higher than normal redemptions). 82Based on an analysis of historical Morningstar weekly fund flow data for equity and fixed income funds from 2009 through 2021. See infra sections III.B.4.a and III.C.1.a.i (providing additional equity and fixed income flow data and discussing this analysis in more detail). While some Morningstar data is available for 2008, we have not included that data in our historical flow analyses in this release because of gaps in the 2008 data (e.g., the 2008 dataset covers a more limited set of funds). Other available flow information for 2008, such as from the ICI Fact Book, is not granular enough for purposes of our analyses. 83We believe weekly outflows is a better proxy for the stressed trade size than daily outflows because stressed conditions may take some time to fully present in flows and often result in outflows that continue over several days or more. 84See Liquidity Rule Adopting Release, supra note 8, at paragraph accompanying n.1084. We do not suggest that a fund should only, or primarily, use its most liquid investments to meet shareholder redemptions. See id., at n.661 and accompanying paragraph. and a fund may weigh the importance of those factors differently to determine what it would reasonably anticipate trading. We believe that using a reasonably anticipated trade size based on these, or a subset of these factors, may not help funds prepare for future stressed conditions. Even if a fund increased its reasonably anticipated trade size during periods of stress, the resulting adjustments in the fund’s liquidity risk management may be too late to help the fund prepare for the stressed environment and, thus, may have limited utility. In response to the variability in funds’ reasonably anticipated trade sizes and the potential ineffectiveness of small trade sizes in helping a fund prepare for stress, we propose to require funds to assume the sale of a set stressed trade size. Specifically, for a fund to determine the liquidity classification of each investment, we propose that it must measure the number of days in which the investment is reasonably expected to be convertible to U.S. dollars without significantly changing the
market value of the investment, while assuming the sale of 10% of the fund’s net assets by reducing each investment by 10%.80 The proposed stressed trade size may result in funds classifying fewer investments as highly liquid, and may increase the number of investments that are subject to the 15% limit on illiquid investments. These changes, in turn, may lead some funds to rebalance their portfolio holdings to comply with the proposed changes, which could negatively affect the performance of these funds. However, a lack of preparation for higher than normal redemptions also can negatively affect fund performance when such redemptions occur.81 We believe that requiring a fund’s classification model to assume the sale of larger-than-typical position sizes would better emulate the potential effects of stress on the fund’s portfolio, similar to an ongoing stress test, and help better prepare a fund for future stress or other periods where the fund faces higher than typical redemptions. Based on an analysis of weekly flows of equity and fixed-income funds over a period of more than ten years, outflows greater than 6.6% occurred 1% of the time in a pooled sample across weeks and funds.82 Based on this analysis, we estimate that a random fund in a random week has approximately a 0.5% chance of experiencing redemptions in excess of the 10% stressed trade size, and there were 3.4% of weeks where more than 1% of funds experienced net redemptions exceeding the proposed stressed trade size. We believe that weekly outflows at the 99th percentile is a useful approximation of the level of outflows funds may experience in future stressed conditions.83 However, because it is difficult to predict future stress events, including the effect and length of such events—particularly without official sector interventions—we believe it is appropriate to require funds to use a stressed trade size amount of 10%, which is moderately higher than the 6.6% weekly outflow figure discussed above. We also considered, during this same historical period, equity and fixedincome funds had weekly inflows of greater than 8% for 1% of the time in a pooled sample across weeks and funds. In addition, large, concentrated inflows have the possibility of translating to similarly large outflows. For example, if the large inflows are the result of investment by an institutional investor or a fund’s inclusion in a model portfolio, the fund may experience similarly large outflows if the investor mandate changes or if the fund is removed from the model portfolio. Under the proposed approach, a fund would apply its stressed trade size to each investment to determine its liquidity classifications. We have observed that funds generally determine and apply a reasonably anticipated trade size to each investment or asset class currently (commonly referred to as pro rata or vertical slice methods). We have also observed, however, that some funds have applied the reasonably anticipated trade size in such
a manner that the trading would be satisfied largely by selling the fund’s most liquid investments, resulting in smaller assumed trade sizes for purposes of classifying the fund’s less liquid investments.84 As recognized above, small assumed sale sizes can result in more liquid classifications generally, as sales of small amounts are less likely to affect the market value of the investment significantly and typically can be converted to U.S. dollars more quickly. We are particularly concerned that use of small assumed sale sizes for non-highly liquid investments can overstate the liquidity of these investments and reduce the effectiveness of a fund’s liquidity risk management program when a fund needs to sell a larger-than-assumed portion to meet redemptions under stressed conditions or for any other portfolio management reason. Requiring funds to apply the 10% stressed trade size to each investment would better prepare funds to manage their liquidity in stressed conditions, when a fund may be required to sell positions that are larger than the assumed sale sizes some funds are using currently. The amendments to replace the determination of a reasonably anticipated trade size with a stressed trade size are designed to enhance a fund’s preparation for stressed conditions, including the potential for sizeable outflows. We request comment on the proposed requirement for funds to apply a stressed trade size to each investment in their liquidity classification determinations:

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

85See Liquidity Rule Adopting Release, supra note 8, at paragraph accompanying n.334. 86See id., at paragraph accompanying n.339. 87See proposed rule 22e–4(a) (definition of ‘‘Significantly changing the market value of an investment’’). 88The proposed rule would continue to provide that an investment’s classification is based on a fund’s reasonable expectations in current market conditions. See Liquidity Rule Adopting Release, supra note 8, at section III.C.1.d (discussing comments and suggestions on the consideration of market conditions). Thus, a fund would be able to rely on its reasonable expectations at the time it makes the value impact assessment. Although we are proposing to require funds to assume an element of stressed conditions in their liquidity classifications through the stressed trade size, a broader requirement to predict how an investment may trade in stressed market conditions would introduce additional variables into the classification process that could increase the risk of misclassifications and decrease the data quality of funds’ liquidity-related reporting and disclosure. 89Under this proposal, the sale or disposition must be below 20% of the security’s average daily trading volume. A fund may choose to impose a stricter limitation of any percentage under 20%, for example, 15% of average daily trading volume. 90Through staff outreach, we observed many funds using some percent of average daily trading volume (e.g., 15%, 20%, or 25%) that the fund’s investment can represent if it wants to be able to sell into daily volume without affecting market prices. In practice, this meant funds would estimate the number of days it would take to sell or dispose of the reasonably anticipated trade size without approaching the set percentage of average daily trading volume to avoid impacting the value significantly. We observed funds calculating the average daily trading volume taking into account different sources, and for different time periods, ranging from 10 days to 6 months. other data that should factor into setting the stressed trade size?
3. Should the stressed trade size vary
for different types of funds and, if so, how? For instance, should the stressed trade size be a function of the fund’s flow history, such as the 99th percentile highest week of the fund’s absolute or net flows over a given period (e.g., 3 years, 5 years, 10 years, or the life of the fund)? Should the stressed trade size be the higher of a specified value applied to each investment or the 99th percentile highest week of absolute flows?
4. Should the method of applying the
stressed trade size to each investment vary for different types of funds and, if so, how? Are there types of investments that should be excluded or use a different stressed trade size? Are there other, more appropriate methods of applying a stressed trade size across different type of investments and portfolios?
5. Instead of establishing a set stressed
trade size, should we set a minimum stressed trade size and provide factors for determining if a fund should have a higher stressed trade size? If so, what factors should funds consider in setting their stressed trade size?
ii. Determining a Significant Change to
Market Value
Currently, when a fund makes liquidity classifications under rule 22e– 4, it must analyze whether a sale or disposition would significantly change the market value of the investment. In the adopting release for rule 22e–4, the Commission explained that this value impact analysis captures the risk of a fund only being able to meet redemption requests in a manner that significantly dilutes the non-redeeming shareholders.85 The Commission established the value impact standard to capture the risk of dilution in cases of inadequate liquidity, while not requiring funds to account for every possible value movement.86 We propose to establish a minimum value impact standard that defines more specifically what constitutes a significant change in market value.87 We believe the proposed change would improve the quality of funds’ liquidity classifications by preventing funds from overestimating the liquidity of their investments and would improve comparability of funds’ liquidity classifications. In addition, the proposed approach is consistent with more effective practices we have observed from some funds and liquidity classification vendors, as discussed below. Under the current rule, a fund may determine value impact in a variety of ways, depending on the type of asset, or vendor, model, or system used. There also is variation in the depth and sophistication of funds’ analyses. We believe the variation in how a fund may determine value impact leads to differences in the quality of funds’ classifications, limits comparability of funds’ classifications across the same or similar investments, and may cause funds to over-estimate the liquidity of their investments. The proposed definition of a significant change in market value would require a fund to consider the size of the sale relative to the depth of the market for the instrument.88 This would vary depending on the type of investment. For shares listed on a national securities exchange or a foreign exchange, we believe selling or disposing of more than 20% of the security’s average daily trading volume would indicate a level of market participation that is significant.89 We understand that if a fund sold more than 20% of the average daily trading volume of a listed equity security, such a large sale is likely to result in a significant change in the security’s market value, which would dilute remaining investors in the fund. We have observed that a standard based on average daily trading volume is consistent with practices many funds and vendors apply for assessing value impact for listed equity investments today.90 To determine average daily trading volume, we propose to require funds to measure the average daily trading volume over the preceding 20 business days. We believe using a period of 20 business days provides an appropriate measure of daily trading volume, which would reflect current market conditions as well as consider a period of recent market history. The 20 business day period is intended
to strike a balance between longer periods that are less reflective of current conditions and shorter periods that can be skewed easily by an abnormally high or low volume day. For purposes of measuring average daily trading volume, the preceding 20 business days include those days where U.S. markets are open but where one or more international markets are closed, such as ‘‘Golden Week,’’ a week in Japan including multiple Japanese public holidays. A fund would count these and any other trading days where shares were not traded as zero volume days for the relevant investment. For any investments other than shares listed on a national securities exchange or a foreign exchange, such as fixedincome securities and derivatives, we propose to define a significant change in market value as any sale or disposition that a fund reasonably expects would result in a decrease in sale price of more than 1%. Funds currently use a variety of methods to determine significant changes in market value in fixed-income securities, taking into account different groups of comparable securities, asset class characteristics and volatility, number and depth of market makers, bid-offer spread size, volume of the security or similar securities, and elasticity of prices in the security or similar securities. For purposes of the proposed rule, a decrease of more than 1% would indicate a level of value impact that is significant because the fund is selling or disposing of a relatively large position or because the market for the investment has constricted, and bid-ask spreads have widened. We also understand that several commonly employed liquidity models currently use this price decrease measure. We acknowledge that not all liquidity models specify a price decrease explicitly as the determination for a significant change in market value and some funds would have to make changes to convert to this more

91See rule 22e–4(b)(1)(ii)(A).
92See Liquidity Rule Adopting Release, supra note 8, at section III.C.3.a. The current approach was also intended to leverage fund managers’ current practices and to recognize that many investments within an asset class may be considered interchangeable from a liquidity perspective. 93See rule 22e–4(b)(1)(ii) (identifying the circumstances in which a fund must review its portfolio investments’ classifications more Continued objective threshold. The proposed value impact standard would improve funds’ abilities to perform quality checks and back testing and would allow the Commission to better analyze classification data across funds. In considering whether a sale is reasonably expected to result in a price decrease of more than 1%, the fund would be required to consider the size of the sale relative to the depth of the market for the instrument. As part of that analysis, we believe a fund generally should consider, among other things, the width of bid-offer spreads. This is because the width of bid-offer spreads is an important consideration in analyzing the costs of selling a security and thus whether a sale would result in a price decrease exceeding 1%. For example, a sale would be more likely to result in a price decline of more than 1% if the trade size is large in relation to the market for that instrument or if bid-ask spreads are wide, or if both are the case. Wide, or widening, bid-ask spreads may indicate a lower level of demand for the instrument, which makes it more likely that a sale of the instrument would result in a price decline of more than 1%. We request comment on our proposed definition of significant change in market value:
6. Would funds have to make
significant changes to their liquidity classification methodologies to reflect the proposed amendments to the value impact standard? If so, what effect would those changes have on a fund’s liquidity risk management program?
7. Should we define value impact
through average daily trading volume or price decline, as proposed? Should we use a different definition of value impact instead, and if so, should it depend on the type of investment? Should different types of funds have different value impact standards? If yes, what standards, and for what types of funds?
8. For shares listed on a national
securities exchange or a foreign exchange, should we define a significant change in market value as selling or disposing of more than 20% of the average daily trading volume, as proposed? Are there other types of investments for which an average daily trading volume test would be appropriate? For example, is there data available for fixed-income securities that funds could use objectively to analyze market participation under a value impact standard?
9. Should the percent of average daily
trading volume be higher or lower (e.g., 15% or 25%)? Should the measurement period for the average daily trading volume be longer or shorter than the proposed 20 business days (e.g., 10, 30, or 40 business days)? Should days where shares were not traded be counted as zero volume days as proposed or in some other manner? Are there circumstances in which the average daily trading volume test should vary by instrument, type of instrument, or trading venue?
10. For investments that are not listed
on a national securities exchange or foreign exchange, should we define a significant change in market value as any sale or disposition that the fund reasonably expects would result in a price decline of more than 1%, as proposed? Should the identified percentage be higher or lower (e.g., 0.5% or 2%)? Should this standard for determining a significant change in market value apply to all investments? Would funds need additional guidance or parameters to measure this standard consistently, including what inputs or comparable investments may be used in determining the price decline?
11. Should the 1% price decline
definition of value impact be applied against the fund’s last valuation of an investment, which would include both the effect of the fund’s sale and market moves?
iii. Removing Asset Class Classification
Under current rule 22e–4, a fund may generally classify and review its portfolio investments (including the fund’s derivatives transactions) according to their asset class. However, a fund must separately classify and review any investment within an asset class if the fund or its adviser has information about any market, trading, or investment-specific considerations that are reasonably expected to significantly affect the liquidity characteristics of that investment as compared to the fund’s other portfolio holdings within that asset class.91 The current provision was intended to strike a balance between reducing operational burdens associated with classification and providing reasonably precise liquidity classifications that appropriately reflect investments’ liquidity characteristics.92 The burden to determine individual investment classifications may have decreased since the adoption of the rule for many funds as these funds became more familiar with and developed their liquidity risk management programs and, in some cases, developed automated processes for classifying investments or employed sophisticated liquidity classification vendors that provide economies of scale. In addition, in practice there may be weaknesses in asset class level classifications that may result in a lack of reasonably precise classifications. Therefore, we propose to remove the asset class method of classification from the rule. Through outreach, we understand that asset class level classifications are not widely used by many funds. But, where these asset class level classifications are used, this method runs the risk of overestimating the liquidity of a fund’s investments and not adjusting quickly in times of stress. After a fund has begun to use asset class level classifications, and particularly if classifications are reviewed only on a monthly basis, it might be difficult for a fund to identify instances where a given investment’s liquidity characteristics do not align with the characteristics of other investments in the asset class because individual investment liquidity data is not being collected and analyzed. Through outreach, we observed that funds generally established a process and timing for liquidity assessments and did not change those processes or timing as market conditions changed, and particularly were unlikely to do so under stressed conditions. For example, during a stress event like March 2020, a fund using asset class level classifications may not be equipped to re-classify a subset of investments in an asset class adeptly in response to changing conditions that affect those investments directly. Also, because funds classify a significant portion of their holdings as highly liquid, we believe this potential gap in identifying investments that a fund should classify differently from other investments in the asset class is more likely to overestimate, rather than under-estimate, the liquidity of a fund’s investments. These tendencies run
counter to the premise of the current rule’s classification system, which presumed that a fund would use efficiencies such as asset class level classifications and monthly review of classifications only when market conditions or other factors did not indicate that a shift to a more granular or frequent classification is appropriate.93 Therefore, we are

frequently than monthly); rule 22e–4(b)(1)(ii)(A) (identifying the circumstances in which a fund must separately classify and review an investment within an asset class instead of classifying according to the investment’s asset class). 94See rule 22e–4(a)(10) (defining ‘‘less liquid investment’’). 95See rule 22e–4(a)(8) (defining ‘‘illiquid investment’’). 96See proposed rule 22e–4(a). 97See Liquidity Rule Adopting Release, supra note 8, at n.848 (‘‘Cash means cash held in U.S. dollars, and would not include, for example, cash equivalents or foreign currency.’’). 98Based on Form N–PORT data, bank loans made up 77% and 60% of investments reported as less liquid in Feb. and Mar. 2020, respectively. In proposing to remove asset class level classifications to provide more precise liquidity classifications that appropriately reflect investments’ liquidity characteristics. Moreover, asset class level classifications are not compatible with the other changes we are proposing to the classification framework, including the proposed definitions of the value impact standard. It would also be difficult for a fund to meaningfully apply at the asset class level a standard based on average daily trading volume or a price decline in a given investment because the average trading volume, or market depth generally, can vary from investment to investment even within the same asset class. Classifying each investment separately therefore allows a more precise assessment of that investment’s liquidity. In addition, because the proposed rule would include specific minimum standards for classifying investments, it may reduce burdens of classifying investments while improving the quality of classifications relative to the current rule, consistent with the Commission’s objectives in originally allowing asset class level classifications. Finally, staff has observed through outreach that liquidity risk management programs have developed so that specific and individual portfolio investment liquidity classifications are widely used and the removal of asset class level classifications is consistent with that approach. We request comment on the proposed removal of the provision permitting funds to classify the liquidity of their investments by asset class.
12. Should we preserve the ability of
funds to use asset classes for liquidity determinations, as currently permitted? To what extent do funds currently rely on the provision allowing liquidity classifications by asset class? Would it be more or less burdensome for funds to classify investments individually under the proposal’s specific minimum standards (such as the stressed trade size and the defining the value impact standard) than to separately classify any investment within an asset class whenever the fund or its adviser has market, trading, or investment-specific information indicating that the investment should be classified separately rather than as part of the relevant asset class?
13. Would the operational burden of
individually classifying be balanced by the improved quality of data for each individual investment as compared to classifying by asset class? To what extent would investment-by-investment classifications differ compared to asset class level classification? Are there other benefits to removing asset class level classification, such as timely, useful, improved, or increased data?
14. Is reliance on this provision more
common for certain types of funds or certain asset classes? Should asset class level classifications be limited to specific types of funds or asset classes?
15. If we permitted asset class level
classifications, how should the stressed trade size and value impact standard in the proposal apply to asset class level classifications? b. Amendments to Liquidity Classification Categories We are proposing changes to the liquidity classification categories to improve funds’ abilities to make timely payment on shareholder redemptions, without the sale of portfolio investments resulting in the dilution of outstanding fund shares. Section 22(e) of the Act establishes a right of prompt redemption in open-end funds by requiring such funds to make payments on shareholder redemption requests within seven days of receiving the request. In March 2020, in connection with the economic shock from the onset of the COVID–19 pandemic, open-end funds faced a significant amount of investor redemptions, and we believe additional changes to rule 22e–4 would assist funds in managing investor redemptions in future stressed conditions. Rule 22e–4 currently allows funds to classify as less liquid investments those that the fund reasonably expects to be able to sell or dispose of in seven calendar days or less without significantly changing the market value of the investment, but that are reasonably expected to settle in more than seven calendar days.94 Under the current rule, an investment is classified as illiquid if it cannot be sold or disposed of in seven calendar days or less without significantly changing the market value of the investment.95 We propose to eliminate the less liquid classification category and amend the definition of illiquid investment to include those investments that a fund reasonably expects not to be convertible to U.S. dollars in current market conditions in seven calendar days or less without significantly changing the market value of the investment, as well as those investments whose fair value is measured using an unobservable input that is significant to the overall measurement.96 Under the proposal to eliminate the less liquid classification category, the rule would therefore have only three liquidity classifications:
highly liquid investments, moderately liquid investments, and illiquid investments. We also propose to amend the term ‘‘convertible to cash’’ to ‘‘convertible to U.S. dollars,’’ codifying prior Commission statements.97 Finally, we propose to specify how to count the identified number of days an investment is convertible to U.S. dollars for purposes of the liquidity categories.
i. Removing the Less Liquid Investment
Category and Classifying These Investments as Illiquid We propose to eliminate the less liquid classification category and amend the definition of illiquid investment to include investments, in part, that a fund reasonably expects not to be convertible to U.S. dollars in seven calendar days or less without significantly changing the market value of the investment. Investments that funds currently classify as less liquid would become illiquid investments under the proposed amendments, absent changes to shorten the settlement time of many of those investments. Section 22(e) of the Act requires open-end funds to make payment on shareholder redemption requests within seven days of receiving the request. The proposed amendment to define an investment as illiquid if it does not settle to U.S. dollars in seven calendar days is designed to reduce the mismatch between the receipt of cash upon the sale of assets with longer settlement periods and the payment of shareholder redemptions. This would help prepare funds for future stressed conditions by reducing the risk of a fund not being able to meet shareholder redemptions. Unlike the current rule, the proposed rule would directly limit to 15% the amount of fund assets that are not reasonably expected to be convertible to U.S. dollars in seven days. While funds may classify different types of investments as less liquid investments today, the most common type of investment in this category is bank loans.98 Fund investments make

addition to bank loans, a smaller number of fixedincome securities, mortgage-backed securities, and equities are categorized as less liquid investments. 99See Leveraged Loan Primer (last visited Oct. 4, 2022), available at https://pitchbook.com/ leveraged-commentary-data/leveraged-loanprimer#market-size (stating that the Morningstar LSTA U.S. Leveraged Loan Index, which is used as a proxy for market size in the U.S., totaled approximately $1.375 trillion as of Feb. 2022). As of Dec. 2021, there are 746 open-end funds that classified approximately $204 billion in bank loan interests as reported on Form N–PORT. Using this data, we estimate that funds held approximately 15% of the bank loan market. 100Based on Form N–PORT data, in 2021, more than 90% of the gross value of loans reported by open-end funds were classified as less liquid. This was also the case in Feb. and Mar. 2020. 101 See, e.g., Comment Letter of the Loan Syndications and Trading Association on 2015 Proposing Release, supra note 31, File No. S7–16– 15, available at https://www.sec.gov/comments/s7- 16-15/s71615-57.pdf (‘‘LSTA Comment Letter’’) (stating the goal of transforming syndicated loan settlement to a similar settlement period as most other asset classes). 102See id. 103See LSTA Comment Letter. 104See Liquidity Rule Adopting Release, supra note 8, at n.380 and accompanying text. 105See LSTA, Secondary Trading & Settlement:
Monthly July Executive Summary (Aug. 19, 2021), available at https://www.lsta.org/news-resources/ secondary-trading-settlement-monthly-julyexecutive-summary/?utm_source=rss&utm_ medium=rss&utm_campaign=secondary-tradingsettlement-monthly-july-executive-summary. In addition, fewer trades settled within T+7, (just 20% of trades settled within the LSTA guideline during July, a nine-percentage point reduction from the previous year’s monthly average) and settlements wider than T+20 increased 10-percentage points as of July 2021, to a 39% market share, nearly double that of the T+7 distribution. 106This is based on Form N–PORT information as of Jan. 31, 2022. 107See LSTA Comment Letter (stating that settlement times have decreased in periods of large outflows, for example, in Aug. 2011, when bank loan funds experienced $8 billion of outflows (approximately 13% of assets). Similarly, in Mar. 2020, when bank loan funds experienced $12 billion of outflows (approximately 13% of assets), we understand that settlement times also generally decreased. 108See infra note 459 and accompanying text (providing information about bank loan funds’ use of lines of credit as of Dec. 2021). 109The number of funds is estimated by dividing the aggregate gross value in the relevant categories by the aggregate gross value reported. 110See infra section III.C.1.b. 111See FASB ASC 820–10–35–37, which sets out a fair value hierarchy for accounting purposes, as compared to rule 2a–5, which provides a framework for fund valuation practices and determining fair value (including applying an appropriate methodology consistent with the principles of FASB Accounting Standard Codification Topic 820:
Fair Value Measurement (‘‘ASC Topic 820’’)) for purposes of the Act. See Good Faith Determinations of Fair Value, Investment Company Act Release No. 34128 (Dec. 3, 2020) [86 FR 748 (Jan. 6, 2021) (‘‘Valuation Adopting Release’’)]. up approximately 15% of the bank loan market.99 Filings on Form N–PORT show that over 90% of bank loan investments reported by open-end funds are classified as less liquid.100 In 2015, commenters addressing concerns about liquidity in the bank loan market stated that significant efforts were then underway to materially improve settlement times in the bank loan market, which are typically longer than other asset classes.101 Bank loans are not standardized and have individualized legal documentation. This provides flexibility of terms for bank loans, but also increases the time for a fund to settle a bank loan trade and receive proceeds from the sale, thus increasing the risk of the fund not being able to meet shareholder redemptions.102 Around the time that the Commission adopted the liquidity rule, the median settlement time for a loan sale was about 12 days.103 In the Liquidity Rule Adopting Release, the Commission stated that a fund may need to consider re-classifying an investment as illiquid in the event of an extended settlement period.104 By July 2021, the average time to settle a bank loan par trade in the secondary market increased to a then seven-year high of T+23, and the median was at T+15.105 While median settlement time for bank loans in which funds invest has generally increased, Form N–PORT data has not shown funds reclassifying these investments to take into account extended settlement times. We are proposing changes to remove the less liquid investment classification to reduce the risk that funds that invest significantly in less liquid investments may not be able to meet shareholder redemptions. While bank loan funds were able to meet redemption requests during March 2020, a period of significant outflows, we are concerned that they may not be able to meet shareholder redemptions in future stressed conditions, especially as investments in this asset class increase. During the month of March 2020, bank loan funds experienced outflows of approximately 13% of assets, more than any other type of fund. In addition, since March 2020, total registered investment company investments in bank loans have increased 50% to approximately $200 billion.106 We understand that in past times of large outflows, the median buy-side settlement time for bank loans generally decreased and funds had a degree of success in effecting shorter settlement periods for these investments to help meet redemptions.107 We are concerned, however, that in future stress events these attempts to shorten settlement times may fail since loans are not standardized, have individualized legal documentation, and rely on manual processes for settlement. We also understand that funds with significant extended settlement investments have used
borrowing through lines of credit to meet redemptions, but lines of credit may not be available to all funds and borrowing imposes costs that can dilute the value of the fund for remaining investors. Based on Form N–CEN filings, several bank loan funds have accessed their lines of credit in their most recent reporting period.108 We understand that the costs of borrowing have risen and credit has become more difficult to obtain over time. We believe that investments that funds currently classify as less liquid should be classified as illiquid investments and be subject to the 15% limit on illiquid investments, so that funds may be better prepared to satisfy redemptions in future stressed conditions without delay and without significant dilution. Using Form N– PORT data, we estimate that approximately 200 funds during March 2020 would have had illiquid investments over the 15% limit if this proposed change had been in effect, with bank loan funds being the largest type of affected fund.109 As a result of the proposed amendments, more bank loan funds may contract for expedited settlement, which would involve costs. Alternatively, advisers with strategies that have 15% or more of assets in investments classified as less liquid and illiquid may change those strategies, close funds, or consider using a closedend fund or other investment vehicle structure that is not subject to rule 22e–
4. Further, potential additional demand
for these investments could provide incentives to shorten the settlement cycle for bank loans more generally, which may reduce trading costs.110 We believe that these amendments would reduce the risk of a fund not being able to satisfy redemptions without diluting the interests of remaining shareholders while waiting for the proceeds from the sale of an investment with extended settlement.
ii. Additional Amendments to the
Definition of Illiquid Investment We also propose to amend the definition of illiquid investment to include investments whose fair value is measured using an unobservable input that is significant to the overall measurement. U.S. GAAP establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value.111 The fair value measurements of investments are categorized in accordance with this three-level

112See ASC Topic 820. U.S. GAAP requires funds to maximize the use of relevant observable inputs and minimize the use of unobservable inputs in valuing any asset or liability. In some cases, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the overall measurement. See ASC 820–10–35–16AA and 820– 10–35–37A. Examples of particular assets and liabilities that may be measured using Level 3 inputs include long-dated currency swaps, threeyear options on exchange-traded shares, interest rate swaps, asset retirement obligations at initial recognition, and reporting units. See FASB ASC 820–10–55–22. 113See infra note 424 and accompanying paragraph. We observed that the investments classified as highly liquid that were Level 3 investments primarily were mortgage-backed securities. 114We recognize that, in light of the proposed removal of the less liquid category, only those investments valued using unobservable inputs that are significant to the overall measurement that are classified as highly liquid or moderately liquid would be affected by this proposed amendment. 115We also are proposing to remove a provision that addresses how to classify an investment that could be viewed as either a highly liquid investment or a moderately liquid investment because the ambiguity in classification that provision addresses is no longer present under the proposed amendments to those classifications. See note to paragraph (b)(1)(ii) introductory text in current rule 22e–4. 116See proposed rule 22e–4(a) (defining ‘‘convertible to U.S. dollars’’ as the ability to be sold or disposed of, with the sale or disposition settled in U.S. dollars) (emphasis added). We also propose to amend the definition of convertible to U.S. dollars to refer to disposition of an investment, and not only sales. This is a conforming amendment, as current rule 22e–4 classifications otherwise refer to the ability to sell or dispose of an investment. 117See Liquidity Rule Adopting Release, supra note 8, at n.848. 118See id., at paragraph accompanying n.379 (providing an example where certain foreign securities may be able to be sold in seven calendar days or less, but may be subject to capital controls that would limit the extent to which the foreign currency could be repatriated or converted to dollars within this time frame and explaining that these securities would be considered to be less liquid investments because they would be reasonably expected to settle in more than seven calendar days). 119See id., at n.105 and accompanying text (noting concerns about the potential mismatch between the timing of receipt of cash for sales of fund assets and the payment of cash for shareholder redemptions). 120See proposed rule 22e–4(a) (defining ‘‘highly liquid investment’’ and
‘‘in-kind exchange traded fund’’); and proposed rule 22e–4(b)(1)(i)(C) (listing liquidity risk factors). hierarchy. The highest-level measurements are those developed using quoted, observable inputs in active markets for identical assets and liabilities (Level 1), such as prices for identical investments on a securities exchange; the lowest are those developed using unobservable inputs (Level 3).112 We acknowledge that observability is a valuation concept and may not always correspond to liquidity. The proposed amendment would require those funds not already classifying investments valued using unobservable inputs that are significant to the overall measurement as illiquid to change their classification practices and may change the liquidity profile for those funds under the rule to be less liquid. To the extent there is a liquid market for affected investments, this proposed amendment would cause funds to over-estimate the illiquidity of their portfolios. As of December 2021, 2,006 open-end funds held investments that were valued using unobservable inputs that are significant to the overall measurement (Level 3 investments), comprising $76.3 billion, or 0.27% of all open-end fund assets.113 Among these, $16.9 billion were classified as highly liquid investments and $2.1 billion as moderately liquid investments.114 Accordingly, we estimate that approximately 0.07% of all open-end fund assets would be affected by this amendment. Where an investment is valued using unobservable inputs that are significant to the overall measurement, this may indicate that an active, liquid, and visible market for the investment does not exist. Where there is no active, liquid, and visible market for an investment, there may be a corresponding risk that the fund cannot sell the investment in time to meet redemptions without dilution. The proposal defines investments whose fair value is measured using unobservable inputs that are significant to the overall measurement as illiquid for purposes of this rule, which is intended to reduce this risk. By classifying these investments as illiquid, the proposal would establish a minimum standard for classifying the liquidity of an investment, which is designed to provide more consistent guideposts for liquidity classifications.
iii. Other Amendments Related to
Liquidity Classification Categories Amendments to the Definition of Moderately Liquid Investment We propose to simplify the definition of moderately liquid investment to mean any investment that is neither a highly liquid investment nor an illiquid investment.115 The moderately liquid investment category would continue to provide information about the portion of a fund’s portfolio that is not on the most liquid end of the spectrum, but that still is sufficiently liquid to meet redemption requests within the statutory seven day period. Amendments to the Definition of Convertible to Cash and References to Cash We propose to amend the term ‘‘convertible to cash’’ to ‘‘convertible to U.S. dollars’’ and to make conforming amendments to the definition of this term to refer to the ability for a fund to sell or dispose of an investment, and for it to settle in U.S. dollars.116 These amendments codify prior Commission statements. In the adopting release for rule 22e–4, the Commission stated that cash means ‘‘cash held in U.S. dollars, and would not include, for example, cash equivalents or foreign currency.’’ 117 The Commission also provided an example in that release in which the period of time it took to repatriate or convert a foreign currency to dollars factored into the analysis of how quickly a foreign security could convert to cash.118 Some funds are classifying foreign investments as highly liquid taking into account solely the time it would take to convert the proceeds of a sale to the foreign currency. Similarly, some funds classify foreign currency as highly liquid without further analysis about the time that would be needed to convert that currency to U.S. dollars. We believe it is important to view the liquidity of fund investments in terms of convertibility to U.S. dollars within a specified period so that a fund is able to satisfy redemption requests in U.S. dollars.119 This amendment is intended to promote the ability of funds to meet redemptions without diluting the interests of the remaining shareholders and increase consistency in how funds classify the liquidity of investments, including in foreign investments and foreign currencies. In addition to the definition of convertible to cash, we also propose to amend other references in rule 22e–4 to refer to U.S. dollars instead of cash for consistency and clarity.120 Method for Counting the Number of Days We propose to specify when a fund must start to measure the identified number of days in which it reasonably expects a stressed trade size of an investment would be convertible to U.S. dollars without significantly changing its market value. Currently, the rule does not directly specify when to begin counting the number of days an investment would be convertible to U.S. dollars, and funds have inconsistent practices as to when they begin this measurement. This inconsistency may lead certain funds to overestimate their liquidity classifications, and reduce

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

124See rule 22e–4(b)(1)(ii).
125See rule 22e–4(b)(1)(iv).
126See rule 22e–4(b)(1)(iv)(A) and rule 22e– 4(b)(1)(iii)(A)(3); Form N–RN Parts B through D. 127See proposed rule 22e–4(b)(1)(ii). Although rule 22e–4 currently requires funds to classify each of the fund’s portfolio investments (including each of the fund’s derivatives transactions), we have observed that some funds are not classifying all investments in their portfolios, such as positions in to-be-announced (TBA) contracts to trade mortgagebacked securities or the reinvestment of cash collateral received in securities lending arrangements. 128 Despite the liquidity constraints in Mar. 2020, we observed through Form N–PORT filings that roughly 75% of funds did not reclassify any investment held in both Feb. and Mar. 2020. Specifically, roughly 80% of U.S. equity funds did not reclassify any holding that was held in both Feb. and Mar. 2020, while roughly 10% reclassified at least one investment into a more liquid category and roughly 13% reclassified at least one investment into a less liquid category. Roughly 55% of taxable bond funds reclassified on average 4% of their portfolios, with the median fund reclassifying 1% of its portfolio. Of the funds that reclassified, roughly 30% reclassified at least one investment into a more liquid category and roughly 44% reclassified at least one investment into a less liquid category. More funds did, however, reclassify in Mar. 2020 period than for either Feb. or Apr. 2020. we require funds to maintain records describing why they did not classify such an investment as illiquid? Should we require funds to disclose on Form N–PORT any circumstances in which they did not classify such an investment as illiquid?
23. Are there other types or
characteristics of investments that we should include in the definition of illiquid investment? If so, which ones?
24. Should we amend the definition
of moderately liquid investment, as proposed? Alternatively, should we retain the details in the current definition that specify the number of days in which a fund must reasonably expect an investment to be convertible to U.S. dollars in order to classify it as moderately liquid?
25. Would the proposed changes to
the liquidity classifications affect investment options available to investors? For example, would bank loan funds only be available in nonopen-end investment vehicles? What effect would these proposed changes have on those asset classes that are less available for investment by open-end funds for liquidity reasons, the availability of credit to borrowers, and more generally, on capital formation?
26. Should we amend the definition
of convertible to cash and other references to cash in rule 22e–4 to refer to U.S. dollars, as proposed? Would these amendments raise issues for specific types of funds? If so, which ones and how? Would these amendments affect funds’ investment strategies, including their allocation to foreign investments and U.S. dollars, or their performance?
27. Are there circumstances in which
a fund would pay redemptions in a different currency than U.S. dollars? If so, would it be appropriate for that fund to be able to assess the time in which an investment could convert to that other currency for purposes of the rule?
28. In addition to sale and
disposition, are there other ways an investment may be converted to U.S. dollars that should be included in the definition of convertible to U.S. dollars? If so, what are they?
29. Would the amendment to refer to
U.S. dollars instead of cash in the definitions of highly liquid investment and convertible to cash materially change how funds classify highly liquid investments currently? If so, how?
30. Should we require funds to
include the day of classification when counting the number of days to convert to U.S. dollars as proposed, or should we require funds to begin to count the number of days to convert to U.S. dollars on the following day? What are the advantages and disadvantages of this alternative? Would this alternative result in less conservative liquidity classifications for some funds or investments (i.e., by causing some investments that otherwise would have been classified as moderately liquid to be classified as highly liquid) or impair a fund’s ability to meet redemptions?
31. Instead of using the days an
investment would be convertible to U.S. dollars in the liquidity classifications as proposed, should we separately set the number of days to: (1) make the trade; and (2) settle the trade or otherwise dispose of an investment, in determining liquidity classifications? Why or why not? Is there a different way the rule should measure the period that an investment is convertible to U.S. dollars?
c. Frequency of Classifications
Rule 22e–4 currently requires that funds review their liquidity classifications at least monthly in connection with reporting on Form N– PORT, and more frequently if changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect one or more of their investments’ classifications.124 The current rule also requires a fund to monitor and take timely actions related to the liquidity of its investments, including changes to its liquidity profile. Specifically, the rule prohibits a fund from acquiring any illiquid investment if, immediately after the acquisition, the fund would have invested more than 15% of its net assets in illiquid investments that are assets.125 In addition, the rule requires a fund to provide timely notice to its board, and to the Commission on Form N–RN, if the fund exceeds the 15% limit on illiquid investments, or if there is a shortfall of the fund’s highly liquid investments below its highly liquid investment minimum for seven consecutive calendar days.126 We propose amendments to require a fund to classify all of its portfolio investments each business day instead of at least monthly.127 Daily classification would reflect current market conditions more accurately and would provide funds with more data for analysis to prepare for future stressed conditions. We believe that daily classifications would assist liquidity risk program administrators in better monitoring of a fund’s liquidity and enhance a fund’s ability to more rapidly respond to changes that affect the liquidity of the fund’s portfolio, reflecting more effective practices we have observed. In addition, daily classifications would help ensure that funds timely report shortfalls below the highly liquid investment minimum or breaches of the 15% limit on illiquid investments to the fund’s board and to the Commission, which would better achieve the goals of the current provisions to provide board and Commission oversight of the fund’s liquidity risk management program and its effectiveness. Most funds did not report reclassifications of their portfolio investments despite extraordinary liquidity constraints in March 2020.128 Based on the liquidity classification practices we observed in March 2020 and on filings covering this period, we are concerned that some funds effectively are equipped to classify their investments primarily on a monthly basis to meet reporting requirements and are not prepared to review classifications intra-month. Because intra-month analyses for these funds would be out of the ordinary and only occur when a fund determines that changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect one or more of their investments’ classifications, it may be especially challenging during stressed conditions for these funds to reclassify their investments intra-month. Requiring daily classification, while involving costs, may ultimately lead
to a more efficient classification process for funds than monitoring trading conditions to determine if and when intra-month classifications are required. For

129See rule 22e–4(b)(1)(iii).
130Approximately 83% of funds holding 85% of net assets do not report setting a highly liquid investment minimum on Form N–PORT. 131For these purposes, funds are required to consider certain factors during stressed conditions only to the extent they are reasonably foreseeable during the period until the next review of the highly liquid investment minimum. See rule 22e– 4(b)(1)(iii)(A)(1). 132See supra section II.A.1.a.i for discussion of the stressed trade size and of fund flow data. example, a daily classification requirement, in combination with the minimum standards we propose for trade size and value impact, may lead funds to modify their liquidity classification processes, which would make the process more standardized, timely, and efficient. We request comment on the proposed amendments to require funds to classify the liquidity of their investments on a daily basis.
32. Should we require funds to
classify all portfolio investments on a daily basis, as proposed? Would this proposed amendment result in a material change to how funds are currently classifying? To what extent do funds already classify the liquidity of their investments on a daily basis or collect the information they would need to classify daily? Would this proposed amendment better integrate liquidity risk management and portfolio management systems?
33. We also are proposing that funds
use a stressed trade size and a defined value impact standard in determining liquidity classifications. Would those changes affect the burdens of classifying on a daily basis? Would those effects be different for different types of funds? For example, would it be easier to determine on a daily basis whether the sale of a stressed trade size of shares listed on an exchange would exceed 20% of the average daily trading volume for those shares than to determine whether the sale of a stressed trade size of other investments would result in a price decline of more than 1%?
34. Instead of classifying on a daily
basis, should we require funds to classify the liquidity of their investments at some other frequency (e.g., weekly, biweekly, or monthly)? If so, should we maintain the requirement for a fund to classify more frequently if changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect one or more of its investments’ classifications? Is there a different approach we should use effectively to require a fund to classify its investments in response to changing conditions? Are there certain types of funds that should be excluded from daily classifications? If so, which funds?
35. If we require funds to classify on
a non-daily frequency, how would they monitor for compliance with the 15% limit on illiquid investments and the highly liquid investment minimum? How are those limits monitored for compliance now?
2. Highly Liquid Investment Minimums
a. Proposed Scope of the Requirement and Determination of the Minimum Rule 22e–4 currently requires a fund to determine a highly liquid investment minimum if it does not primarily hold assets that are highly liquid investments. Funds that are subject to the highly liquid investment minimum requirements must determine a highly liquid investment minimum considering several factors, review the minimum at least annually, and adopt policies and procedures to respond to a shortfall of the fund’s highly liquid investments below the minimum required.129 We propose to require all funds to determine and maintain a highly liquid investment minimum of at least 10% of the fund’s net assets, which is equivalent to the stressed trade size. In connection with this proposed requirement, we would remove the exclusion for funds that primarily invest in highly liquid investments (the ‘‘primarily exclusion’’). The proposed amendments are designed to ensure that funds have sufficient liquid investments for managing stressed conditions and heightened levels of redemptions. We assessed liquidity-related data reported on Forms N–PORT, as well as the development of liquidity risk management programs, through staff outreach to funds and advisers. Based on Form N–PORT filings, most funds do not determine a highly liquid investment minimum and instead rely on the primarily exclusion.130 For those funds that have highly liquid investment minimums, the rule currently requires that they consider various liquidity factors, such as their investment strategy and cash-flow projections, in both normal and reasonably foreseeable stressed conditions.131 We understand that those funds additionally consider factors such as asset class, market volatility, and shareholder concentration in their determinations. As discussed above, by requiring fund liquidity classifications to assume the sale or disposition of a set stressed trade size, the proposal is intended to better prepare all funds for future stressed conditions.132 To help further prepare a fund for heightened levels of redemptions in stressed conditions, we are proposing to require the highly liquid investment minimum to be equal to or higher than the assumed stressed trade size. In setting the highly liquid investment minimum to be at least the stressed trade size, we considered data on fund flows for setting the stressed trade size as well as data reported on Form N–PORT on funds’ current highly liquid investment minimums. As of March 2020, for funds that had determined a highly liquid investment minimum, the majority of those funds reported setting a highly liquid investment minimum of less than 10% of the fund’s net assets. In contrast, approximately 8% of those funds reported setting a highly liquid investment minimum of more than 50% of the fund’s net assets. Thus, while there is a wide divergence in highly liquid investment minimums, most of these funds have a minimum that is lower than the proposed 10% level. Given the
level of weekly outflows some funds have experienced and the difficulty in predicting future stress events, we believe that a regulatory minimum of 10% for the highly liquid investment minimum would benefit investors by improving the ability of funds to meet shareholder redemptions in stressed scenarios. In addition, the proposal’s requirement for funds to both assume a stressed trade size to determine liquidity classifications and also maintain an equal or higher minimum of highly liquid investments is intended to work together to better prepare them for future stressed conditions and to reduce the risk of dilution. Not only would funds have highly liquid investments in an amount needed to meet the stressed trade size, they would also have more highly liquid assets to meet redemptions without having to sell less liquid investments at discounted prices. Funds would continue to be required to periodically review the highly liquid investment minimum and have policies and procedures to address any shortfall in highly liquid investments below the minimum. While the proposed minimum of 10% of a fund’s net assets may be a suitable highly liquid investment minimum for most funds, certain funds may find a higher amount appropriate depending on a fund’s liquidity risk factors and investment objectives. Consistent with the current rule, a fund would be required to consider a specified set of liquidity risk factors to determine whether its highly liquid investment

133See Liquidity Rule Adopting Release, supra note 8, at paragraph following n.669. 134See id., at section III.B.2. 135See id., at n.663 and accompanying text. 136As recognized above, being unprepared for higher than normal redemptions also can affect a fund’s performance when such redemptions occur. See supra note 81. For instance, although less liquid assets generally offer a higher return, the trading costs associated with selling these assets during periods of increased redemptions may offset this risk premium, potentially resulting in a lower overall return for fund investors. See infra note 351 and accompanying text. 137Liquidity Rule Adopting Release, supra note 8, at paragraph accompanying n.724. minimum should be above 10%.133 We continue to believe that the liquidity risk factors funds must consider in determining a highly liquid investment minimum under the current rule and the associated guidance the Commission provided in the Liquidity Rule Adopting Release regarding these factors are appropriate for a fund to take into account for these purposes.134 A broad variety of investments, as well as cash, may qualify towards the highly liquid investment minimum.135 Since approximately 83% of funds currently rely on the primarily exclusion, we would not expect this proposal to affect their strategies. We recognize, however, that imposing a highly liquid investment minimum of at least 10% would require some other funds to hold a larger amount of highly liquid assets than they currently do, and thus may affect these funds’ performance or strategies.136 For funds with strategies focused on investments that would not be considered highly liquid, they would have to determine how to constitute a portfolio of investments that would allow the fund to meet its strategy and investing parameters while maintaining a highly liquid investment minimum of at least 10%. All funds would be subject to the same highly liquid investment minimum of at least 10%, which would minimize any competitive advantage for similar funds associated with the proposed highly liquid investment minimum requirements. We believe it is important that all funds be prepared to meet redemptions in future stressed scenarios, and that funds would be better able to do so with the proposed highly liquid investment minimum requirements. In establishing a uniform floor for the highly liquid investment minimum, we are also proposing to remove the exclusion for funds that invest primarily in highly liquid investments. The Commission adopted the primarily exclusion because it believed the benefits associated with requiring such funds to determine and review a highly liquid investment minimum, or to adopt shortfall procedures, would not justify the associated burdens.137 Since that time, however, we have observed that a fund relying on the primarily exclusion may experience significant declines in its liquidity that result in the fund holding less than 50% of its portfolio in highly liquid
investments for a period of time. For example, a fund that invests significantly in a given foreign market and that generally classifies those investments as highly liquid can experience substantial declines in the amount of its highly liquid investments if, for example, there is political or economic turmoil in or an extended holiday closure of that foreign market. Funds that currently use the primarily exclusion instead of determining and maintaining a highly liquid investment minimum do not have the benefit of shortfall procedures, including board oversight, to respond to events or market conditions that may cause the fund to fall under its previously determined level of primarily held highly liquid investments. By requiring a highly liquid investment minimum for all funds, investors would enjoy the benefit of policies and procedures that are designed to ensure not only oversight by the liquidity risk program administrator but also the fund’s board. Moreover, the burdens of complying with highly liquid investment minimum requirements for funds that currently use the primarily exclusion may be reduced because many fund complexes already have experience developing highly liquid investment minimum shortfall policies and procedures. It may be possible for funds in the same complex to leverage this experience to reduce the burdens of developing these policies and procedures for funds that previously qualified for the primarily exclusion. As liquidity risk management programs have matured, and continue to mature, many fund complexes continue to gain experience with highly liquid investment minimum shortfall policies and procedures, which may also reduce burdens. By requiring all funds to adopt a highly liquid investment minimum, we are seeking to help ensure that funds would be better prepared to handle future stressed conditions, which may occur suddenly and unexpectedly, as they would have sufficient liquid investments for managing heightened levels of redemptions. We request comment on the proposed amendments to highly liquid investment minimum requirements.
36. Should we require all funds to
determine and maintain a highly liquid investment minimum, as proposed? What effect would this proposal have on funds? For example, would some funds have to change their strategies or expect effects on performance?
37. Should some types of funds be
excluded from the requirement to have a highly liquid investment minimum? If yes, which ones and why? For example, should we preserve the exclusion for funds that primarily hold highly liquid assets? Alternatively, should funds currently using the primarily exclusion have a higher highly liquid investment minimum requirement? Would funds using the primarily exclusion be as prepared to meet redemptions in stressed scenarios without a highly liquid investment minimum and its corresponding policies and procedures?
38. If the primarily exclusion is kept,
should we define the amount of highly liquid assets a fund must maintain under this standard (e.g., investing at least 51% of the fund’s net assets in highly liquid assets, or a higher or lower amount)?
39. Should we establish a regulatory
minimum for the amount of highly liquid investments of 10%, as proposed, or should it be set at 15% or 5% (or some other higher or lower amount)? Would establishing a regulatory minimum reduce the burdens associated with determining and periodically reviewing the fund’s highly liquid investment minimum?
40. Rather than propose a regulatory
minimum with factors that a fund must consider to determine whether its own highly liquid investment minimum should be higher, should we require all funds to use the same highly liquid investment minimum? Would this set a level playing field for all funds and diminish any competitive advantage for a fund with a lower highly liquid investment minimum? If so, what amount would be appropriate for a uniform highly liquid investment minimum for all funds (e.g., 5%, 10%, 15%, or a higher or lower amount)?
41. Would providing more detail or
guidance on the liquidity risk factors be helpful? If so, which factors?
42. Would funds that do not currently
have a highly liquid investment minimum be able to leverage policies and procedures already developed for highly liquid investment minimums, for example by other funds in the same complex, to reduce the burdens of developing these policies and procedures? If not, what costs would funds incur to adopt and implement highly liquid investment minimum policies and procedures?

138See Liquidity Rule Adopting Release, supra note 8, at text following n.117. 139As the Commission explained at the time it adopted rule 22e–4, this is not meant to suggest that a fund should only, or primarily, use highly liquid investments to meet shareholder redemptions. Instead, we believe that a fund holding sufficient highly liquid assets will support the fund in meeting redemption requests in a non-dilutive manner, and assist it in readjusting its portfolio in times of market stress, heightened volatility, and managing its obligations to derivatives counterparties. See Liquidity Rule Adopting Release, supra note 8, at n.680 and accompanying text. 140Proposed rule 22e–4(b)(1)(iii)(B)(1); 22e– 4(b)(1)(iii)(B)(2). Rule 22e–4 currently refers to a ‘‘pledge’’ of margin or collateral, rather than ‘‘posting.’’ We are proposing to use the term ‘‘post’’ because we believe this term is more commonly used within the industry and by other regulators to refer to instances where a party provides margin or collateral to its counterparty to meet the performance of its obligation under one or more derivatives transactions as a result of a change in the value of such obligations since the trade was executed or the last time such collateral was provided (commonly referred to as variation margin) or is provided to secure potential future exposure following default of a counterparty (commonly referred to as initial margin). See, e.g., Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 86 FR 6850 (Jan. 25, 2021). 141See Liquidity Rule Adopting Release, supra note 8, at nn.727–730 and accompanying text. This aspect of the proposed rule would only require an adjustment to the amount of a fund’s highly liquid investments that are assets, since investments that are in a liability position are unable to be used to meet redemption requests. See proposed rule 22e– 4(b)(1)(iii)(B)(1). 142Rule 22e–4(b)(1)(ii)(C). In addition, funds currently also are required to exclude highly liquid assets that are posted as margin or collateral in connection with non-highly liquid derivatives transactions when determining whether the fund primarily holds highly liquid assets. Rule 22e– 4(b)(1)(iii)(B). 143See Liquidity Rule Adopting Release, supra note 8, at n.476 and accompanying text. 144 Id. at n.489 and accompanying text. 145Note 1 to proposed rule 22e–4(b)(1)(iii)(B)(1). Cf. Note 1 to rule 22e–4(b)(1)(ii)(C). See also Liquidity Rule Adopting Release, supra note 8, at nn.489–490 and accompanying text (explaining that in the absence of such an instruction, some funds might instead take the opposite approach, and assume that posted non-highly liquid investments first cover these less liquid derivatives transactions, creating inconsistencies between funds). 146We recognize that margin or collateral may be determined and paid by funds on the basis of a group of derivatives transactions, with the fund posting or receiving a net amount of margin or
collateral. When a fund pays margin or collateral in connection with a group that includes derivatives transactions that are highly liquid and non-highly liquid, funds already must determine the amount of margin or collateral attributable to the non-highly liquid derivatives under the current rule. For example, a fund must perform this attribution in order to identify the percentage of the fund’s highly liquid investments that it has posted as margin or collateral in connection with derivatives transactions that are not themselves highly liquid. 147See supra note 145. In connection with the proposed amendments to the rule’s highly liquid investment minimum provisions, we propose to renumber certain existing paragraphs and to add paragraphs to the rule. As a result, we propose to update cross-references to the highly liquid investment minimum provisions within the rule. See proposed rule 22e–4(b)(1)(iii)(C) through (E) and proposed rule 22e–4(b)(3)(iii). b. Calculation of the Highly Liquid Investment Minimum We are proposing amendments to rule 22e–4 that are designed to help ensure that the highly liquid investments a fund holds to meet its highly liquid investment minimum are available to support the fund’s ability to meet redemptions. A key aim of the highly liquid investment minimum requirement is to decrease the likelihood that funds would be unable to meet their redemption obligations.138 Building on existing aspects of rule 22e– 4, the proposed amendments would require that, when determining the amount of assets a fund has classified as highly liquid that count toward the highly liquid investment minimum, the fund account for limitations in its ability to use some of those assets to meet redemptions.139 Specifically, in assessing compliance with the fund’s highly liquid investment minimum, the fund would be required to: (1) subtract the value of any highly liquid assets that are posted as margin or collateral in connection with any derivatives transaction that is classified as moderately liquid or illiquid; and (2) subtract any fund liabilities.140
i. Margin or Collateral of Moderately
Liquid and Illiquid Derivatives The requirement for a fund to reduce the value of its highly liquid assets by the amount posted as margin or collateral in connection with a nonhighly liquid derivatives transaction reflects that this amount of highly liquid assets is not available for the fund to use to meet redemptions.141 This is because, where a fund enters into a moderately liquid or illiquid derivative and posts highly liquid assets as margin or collateral, the posted collateral is highly liquid, but the fund cannot access the value of posted assets unless the fund exits the derivatives transaction. Since the fund has classified the derivative as moderately liquid or illiquid, it does not reasonably expect to be able to exit the derivatives transaction within three business days. We recognize that the fund may be able to access the specific assets posted as margin or collateral by replacing them with other assets acceptable to the fund’s counterparty. But regardless of the specific assets posted, the value of collateral posted in connection with a moderately liquid or illiquid derivative would not be convertible to U.S. dollars within three business days or less. Under the current rule, a fund is required to identify the percentage of the fund’s highly liquid investments that it has posted as margin or collateral in connection with derivatives transactions that the fund has classified as less than highly liquid.142 The Commission believed that this approach struck an appropriate balance between providing transparency and reducing burdens on funds.143 The Commission observed that a fund generally would not need to specifically identify particular assets that are posted as margin or collateral to cover particular derivatives transactions, but instead would calculate the percentage of highly liquid investments posted as margin or collateral for derivatives transactions classified in each of the other classification categories.144 Under the rule, a fund that has posted both highly liquid investments and non-highly liquid investments as margin or collateral in connection with a nonhighly liquid derivatives transaction should reduce its highly liquid investments, rather than assume that posted non-highly liquid investments would first cover the derivatives transaction, unless the fund specifically identifies non-highly liquid investments as margin or collateral in connection with a derivatives transaction.145 Finally, the Commission observed that the current approach responds to commenters’ concerns that linking the liquidity of specific assets posted as margin or collateral to the liquidity of a fund’s derivatives transactions could understate the liquidity of those assets, since a fund may be able to readily substitute another liquid asset for the asset posted as margin or collateral.146 The proposed approach is intended to enhance investor protection while continuing to strike an appropriate balance with the potential increased burdens on
funds. The proposed approach would not require funds to identify and reclassify specific assets posted as margin or collateral, but rather to reduce the value of the fund’s highly liquid assets available to meet the fund’s highly liquid investment minimum by the value of the assets posted as margin or collateral. We also propose to maintain, with conforming changes, the explanatory note discussed above guiding the allocation of amounts posted as margin or collateral.147 By reducing the fund’s highly liquid investments by the value of amounts posted as margin or collateral, the proposed approach would avoid burdens associated with tracking specific securities posted as margin or collateral and reclassifying investments as they are posted as margin or collateral and recalled. It also would not

148See Liquidity Rule Adopting Release, supra note 8, at n.491 and accompanying text. 149See Liquidity Rule Adopting Release, supra note 8, at nn.468–472 and accompanying text (operational concerns); Derivatives Adopting Release, supra note 21, at section II.L (withdrawal of Investment Company Act Release 10666). 150The highly liquid investment minimum is the percentage of a fund’s net assets that it invests in highly liquid assets that are eligible to count toward the minimum under the rule. See rule 22e–4(a)(7) (defining highly liquid investment minimum). Because this calculation uses net assets as the denominator (which reflects the amount of assets less any liabilities), we believe the numerator of eligible highly liquid assets similarly should be net of liabilities. 151 Depending on the rules of any applicable exchange and local law, a variation margin payment with respect to a derivatives transaction may be deemed to settle the fund’s liability for the daily mark-to-market loss on the transaction. In that case or any other case where a fund does not have a liability in connection with a given transaction, the fund would not be required to reduce its highly liquid investments in connection with that transaction under the proposal. 152See rule 22e–4(b)(1)(iv). A fund also must notify its board, and report confidentially to the Commission on Form N–RN, if its illiquid investments that are assets exceed 15% of net assets. 153See proposed rule 22e–4(b)(1)(iv). 154See Liquidity Rule Adopting Release, supra note 8, at text accompanying nn.218–223. 155The limitations on funds’ issuance of senior securities, which include derivatives creating certain payment or delivery obligations, in section 18 of the Act and 17 CFR 270.18f–4 (rule 18f–4) understate the liquidity of specific securities that are posted as margin or collateral because each security would continue to be classified based on its own characteristics, and instead the adjustments would only be made at the aggregate level.148 Moreover, many of the operational concerns commenters raised when rule 22e–4 was proposed, which led the Commission to adopt the current approach, related to the treatment of assets segregated under the Commission’s Investment Company Act Release 10666, which the Commission has since rescinded, effective August 19,
2022.149 We therefore believe the
proposed amendments would enhance investor protections by helping to ensure a fund’s highly liquid assets are in fact available to meet redemptions, while continuing to balance the value of the provision against the operational burdens to implement it.
ii. Fund Liabilities
Under the proposal, a fund would also be required to reduce the amount of highly liquid assets that count toward the fund’s highly liquid investment minimum by the amount of the fund’s liabilities. This proposed change is intended to result in a more accurate calculation of the highly liquid investment minimum.150 The proposed approach would include any liabilities, as defined in 17 CFR 210.6–04 (rule 6.04 of Regulation S–X). For example, this would include investment liabilities and amounts payable for investment advisory, management, and service fees. Reducing the amount of highly liquid assets by fund liabilities reflects that fund liabilities are generally paid in cash, meaning that highly liquid assets may need to be liquidated in order to satisfy those liabilities rather than to meet redemptions. Based on staff outreach, it is our understanding that the proposal reflects many funds’ existing practices. For example, when a fund has significant liabilities, they generally will be incurred in connection with derivatives transactions or other investments that give rise to a fund liability. Because funds are required to classify all investments, including liabilities, investments such as highly liquid derivatives in a liability position will reduce the value of the fund’s highly liquid investments that are assets. To enhance investor protection by preventing assets that a fund may in the future use to pay liabilities from also being counted toward the fund’s highly liquid investment minimum, and to promote consistency in how funds calculate their highly liquid investment minimum, we are proposing to require that all funds reduce their highly liquid assets used to satisfy their highly liquid investment minimum by the amount of the fund’s liabilities.151 We request comment on these aspects of the proposal, including:
43. Should we, as proposed, require a
fund to reduce the amount of its highly liquid investments computed for the purposes of determining compliance with its highly liquid investment minimum by the value of any highly liquid assets that are posted as margin or collateral in connection with any derivatives transaction that is classified as moderately liquid or illiquid? Why or why not? Should we also require that amounts posted as margin or collateral in connection with derivatives transactions that are classified as highly liquid be treated in this way? Alternatively, should we exempt amounts posted as margin or collateral in connection with certain types or categories of derivatives transactions from this requirement?
44. How frequently do funds calculate
the percentage of their highly liquid assets posted as margin or collateral in connection with non-highly liquid derivatives transactions today? Would the proposed requirement to calculate this value on a daily basis present new challenges?
45. Should we, as proposed, require a
fund to reduce the amount of its highly liquid assets computed for the purpose of determining compliance with its highly liquid investment minimum by the value of any liabilities? Do funds already make this reduction when determining compliance with highly liquid investment minimums? Should we instead require a fund to reduce the amount of its highly liquid assets by a different amount, such as the percentage of the fund’s total assets that its liabilities represent? Are there certain classes or types of fund liabilities that should not be counted? For example, should we provide an exception for liabilities associated with fund borrowings that are used to meet redemptions in order to avoid a disincentive for funds to borrow for this purpose under appropriate circumstances?
46. We propose that, for these
purposes, the amount of a fund’s liabilities would be computed in the same manner as a fund computes its liabilities for purposes of rule 6–04 of Regulation S–X. If we use this standard, as proposed, would the amount by which funds should reduce their highly liquid assets be clear? Are there any issues that may arise from using the standard funds use to prepare their balance sheets? Would a different definition of ‘‘liabilities’’ be more appropriate?
3. Limit on Illiquid Investments
Rule 22e–4 currently limits a fund’s ability to acquire illiquid investments. Specifically, the rule prohibits a fund from acquiring any illiquid investment if, immediately after the acquisition, the fund would have invested more than 15% of its net assets in illiquid investments that are assets.152 We are proposing to amend the rule’s limitation on illiquid investments to provide that the value of margin or collateral that a fund could only receive upon exiting an illiquid derivatives transaction would itself be treated as illiquid for these purposes.153 As the Commission stated in 2016, the potential effects of a fund’s use of derivatives are relevant to assessing, managing, and periodically reviewing a fund’s liquidity risk.154 The potential effects may be heightened when the derivatives transaction is itself illiquid, and thus may be difficult for a fund to exit quickly enough to use the associated margin or collateral to meet redemption requests, or at all. Funds’ use of illiquid derivatives is subject to several limitations but, for open-end funds, the risks associated with illiquid derivatives may be heightened as a result of the funds’ redeemability.155

provide certain protections to investors, and the proposed amendments are designed to complement those protections. See Derivatives Adopting Release, supra note 21 (stating that a fund’s derivatives risk management program would be part of an adviser’s overall management of portfolio risk and would complement—but would not replace— a fund’s other risk management activities, such as a fund’s liquidity risk management program adopted under rule 22e–4). 156This does not mean that the investment acting as margin or collateral would need to be classified as an illiquid investment under the rule. A fund would classify the relevant investment according to the rule’s classification framework. In order to aid understanding of the reported data, we propose to require a fund to report the value of investments treated as illiquid as a result of this provision. See
section II.E.1.d, infra and Item B.8.b of proposed
Form N–PORT.
157See Item B.8.b of proposed Form N–PORT. 158See proposed rule 22c–1(b). We refer to registered open-end management investment companies other than excluded funds as ‘‘funds’’ or ‘‘open-end funds’’ when discussing the swing pricing requirement. We continue to believe it is appropriate to limit swing pricing to these funds and to not include other fund types, such as unit investment trusts or closed-end funds. See Swing Pricing Adopting Release, supra note 8, at nn.62– 72 and accompanying text. With respect to excluded funds, the Commission recently proposed to require certain money market funds to engage in swing pricing under rule 2a–7, but those money market funds would not be subject to the proposed swing pricing requirement under rule 22c–1(b). See Money Market Fund Reforms, Investment Company Act Release No. 34441 (Dec. 15, 2021) [87 FR 7248 (Feb. 8, 2022)] (‘‘Money Market Fund Proposing Release’’). ETFs, including an ETF share class of any fund that issues multiple classes of shares representing interests in the same portfolio, would not be subject to the swing pricing requirement, as discussed below. See definition of ‘‘Exchangetraded fund’’ in proposed rule 22c–1(d). 159Some research suggests that a first-mover advantage in open-end funds may lead to cascading anticipatory redemptions akin to traditional bank runs. This research generally models an exogenous response to negative fund returns and not trading costs. However, these results may extend to trading costs to the degree that cost based dilution may reduce subsequent fund returns, which would trigger runs in these models. See, e.g., Chen, Qi, Itay Goldstein, and Wei Jiang. 2010. ‘‘Payoff Complementarities and Financial Fragility:
Evidence from Mutual Fund Outflows.’’ Journal of Financial Economics 97(2): 239–262. See also Goldstein, Itay, Hao Jiang, and David Ng. 2017. ‘‘Investor Flows and Fragility in Corporate Bond Funds.’’ Journal of Financial Economics 126(3):592–613. See also Morris, Stephen, Ilhyock Shim, and Hyun Song Shin. 2017. ‘‘Redemption Risk and Cash Hoarding by Asset Managers.’’ Journal of Monetary Economics 89: 71–87. See also Zeng, Yao. 2017. ‘‘A Dynamic Theory of Mutual Fund Runs and Liquidity Management.’’ Working Paper. See also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. ‘‘Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity.’’ Working Paper. See also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. ‘‘Bank Debt versus Mutual Fund Equity in Liquidity Provision.’’ Working Paper. See also Christof W. Stahel. 2022. ‘‘Strategic Complementarity Among Investors with Overlapping Portfolios’’, available at https:// ssrn.com/abstract=3952125 (positing that investors behave similarly regardless of whether they hold assets indirectly through a fund or directly through a separately managed account and the general explanation for investor decisions to sell assets is that all market participants compete for finite market liquidity). 160See proposed rule 22c–1(b)(1) and definition of ‘‘Inflow swing threshold’’ in proposed rule 22c– 1(d). Under the proposal, for purposes of determining whether the fund is in compliance with the limitation on illiquid investments, the fund would treat as illiquid the amount of margin or collateral it has posted in connection with a derivatives transaction that is classified as an illiquid investment and that the fund would receive if it exited the derivatives transaction (‘‘excess collateral’’).156 This proposed requirement recognizes that, because a fund does not reasonably expect to be able to convert an illiquid derivatives investment to U.S. dollars within seven days, the fund likewise would not be able to convert to U.S. dollars the value of excess collateral posted as margin or collateral in connection with the derivatives transaction within seven days. Therefore, the proposal would require a fund to include the value of the excess collateral or margin when it determines the amount of illiquid assets it holds for purposes of the 15% limit on illiquid investments. As with the proposed amendments related to the amounts posted as margin or collateral for non-highly liquid derivatives, a fund would not be required to specifically identify particular assets that it posted as margin or collateral to cover specific derivatives transactions. Instead, a fund would calculate the value of its assets posted as margin or collateral in connection with illiquid derivatives transactions and treat that value of assets as illiquid.157 We request comment on this aspect of the proposal, including:
47. Should we, as proposed, require
funds to treat as illiquid investments the value of excess collateral the fund has posted in connection with a derivatives transaction that is classified as an illiquid investment? Are there circumstances where a fund would have ready access to the value of such collateral even though the associated derivatives transaction is illiquid?
48. Are there challenges to identifying
and monitoring the amount of excess collateral a fund has posted in connection with a derivatives transaction that is classified as an illiquid investment? If so, are there ways to address those challenges?
49. Are there other instances where
we should treat an investment as illiquid for purposes of the rule’s limit on illiquid investments that the current rule and the proposal do not contemplate?
50. Should we amend any other
aspects of the illiquid investment limitations in the rule? For example, should we change the amount of the limit on illiquid investments from 15% to a lower amount, such as 10% or 5%, or a higher amount, such as 20% or 25%? B. Swing Pricing We are proposing amendments to rule 22c–1 that would require all registered open-end management investment companies to engage in swing pricing under certain conditions, except for money market funds and ETFs (the latter, ‘‘excluded funds’’).158 Swing pricing is a process of adjusting a fund’s current NAV when certain conditions are met, such that the transaction price effectively passes on costs stemming from shareholder inflows or outflows to the shareholders engaged in that activity. Trading activity and other changes in portfolio holdings associated with purchases and redemptions may impose costs, including trading costs and costs of depleting a fund’s liquidity. These costs, which currently are borne by the non-transacting shareholders in the fund, can dilute the interests of these shareholders. In addition, this can create incentives for shareholders to redeem quickly to avoid losses, particularly in times of market stress. If shareholder redemptions are motivated by this first-mover advantage, they can lead to increasing outflows, and as the level of outflows from a fund increases, the incentive for remaining shareholders to redeem may also increase.159 By imposing the costs associated with net purchases or net redemptions on the shareholders who are purchasing or redeeming from the fund at that time, swing pricing can more fairly allocate costs, reduce the potential for dilution of investors who are not currently transacting in the fund’s shares, and reduce any potential first-mover advantages.

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

161See supra notes 59 to 63 and accompanying text (stating that some fund managers with both U.S. and European operations indicated to the staff that swing pricing would have been a useful tool for U.S. funds to have had to combat dilution in Mar. 2020). 162See Swing Pricing Adopting Release, supra note 11, at n.360 and accompanying text. In 2016, when the Commission adopted the optional swing pricing rule for open-end funds that are not excluded funds, it also adopted certain amendments to Form N–1A to enhance disclosure related to a fund’s use of swing pricing, if applicable. Among other things, these amendments required that a fund that uses swing pricing explain the fund’s use of swing pricing, including its meaning, the circumstances under which the fund will use it, the effects of swing pricing on the fund and investors, and the upper limit it has set on the swing factor. See Item 6(d) of Form N–1A. Although no funds currently use swing pricing, and therefore do not provide swing pricing disclosures to their investors, under the proposed rule all funds other than excluded funds would be required to provide these disclosures, other than the swing factor upper limit disclosure, to their investors. 163See, e.g., Dunhong Jin, Marcin Kacperczyk, Bige Kahraman, and Felix Suntheim, Swing Pricing and Fragility in Open-end Mutual Funds, The Review of Financial Studies, 35(1) (2022), available at https://academic.oup.com/rfs/article/35/1/1/ 6162183 (‘‘Jin, et al.’’); BlackRock, Swing Pricing— Raising the Bar (Sept. 2021), available at https:// www.blackrock.com/corporate/literature/ whitepaper/spotlight-swing-pricing-raising-the-barseptember-2021.pdf (‘‘BlackRock Swing Pricing Paper’’). 164See Association of the Luxembourg Fund Industry, Swing Pricing Brochure (July 2022), available at https://www.alfi.lu/getattachment/ 3154f4f7-f150-4594-a9e3-fd7baaa31361/app_dataimport-alfi-alfi-swing-pricing-brochure-2022.pdf. 165See CSSF Paper, supra note 61. 166See BlackRock Swing Pricing Paper, supra note 163. 167See notes 59 to 63 and accompanying text. 168See Claessens and Lewrick, supra note 61. 169See CSSF Paper, supra note 61 (stating that funds applying swing pricing are less exposed to redemption pressure during episodes of elevated market volatility, but this dampening effect appears to vanish during episodes of severe market volatility, such as in Mar. 2020); see also infra notes 354 to 355 and accompanying text. 170See Swing Pricing Adopting Release, supra note 13, at paragraph accompanying n.166. 171See proposed rule 22c–1(b)(5) and current rule 22c–1(a)(3)(iv). 172See Swing Pricing Adopting Release, supra note 13, at paragraph accompanying n.68. swing pricing could result in benefits for investors, as discussed below.161 However, at present no U.S. funds have implemented swing pricing. One reason funds have not implemented swing pricing is that they lack timely flow information to operationalize this antidilution tool. However, even if all funds
had access to sufficient flow information in order to implement swing pricing, some may nonetheless choose not to implement it due to implementation costs or because investors in U.S. funds are unfamiliar with swing pricing. Therefore, funds may not be incentivized to be the first to adopt swing pricing. We believe that a regulatory requirement, rather than a permissive framework, would accrue benefits to investors that justify the implementation costs and would overcome these collective action problems that may have prevented swing pricing implementation. In addition, we continue to believe the information a fund that uses swing pricing must disclose in its prospectus will improve public understanding regarding a fund’s use of swing pricing.162 Some academics and market participants have suggested that swing pricing has provided significant benefits to long-term investors in funds in other jurisdictions, reducing dilution attributable to the transaction costs associated with shareholder activity.163 As an example, one foreign fund industry group has suggested that funds using swing pricing exhibit superior performance returns over time compared to funds with identical investment strategies and trading patterns that do not employ antidilution measures.164 In terms of performance benefits, one study found that, for a 10% rise in monthly outflows, the associated decline in monthly returns relative to a fund’s benchmark was double the amount for a fund that does not use swing pricing in comparison to a fund that uses swing pricing (a 6 basis point decline versus a 3 basis point decline, respectively).165 And one investment manager reviewed the effects of swing pricing for twenty of its European funds in 2019 and found that the anti-dilution effect of swing pricing improved annual performance for these funds by around 10 to more than 60 basis points.166 In addition, in March 2020, many European funds that used swing pricing lowered their swing thresholds and increased the size of their swing factors, suggesting there was a need to make more frequent and significant adjustments to the funds’ NAVs at that time to avoid substantial dilution that otherwise would have occurred.167 One study found that surveyed funds using swing pricing during a three week period of elevated redemptions in March 2020 recouped roughly 6 basis points of total net assets on average from redeeming investors.168 The swing pricing policies that the proposed rule would require, which are similar to those used by some foreign funds, are designed to mitigate dilution arising from shareholders’ purchase and redemption activity, particularly during times of stress when those dilution costs may increase. In addition to reducing dilution, some studies also suggest that swing pricing dampens redemption pressure, although some have found this effect to be minimal or nonexistent during certain periods of market stress.169 Consistent with our current optional swing pricing framework, the
proposed swing pricing requirement for open-end funds would apply to both net purchases and net redemptions. Although liquidity and transaction costs associated with meeting net redemptions can present heightened risks of dilution, particularly in stress periods, we continue to believe that net purchases also may cause shareholder dilution.170 However, when a fund has net purchases, we propose to require swing pricing only if the amount of net purchases exceeds a specified threshold. While the proposed swing pricing requirement generally would apply to all registered open-end funds other than excluded funds, we propose to retain the current provision that does not permit feeder funds in a master-feeder fund structure to use swing pricing.171 The use of swing pricing would generally be inappropriate for feeder funds, because that level of a fund structure does not actually transact in underlying portfolio assets as a result of net purchase or net redemption activity. A master fund, however, generally would be subject to the swing pricing requirement. The master fund may purchase portfolio assets to invest purchasing shareholders’ cash (as transferred through the feeder fund) or sell portfolio assets to pay redemption proceeds (reducing the feeder fund’s interest in the master fund). Thus, to the extent that net purchases into or redemptions from the master fund by one or more feeder funds, or any other investors in the master fund, would trigger the application of swing pricing under the proposed rule, the swing factor would be applied at the level of the master fund. Consistent with current rule 22c–1, we propose to exclude ETFs from the swing pricing requirement because ETFs often impose fees in connection with the purchase or redemption of creation units that are intended to defray operational processing and brokerage costs to prevent possible shareholder dilution.172 We also are not including ETFs within the scope of the proposed requirement because we believe that swing pricing could impede the effective functioning of an ETF’s arbitrage mechanism. Additionally, notwithstanding section 18(f)(1) of the Act, a fund with a share class that is an exchange-traded fund is subject to the swing pricing requirement only with respect to any share classes that are not

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

175See infra note 225 (discussing that European jurisdictions in which funds use swing pricing generally already have a hard close, which results in European funds receiving order flow much earlier than U.S. funds). 176The factors a fund currently must consider in determining the size of its swing threshold are: (1) the size, frequency, and volatility of historical net purchases or net redemptions of fund shares during normal and stressed periods; (2) the fund’s investment strategy and the liquidity of the fund’s portfolio investments; (3) the fund’s holdings of cash and cash equivalents, and borrowing arrangements and other funding sources; and (4) the costs associated with transactions in the markets in which the fund invests. See rule 22c–1(a)(3)(i)(B). 177For considerations relating to the swing threshold in the current rule, see generally Swing Pricing Adopting Release, supra note 11, at nn.150– 155 and accompanying text. 178See Bank of England Survey, supra note 60 (‘‘In most cases we observed that funds with different primary strategies and assets, but managed by the same fund manager, used both the same thresholds for applying swing pricing, and the same calculation of the standardised swing factor. This appears to indicate that managers may not be fully considering specific factors such as in the investor base or asset-specific factors for individual funds.’’). 179See proposed rule 22c–1(b)(1)(i). 180See proposed rule 22c–1(b)(2)(i)(C) and definition of ‘‘Market impact threshold’’ in proposed rule 22c–1(d). 181Market impact costs reflect price concessions (amounts added to the purchase price or subtracted from the selling price) that are required to find the opposite side of the trade and complete the transaction. 182Based on Morningstar data for the period of Jan. 2009 through Dec. 2021.
61. Is the experience with swing
pricing in certain foreign jurisdictions relevant to an analysis of whether swing pricing would be an effective tool for U.S. funds? Beyond the operational differences identified in this release, are there differences in regulatory frameworks, markets, fund investors, or other factors between the U.S. and these other jurisdictions that might cause U.S. funds’ experiences with swing pricing to differ? 175
62. Rule 2a–4 under the Act requires
a fund, when determining its current NAV, to reflect changes in holdings of portfolio securities and changes in the number of outstanding shares resulting from distributions, redemptions, and repurchases no later than the first business day following the trade date. Are there any changes we should make to rule 2a–4 to address dilution? For example, should we amend that rule to require that funds reflect these changes on trade date?
2. Amendments to Swing Threshold
Framework
The current rule permits a fund to determine its own swing threshold for net purchases and net redemptions, based on a consideration of certain factors the rule identifies.176 We are proposing to specify when a fund must use swing pricing to adjust its current NAV, which would differ depending on whether the fund has any net redemptions or has net purchases above a specified threshold on a given day. When the Commission adopted the swing pricing provisions in 2016, it determined to require a swing threshold and not to prescribe a swing threshold floor applicable to all funds because it believed that different levels of net purchases and net redemptions would create different risks of dilution for funds with different strategies, shareholder bases, and other liquidityrelated characteristics.177 At that time, the Commission believed consideration of the swing threshold factors—which took into account these different liquidity-related characteristics—would lead a fund to set a threshold at a level that would trigger the fund’s investment adviser to trade portfolio assets in the near term to a degree or of a type that may generate material liquidity or transaction costs for the fund. We further believed that after considering these factors, a fund would be unable to set the swing threshold at zero. Thus the current rule does not contemplate full swing pricing, but assessment of the swing threshold factors could lead certain funds to set low swing thresholds approximating full swing pricing. In the intervening period, however, we have observed that the size of funds’ swing thresholds in certain other jurisdictions has depended more on uniform decisions by the manager of a fund complex than on an individual fund’s liquidity-related circumstances.178 In addition, we considered our experience with the liquidity rule discussed above, where currently allowed discretion has led to favorable liquidity assessments that tend to over-estimate funds’ liquidity during stressed market conditions and that fail to change dynamically during stressed market conditions. A similar experience translated to swing pricing could cause high swing thresholds set during calm market conditions that do not adjust downward as may be appropriate in some cases during stressed market conditions. As a result of these experiences, we are concerned that retaining the principles-based framework for setting swing thresholds under the current rule would not result in the level of fund-specific tailoring the Commission contemplated and, instead, would simply result in undue variation among similarly situated funds and, in some cases, swing thresholds high enough that swing pricing does not adequately address dilution. In the case of net redemptions, the proposed rule would require a fund to apply swing pricing always (i.e., without a swing threshold).179 Because every net redemption can potentially involve trading or borrowing costs that dilute the value of the fund, as well as depletion
of a fund’s liquidity for remaining shareholders that increases the likelihood of future dilution, the proposal, in setting a uniform approach to triggering swing pricing in all circumstances, would require a fund to apply a swing factor regardless of the size of its net redemptions, which is intended to fairly allocate costs and reduce dilution. Applying swing pricing regardless of the size of net redemptions may help reduce any potential firstmover advantage associating with redeeming before other investors. However, the types of costs the swing factor must take into account would depend on the size of net redemptions. Specifically, the proposed rule would require a fund to include market impacts in its swing factor only if net redemptions exceed 1% of the fund’s net assets (the ‘‘market impact threshold’’).180 Market impact costs are the costs incurred when the price of a security changes as a result of the effort to purchase or sell the security.181 We understand that there may be operational challenges and complexities to estimating market impact costs. Recognizing these difficulties, and that market impacts are likely to be minimal or even negligible when redemptions are not significant, the proposal sets a market impact threshold below which estimates of market impact would not be necessary. Based on our analysis of historical daily flow data over a period of more than 10 years for equity and fixed-income mutual funds, a given fund had daily outflows of more than 1% on slightly more than 1% of trading days.182 We propose a 1% market impact threshold to balance the operational challenges of frequently estimating market impacts with the goal of reducing dilution, particularly in times of stress (i.e., when a fund is more likely to experience redemptions of more than 1% of net assets and market impacts are likely to be larger). We recognize that smaller funds may be less likely than larger ones to have market impacts at a 1% threshold, because they generally would be selling smaller investment sizes than larger funds would at that threshold. However, there are circumstances in which smaller funds may also experience market impact costs at the 1% threshold; for example, if the fund holds substantial

183See definition of ‘‘Inflow swing threshold’’ in proposed rule 22c–1(d). 184Regardless of bid-ask spreads, a fund manager also may choose to use cash inflows to invest in derivatives to obtain market exposure quickly while strategizing where to invest that cash on a longerterm basis. Funds may be incentivized to invest promptly in an effort to avoid reduced returns and tracking error. 185Based on Morningstar data for the period of Jan. 2009 through Dec. 2021. 186See definitions of ‘‘Inflow swing threshold’’ and ‘‘Market impact threshold’’ in proposed rule 22c–1(d). Under the proposed rule, the term ‘‘swing pricing administrator’’ has the same meaning as the term ‘‘person(s) responsible for administering swing pricing’’ under the current rule. See proposed rule 22c–1(d); current rule 22c–1(a)(3)(ii)(C). The swing pricing administrator is the fund’s investment adviser, officer, or officers responsible for administering the fund’s swing pricing policies and procedures. The proposed rule specifies that the swing pricing administrator may consist of a group of persons. As with the current rule, the fund’s board of directors must designate this person or group of persons. 187See proposed rule 22c–1(b)(3)(iii)(C). Consistent with the current rule, a fund would be required to maintain a written copy of the report provided to the board for six years, the first two years in an easily accessible place. See rule 22c– 1(a)(3)(iii); proposed rule 22c–1(b)(4). 188See rule 22c–1(a)(3)(ii)(C) and proposed rule 22c–1(b)(3)(ii). See also Swing Pricing Adopting Release, supra note 11, at n.269 and accompanying text. illiquid investments or during periods of market stress. Therefore, the proposal requires all funds to assess whether market impact costs would occur when net redemptions exceed a 1% threshold and, if they do occur, to include such costs in the swing factor. A uniform market impact threshold for all funds would provide a consistent and objective threshold for all funds to consider market impacts. When a fund has net purchases, we propose to only require swing pricing— including market impact—if the amount of net purchases exceeds 2% of the fund’s net assets (the ‘‘inflow swing threshold’’).183 We recognize that smaller levels of net purchases are less likely to result in dilution than net redemptions. This is because funds, while required to pay redemptions within seven days, are not required to invest cash inflows within a specified period. Therefore, if bid-ask spreads have widened on a day that the fund receives the cash inflows, the fund manager generally can wait to invest the cash to reduce transaction costs.184 In addition, while investing the cash inflows could decrease the liquidity of the fund, particularly if the cash is used to purchase illiquid investments, the liquidity rule curbs this possibility by limiting the amount of illiquid investments a fund can acquire. For these reasons, the proposal sets a swing threshold for net purchases
but not one for net redemptions. We also recognize that low levels of net purchases are less likely to result in dilution, but that higher levels of net purchases are more likely to result in dilution absent appropriate tools for mitigating it. Based on our analysis of historical daily flow data over a period of more than 10 years for equity and fixed-income mutual funds, a given fund had daily inflows of approximately 2% on about 1% of trading days.185 Therefore, similar to the proposed market impact threshold, we propose an inflow swing threshold of 2% to balance the operational challenges of frequently implementing swing factors for net purchases with the goal of reducing dilution, particularly when a fund has significant inflows. Although the proposed rule would identify a market impact threshold that would apply to net redemptions and an inflow swing threshold for net purchases, the rule would permit the fund’s swing pricing administrator to use smaller thresholds than the rule identifies in either of these instances as the administrator determines is appropriate to mitigate dilution.186 Flexibility to use a smaller threshold is designed to recognize that there may be circumstances in which a smaller threshold than the rule requires would help reduce dilution, such as when the fund holds a larger amount of investments that are less liquid, in times of market stress, or in the case of a large fund (i.e., because a large fund is selling or purchasing a larger amount of instruments than a small fund at a 1% market impact threshold for net redemptions or a 2% inflow swing threshold for net purchases). For example, a fund might elect to implement swing pricing if the fund experiences net purchases of any amount. We understand that in having the option to set a lower market impact threshold for net redemptions and inflow swing threshold for net purchases, the swing pricing administrator would have discretion that it potentially could use to enhance fund performance in a misleading manner by adjusting the fund’s NAV more frequently or more substantially than is needed to address dilution. To help address this risk, under the proposal the administrator would be required to include in its written reports to the board the information and data supporting its determination to use lower thresholds.187 Additionally, consistent with the current rule, a fund’s portfolio manager could not be designated as the swing pricing administrator.188 We request comment on our proposed amendments to the swing pricing threshold.
63. Should we adopt a framework
that, in the case of net redemptions, requires a fund to adjust its NAV by a swing factor only when those net redemptions exceed an identified threshold (i.e., as we propose for net purchases)? If so, should that threshold be the same size as the 1% market impact threshold, or a lower or higher amount (e.g., 0.5%, 1.5%, or 2%)?
64. Should we require the application
of the swing factor regardless of the size of net purchases or net redemptions, or only when they exceed a certain percentage of a fund’s net assets? Should funds have discretion to set their own thresholds? If so, should that discretion be based on the swing threshold factors currently in the rule or should we adjust those factors?
65. Should we include a market
impact threshold for net redemptions, as proposed? Is 1% an appropriate level for the market impact threshold? Should it be a lower or higher amount (e.g., 0.5%, 1.5%, or 2%)? Is there different data or analysis that we should take into account to determine the market impact threshold?
66. Should we include an inflow
swing threshold for net purchases, as proposed? Is 2% an appropriate level for the inflow swing threshold? Should it be a lower or higher amount (e.g., 0.5%, 1%, 1.5%, or 3%)? Is there different data or analysis that we should take into account to determine the inflow swing threshold?
67. Would the proposed inflow swing
threshold, or a requirement to use swing pricing in the case of net purchases more generally, cause a fund to limit the total amount an investor can invest in the fund? If so, what effects would this have on investors?
68. Should we permit the swing
pricing administrator to use discretion to establish a smaller market impact threshold for net redemptions or a smaller inflow swing threshold for net purchases if the administrator determines a smaller threshold is appropriate to mitigate dilution, as proposed? Should we prescribe the circumstances in which a smaller threshold would be permitted, the timing of such a determination by the swing pricing administrator (e.g., if a swing pricing administrator must formally establish a smaller threshold that will remain in place for a period of time), disclosure of such a determination to the fund’s investors, and recordkeeping requirements in support of the determination? Should we require the fund’s board, instead of

189See rule 22c–1(a)(3)(i)(A) and proposed rule 22c–1(b)(1)(i). 190See definition of ‘‘Investor flow information’’ in proposed rule 22c–1(d). See also infra section II.C.2 (discussing the proposed definition of ‘‘eligible order’’ for purposes of the hard close requirement). 191See rule 22c–1(a)(3)(i)(A). 192Under the current rule, the swing pricing administrator is permitted to make swing threshold determinations based on receipt of sufficient flow information ‘‘to allow the fund to reasonably estimate whether it has crossed the swing threshold(s) with high confidence.’’ See rule 22c– 1(a)(3)(i)(A). the swing pricing administrator, to approve use of a smaller threshold? Should we permit the swing pricing administrator to exclude certain types of costs from the swing factor if it uses a lower-than-required threshold? For example, should a swing pricing administrator be permitted to exclude market impact estimates from the swing factor if it uses an inflow swing threshold that is lower than 2%, and instead only include market impact estimates when inflows also exceed 2%?
69. Should the swing pricing
administrator or the board have flexibility to establish larger thresholds than proposed (i.e., to apply a swing factor only when net redemptions exceed a specified percentage, to include market impacts in the swing factor when net redemptions are an identified amount that is greater than 1%, or to apply a swing factor only when net purchases exceed an identified amount that is greater than 2%)? If so, what are the circumstances in which a fund board or the swing pricing administrator should have flexibility to use larger thresholds that the proposed rule identifies?
70. Should we allow certain types of
funds to use different thresholds than those the proposed rule identifies? For example, should we permit or require smaller funds to use larger thresholds? If so, how should we identify smaller funds for these purposes? Should the rule identify larger thresholds for smaller funds, or should smaller funds have flexibility to determine their own thresholds? As another example, should we permit or require funds that hold significant amounts of highly liquid investments to use larger thresholds? If so, how should we identify funds that hold significant amounts of highly liquid investments for these purposes? Should the rule identify larger thresholds for these funds, or should they have flexibility to determine their own thresholds?
3. Determining Flows
Consistent with the current rule, the swing pricing administrator must review investor flow information to determine if the fund has net purchases or net redemptions and the amount of net purchases or net redemptions.189 For these purposes, investor flow information means information about the fund investors’ daily purchase and redemption activity. Investor flow information may consist of individual, aggregated, or netted eligible orders, and excludes any purchases or redemptions that are made in kind and not in cash.190 Currently it would be difficult to determine investor flow information on a given day because some intermediaries do not provide order flow until after the fund has finalized its NAV. In recognition of these challenges, the current rule permits a swing pricing administrator to make swing pricing determinations based on receipt of sufficient investor flow information to allow the fund to estimate reasonably whether it has crossed a swing threshold with high confidence.191 While the hard close provision in the proposed rule is intended to result in funds generally having flow information in a timely manner, and therefore greatly reduce the need for estimation, we recognize some estimation may still be required. The proposed rule would, therefore, continue to permit the swing pricing administrator to make swing pricing determinations based on reasonable, high confidence estimates of investor flows.192 Under our proposal, the swing pricing administrator would be required to review investor flow information on a daily basis to determine: (1) if the fund experiences net purchases or net redemptions; and (2) the amount of net purchases or net redemptions. We propose to permit the swing pricing administrator to make these determinations based on ‘‘reasonable, high confidence estimates.’’ While there would be less of a need to estimate flows under the proposed hard close requirement, we understand that a swing pricing administrator still would need to use estimates in some cases. For instance, if an investor submits an exchange order to redeem its shares from Fund A and simultaneously invest the proceeds in Fund B, the swing pricing administrator for Fund B may need to estimate the incoming cash by multiplying the number of shares redeemed from Fund A by an estimate of Fund A’s NAV, which may be the prior day’s transaction price. In this situation, we recognize it will not be possible for the swing pricing administrator to determine the exact size of the related flow information until a later time. Therefore, we propose to permit the use of reasonable, high confidence estimates to make swing pricing determinations. Furthermore, some funds groups with both U.S. and European operations may already have experience with this type of estimation, because European funds that have adopted swing pricing generally use the prior day’s price to estimate today’s flows. We request comment on our proposal requirements related to shareholder flow
information.
71. Should we permit a swing pricing
administrator to make reasonable, high confidence estimates of investor flows, as proposed? Are there operational complexities to this approach? Is the rule’s reference to reasonable, high confidence estimates of investor flows sufficiently clear? If not, how should we revise the rule to provide greater clarity about permitted estimates?
72. As proposed, should we remove
references to receipt of sufficient investor flow information in the rule in light of the proposed hard close requirement?
73. Is the proposed definition of
‘‘investor flow information’’ clear and understandable? Should the rule continue to exclude any purchases or redemptions that are made in kind and not in cash, as proposed?
74. Should we provide additional
guidance about circumstances in which a swing pricing administrator may need to use estimates in connection with arriving at a reasonable, high confidence estimate of the fund’s investor flow information and how the administrator should arrive at those estimates? Are there other types of investor orders, beyond orders that identify the number of shares to be purchased or sold and exchanges, that would still require estimation under a hard close approach? Should funds be able to use the prior day’s transaction price for purposes of estimating flows where the amount of such flows are dependent on having a transaction price? Should funds be permitted to make adjustments to the prior day’s price for these purposes (e.g., to reflect market movements relative to fund benchmarks that occurred after the prior day’s NAV was struck)? If so, under what circumstances should we permit such adjustments?
75. If we adopt the proposed hard
close requirement, would there be scenarios in which a swing pricing administrator would be unable to arrive at a reasonable, high confidence estimate of investor flows? If so, when would this occur? How should a fund comply with the swing pricing requirement if the administrator is unable to arrive at a reasonable, high

193See proposed rule 22c–1(b)(2).
194These near-term costs include spread costs, transaction fees and charges arising from asset purchases or asset sales resulting from those purchases or redemptions. See rule 22c– 1(a)(3)(i)(C). 195See proposed rule 22c–1(b)(2). 196See Swing Pricing Adopting Release, supra note 11, at paragraph accompanying n.268. 197See proposed rule 22c–1(b)(2)(i). 198See proposed rule 22c–1(b)(2)(ii). 199 Id. 200See Bank of England Survey, supra note 60. This report states that in calculating swing factors, some surveyed UK funds only considered bid-ask spreads, some other funds also considered explicit transaction costs such as commissions, and a few funds considered market impact as well. Moreover, in reviewing the size of swing factors applied in Mar. 2020, the report found that corporate bond funds with net outflows applied swing factors ranging between ¥5% and +0.5% from Mar. 10 to
23. The report states that the scale of variation
suggests that fund-specific experiences are not the sole explanation for differences in swing factors and that different approaches fund managers took in applying swing pricing also contributed to these variations. confidence estimate of investor flows on a given day?
76. Would the use of reasonable, high
confidence estimates of investor flows subject swing pricing determinations to abuse? Should the use of estimates be limited to specific circumstances? Are there other ways for the swing pricing administrator to make swing pricing determinations without the use of reasonable, high confidence estimates of investor flows?
77. Do fund groups with both U.S.
and European operations already have experience with investor flow estimation? If so, would experience with European operations help these fund groups use estimates in their U.S. funds? What changes to the proposed rule, if any, would help fund groups without prior experience with investor flow estimation?
4. Swing Factors
In determining the swing factor, the proposed rule would require a fund’s swing pricing administrator to make good faith estimates, supported by data, of the costs the fund would incur if it purchased or sold a pro rata amount of each investment in its portfolio to satisfy the amount of net purchases or net redemptions (i.e., a vertical slice).193 The current swing pricing framework requires that the swing factor take into account only the near-term costs expected to be incurred by the fund as a result of net purchases or net redemptions that occur on the day the swing factor is used, as well as borrowing-related costs associated with satisfying redemptions.194 Under our proposal, a fund would be required to assume it would purchase or sell a pro rata amount of each investment in its portfolio, rather than consider the specific investments it would purchase to invest the proceeds from subscriptions or sell to meet redemptions.195 Because a fund would need to calculate its costs based on the purchase or sale of a vertical slice of its portfolio, rather than selecting specific investments or borrowing to meet redemptions, we have proposed to remove borrowing costs from the swing factor calculation. We recognize that there are many ways a fund could pay redemptions or invest proceeds from investor purchases, and a fund may not necessarily sell or purchase a vertical slice of its portfolio holdings to do so. However, we believe analyzing costs based on an assumed purchase or sale of a vertical slice of the fund’s portfolio would more fairly reflect the costs imposed by redeeming or purchasing investors than an approach that focuses solely on the costs associated with the instruments that the fund expects to buy or sell (or expected borrowing costs, in the case of redemptions). For example, under the current rule, if a fund sells only highly liquid investments to meet redemptions, the swing factor would typically reflect relatively low transaction costs of selling those investments and any near-term rebalancing, and generally would not account for the effect of leaving remaining investors with a less liquid portfolio or potential longer-term rebalancing costs. In contrast, the proposed requirement that a fund calculate costs to purchase or sell a vertical slice of the portfolio is designed to recognize the potential longer-term costs of reducing the fund’s liquidity under these circumstances. In addition, using a vertical slice is more objective than the current approach, because the swing factor administrator does not need to anticipate what actions the fund will take to pay redemptions or invest proceeds from investor purchases, which may vary from day to day. This should make the swing factor easier to administer. Further, under the proposed swing pricing framework and consistent with the current rule, a swing factor could generally be determined on a periodic basis, as long as developments that should affect the swing pricing administrator’s good
faith estimates of spreads, market impact, and other transaction costs, such as significant market developments, prompt a quicker reevaluation.196 A quicker reevaluation would be required to comply with the proposed amendments where developments would otherwise prevent the prior swing factor from reflecting the cost the fund would incur if it purchased or sold a pro rata amount of each portfolio investment under current market conditions. Accordingly, we believe a fund would have the incentive to reevaluate promptly its swing factor in these circumstances because having an accurate and fair transaction price is crucially important to investors. We believe that funds would address the frequency of swing factor determinations when designing their policies and procedures relating to swing pricing. Calculating the swing factor would differ depending on whether the fund is experiencing net purchases or net redemptions. In the case of net redemptions, the good faith estimates must include, for selling a pro rata amount of each investment in the fund’s portfolio to satisfy the amount of net redemptions: (1) spread costs; (2) brokerage commissions, custody fees, and any other charges, fees, and taxes associated with portfolio investment sales; and (3) if the amount of the fund’s net redemptions exceeds the market impact threshold, the market impact.197 In the case of net purchases, swing pricing would only be applied if the amount of the fund’s net purchases exceeds 2%.198 In such cases the good faith estimates must include, for purchasing a pro rata amount of each investment in the fund’s portfolio to invest the proceeds from the net purchases: (1) spread costs; (2) brokerage commissions, custody fees, and any other charges, fees, and taxes associated with portfolio investment purchases; and (3) the market impact.199 We believe these components of the swing factor for both net redemptions and net purchases, taken together, approximate the aggregate costs associated with dilution. We also believe that providing a standard for calculating swing factors, including the vertical slice approach and the identification of the categories of costs funds must include, would help avoid the variability in how funds calculate swing factors, as observed in some other jurisdictions where funds use swing pricing.200 We understand that in calculating the swing factor, fund managers may have incentives to over-estimate costs in order to improve fund performance. However, doing so would be misleading. To help address this risk, under the proposal funds would be required to report their swing factor adjustments publicly on Form N–PORT. We believe this public transparency

201See proposed rule 22c–1(b)(3)(ii). 202See FASB ASC 820–10–35–36C (providing that if an asset measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstance shall be used to measure fair value, and that the use of bid prices for asset positions is permitted but not required for these purposes); FASB ASC 820–10–35–36D (stating that use of mid-market pricing as a practical expedient for fair value measurements within a bid-ask spread is not precluded). Since a seller generally asks for a higher price for a security than a buyer bids for that security, the mid-market price is incrementally higher than the bid price for a security, but lower than its ask price. 203See proposed rule 22c–1(b)(2)(iii). 204See proposed rule 22(c)–1(b)(iv). 205See Swing Pricing Adopting Release, supra note 11, at paragraph accompanying n.240. 206Methodologies used to estimate market impact are often created by liquidity measurement vendors. These vendors typically create a model to gauge what size of trade will have a market impact on a security (using various factors such as bid-offer spreads, issue sizes, recent daily average volumes, and recent trade sizes), back-test the model to check its accuracy, and then adjust the weights of the various factors used in the model accordingly. 207See Bank of England Survey, supra note 60 (stating that most surveyed fund managers did not factor market impact explicitly into their swing factors, and few had models in place to estimate spreads when needed). 208See ALFI Swing Pricing Survey 2022 (July 2022), available at https://www.alfi.lu/ getattachment/8417bf51-4871-41da-a892- f4670ed63265/app_data-import-alfi-alfi-swingpricing-survey-2022.pdf. 209See rule 31a–2(a)(2) (requiring funds to preserve for a period of not less than six years all schedules evidencing and supporting each computation of an adjustment to the fund’s NAV based on swing pricing policies and procedures). A fund’s records under the proposed amendments should generally include the fund’s unswung NAV, the level of net purchases or net redemptions that the fund encountered (and estimated) that triggered the application of swing pricing, the swing factor that was used to adjust the fund’s NAV, and relevant data supporting the calculation of the swing factor, including the components of the swing factor such as market impact. 210See rule 22c–1(a)(3)(i)(C). Additionally, a fund’s board of directors, including a majority of directors who are not interested persons of the fund must approve the fund’s swing threshold(s) and the upper limit on the swing factor(s) used, and any changes to the swing threshold(s) or the upper limit on the swing factor(s) used. See rule 22c–1(a)(3)(ii). 211See Swing Pricing Adopting Release, supra note 13, at text accompanying nn.253–254. 212See proposed rule 22c–1(b)(3). We also propose to modify the board’s review of a fund’s swing pricing policies
and procedures to include ‘‘their effectiveness at mitigating dilution’’ rather than ‘‘the impact on mitigating dilution.’’ See proposed rule 22c–1(b)(3)(iii)(A). should reduce a fund’s incentive to over-estimate costs. Additionally, a fund’s portfolio manager, who arguably might have the strongest incentives to over-estimate costs, could not be designated as the swing pricing administrator.201 The method for calculating a fund’s spread costs would differ depending on how the fund values its portfolio holdings. We understand that funds may value portfolio holdings at the bid price or the mid-market price when striking their NAVs.202 If a fund values its portfolio holdings at the bid price, it would not need to include spread costs in its swing factor when the fund has net redemptions. In contrast, if the fund has net purchases exceeding 2%, the fund would need to include spread costs, which would reflect the full bidask spread. For a fund that uses midmarket pricing, it would need to include spread costs in its swing factor any time it applies swing pricing. When a fund using mid-market pricing has net redemptions, or net purchases exceeding 2%, the spread cost component of its swing factor would reflect half of the bid-ask spread. The proposal would require a fund to include market impact in its swing factor only if the amount of net redemptions exceeds the market impact threshold, and in all cases where the amount of net purchases exceeds the inflow swing threshold. The market impact component of the swing factor would reflect good faith estimates of the market impact of selling (in the case of net redemptions) or purchasing (in the case of net purchases) a vertical slice of a fund’s portfolio to satisfy the amount of net redemptions or net purchases. The fund would estimate market impacts for each investment in its portfolio by first estimating the market impact factor. This factor is the percentage change in the value of the investment if it were purchased or sold, per dollar of the amount of the investment that would be purchased or sold. Then, the fund would multiply the market impact factor by the dollar amount of the investment that would be purchased or sold if the fund purchased or sold a pro rata amount of each investment in its portfolio to meet the net redemptions or net purchases.203 We understand that it may be difficult to produce timely, good faith estimates of the market impact of purchasing or selling a pro rata portion of each instrument the fund holds. Recognizing these difficulties, and because some securities held by mutual funds may have similar characteristics and would likely incur similar costs if purchased or sold, the proposed rule would permit the swing pricing administrator to estimate costs and market impact factors for each type of investment with the same or substantially similar characteristics and apply those estimates to all investments of that type rather than analyze each investment separately.204 The
existing swing pricing framework currently in rule 22c–1 does not permit a fund to include market impact costs relating to transacting in the fund’s investments in the swing factor calculation. At the time of the rule’s adoption, the Commission stated that it may be difficult for many funds to estimate readily market impact costs, and that subjective estimates of market impact costs could grant excessive discretion in a fund’s determination of a swing factor.205 We understand that it may continue to be difficult to determine market impact costs with precision, while a fund would be able to determine other relevant factors more precisely.206 However, we believe the experiences of European funds that employed swing pricing through March 2020 have highlighted the importance of considering market impact costs, given the stressed nature of markets at that time, the level of those funds’ redemptions, and the size of those funds’ swing factors. We understand that only some European funds consider market impact costs when determining their swing factors.207 A recent survey conducted by the Association of the Luxembourg Fund Industry (‘‘ALFI’’), however, observed an increase in asset managers including market impact in their swing factors, with 35% of surveyed asset managers including this component in the factor calculation.208 To address the concern that market impact estimation may be difficult, and that subjective estimates of market impact costs could grant excessive discretion in the determination of a swing factor, we are providing additional parameters for estimating market impact to make the calculation more objective as discussed above. These prescriptive requirements should help to limit subjectivity, and recordkeeping requirements would require funds to document their market impact factors, facilitating our staff’s review and oversight of mutual fund swing pricing.209 The current swing pricing framework requires the establishment of an upper limit on the swing factor used.210 The Commission included a 2% upper limit in the current rule to make sure that swing pricing would not operate as a ‘‘de facto gate.’’ 211 We are not including an upper limit on the swing factor under our proposed framework. We propose to remove the requirement for the board to review and approve the fund’s swing threshold and the upper limit on the swing factor(s) used, as well as any charges on these items, to conform to our proposed swing pricing framework.212 The more specific parameters in this proposal for determining a fund’s swing factor are intended to sufficiently mitigate the

213See, e.g., Commission de Surveillance du Secteur Financier, Swing Pricing Mechanism— FAQ, available at https://www.cssf.lu/en/ Document/cssf-faq-swing-pricing-mechanism/ (providing guidance for increasing the swing factor above the maximum level identified in a fund’s prospectus under certain circumstances, and noting that typical maximum swing factors observed in fund prospectuses are between 1% and 3%). 214 Item 6(d) of Form N–1A. 215See Item 6(d) of proposed Form N–1A. concerns that led to an upper limit in the existing swing pricing regime. In addition, although the current rule does not prescribe which investments a fund would purchase or sell, the current upper limit may provide an incentive for funds to sell their most liquid assets first, which may increase the risk of dilution when the fund later rebalances its portfolio. Furthermore, we understand that in certain other jurisdictions, several funds experienced costs and dilution that led to swing factors above 2% in March 2020.213 Those cases suggest that the swing factors helped mitigate dilution and did not constitute a de facto gate, given that they reflected market conditions at that time. We recognize that liquidity costs could vary widely across funds and under different market conditions, and we do not wish to limit the extent to which swing pricing could mitigate dilution. Finally, the policies and procedures for determining the swing factor would be required to be approved by the fund’s board, which has an obligation to act in the best interests of the fund. Additionally, Form N–1A currently requires funds that use swing pricing to disclose a fund’s swing factor upper limit.214 Because we propose to remove the swing factor upper limit in the rule, we also propose to remove the requirement to provide an upper limit on the swing factor from Item 6(d) of Form N–1A.215 We request comment on our proposed calculation of a fund’s swing factor.
78. Does our proposed requirement
that a fund calculate the swing factor by assuming it would sell or purchase a pro rata amount of each investment in its portfolio properly account for liquidity costs? Are there other considerations related to liquidity costs that the swing pricing framework should take into account, such as shifts in the fund’s liquidity management or other repositioning of the fund’s portfolio?
79. Should funds calculate the swing
factor by estimating the costs of purchasing or selling only the investments the fund plans to buy or sell to satisfy shareholder purchases or redemptions (consistent with the current rule), rather than calculating the swing factor based on the costs the fund would incur if it sold a pro rata amount of each investment in its portfolio (as proposed)? Which approach would more fairly reflect the costs imposed by redeeming or purchasing investors?
80. Should we permit a fund not to
use the vertical slice assumption when doing so would require the fund to assume that it is purchasing or selling an amount of a given instrument that would not be permissible under other rules (e.g., if it would result in an assumption that a fund would purchase an amount of illiquid investments that exceeds 15%)? If so, how should we modify the assumption for these purposes? Should we require a vertical slice assumption in all cases for administrative ease and consistency in calculations?
81. As proposed, should the swing
factor calculation take into account spread costs; brokerage commissions, custody fees, and any other charges, fees, and taxes associated with portfolio investment sales; and the market impact under certain circumstances? Should we remove any of these types of costs from the calculation? Are there other types of costs we should include?
82. Should the swing factor
calculation take into account borrowing costs like under the current rule? Should the proposed rule only include borrowing costs for certain assets, such as illiquid assets? Should illiquid investments be defined for this purpose using the same definition as in rule 22e–4?
83. Should the way in which a fund
calculates spread costs depend on whether it uses midpoint or bid pricing when valuing its holdings? Should we allow a fund that uses bid pricing not to apply a swing factor when it has net redemptions unless the amount of net redemptions exceeds a threshold (e.g., the market impact threshold)? Should we require all funds to use bid pricing, either instead of or in combination with a swing pricing requirement? Would use of bid pricing effectively address dilution, particularly when net redemptions are small? Instead of requiring swing pricing as proposed, should we require a fund to use bid pricing to compute its share price or otherwise adjust its price to reflect spread costs on days the fund estimates that it has net redemptions? If so, should the fund also use ask pricing on days the fund estimates that it has net purchases? Should we require a fund to use bid pricing to compute its share price on all days, regardless of whether the fund has net redemptions or purchases?
84. Should we require the swing
factor to include market impact under certain circumstances, as proposed? Do some or all funds already estimate market impact factors, or perform similar analyses, to inform trading decisions or liquidity rule classifications? If so, would these funds’ prior experience smooth the transition to making a good faith estimate of the market impact factor under the proposal? Would the proposed amendments to the liquidity rule further enhance funds’ ability to estimate market impacts? What difficulties might funds experience in developing a framework to analyze market impact factors and in producing good faith estimates of market impact factors for purposes of the proposed swing pricing requirement? What are the specific operational challenges in estimating market impact? Are there ways we could reduce those difficulties, while still requiring redeeming investors to bear costs that reasonably represent the costs they would otherwise impose on the fund and its remaining shareholders?
85. Should we permit funds to
calculate swing factors on a periodic basis, as long as developments such as significant market developments prompt a quicker re-evaluation, as proposed? Does this approach have any effect on the goals of reducing dilution, improving fairness, and addressing potential first-mover advantages? Are there other circumstances in which a fund should be required to re-evaluate its swing factors or certain swing factor components, such as changes in the fund’s investment strategy or liquidity? Should we instead require funds to calculate swing factors (or certain components of swing factors) on a daily basis or at some other defined minimum frequency (e.g., weekly or monthly) unless developments prompt a quicker re-evaluation?
86. Should the rule permit, rather
than require, funds to follow the identified inflow swing threshold, market impact threshold, and swing factor calculations set forth in the rule? If so, what considerations or factors should the rule require a fund to consider when determining thresholds and swing factors if the fund determines not to follow the threshold or calculations set forth in the rule? For example, instead of removing the factors a fund must consider when setting swing threshold(s) under the current rule, should we maintain those or similar factors for purposes of determining a fund’s market impact

216See rule 22c–1(a)(3)(i)(B). 217See, e.g., 17 CFR 270.3a–4. 218See infra section II.D for a discussion of potential liquidity fee or dual pricing frameworks. 219See, e.g., 17 CFR 270.38a–1 (requiring the fund’s chief compliance officer to provide a written report to the board addressing each material compliance matter occurring since the date of the chief compliance officer’s last report to the board); Compliance Programs of Investment Companies and Investment Advisers, Investment Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 74713 (Dec. 24, 2003)] (‘‘Rule 38a–1 Adopting Release’’), at n.84 (‘‘Serious compliance issues must, of course, always be brought to the board’s attention promptly, and cannot be delayed until an annual report.’’). threshold or the inflow swing threshold? 216
87. Should funds be subject to a
numerical limit on the size of swing factors? If so, should we retain the current rule’s 2% swing factor upper limit and the disclosure of the limit in Form N–1A? Alternatively, should the limit be higher or lower (e.g., 1% or 3%)?
88. Should we allow a fund to use a
set swing factor, such as 2% or 3%, in times of market stress when estimating a swing factor with high confidence may not be possible? How would we define market stress for this purpose? Should a fund’s swing pricing administrator, adviser, or a majority of the fund’s independent directors, be permitted to determine market conditions were sufficiently stressed such that the fund would apply the set swing factor? Are there other circumstances in which we should permit or require a fund to use a default swing factor? For example, should the rule establish a default swing factor that would apply when a fund has illiquid investments that exceed 15% or when a fund drops below its highly liquid investment minimum under rule 22e–4?
89. Should the rule permit a fund to
apply a market impact factor of zero for certain investments or under certain circumstances? For example, should a fund be able to use a market impact of zero for certain categories of investments, such as Treasuries or other investments that the fund classifies as highly liquid investments under rule 22e–4? Are there particular circumstances in which it would not be reasonable for the rule to permit a fund to use a market impact factor of zero, such as in stressed market conditions?
90. Instead of specifying swing factor
calculations and thresholds in the rule, should we require a fund to adopt policies and procedures that specify how the fund would determine swing pricing thresholds and swing factors based on principles set forth in the rule? If so, should the policies and procedures include the methodologies from the market impact factor calculation we proposed? Should the policies and procedures be required to include the swing factor calculation? Should the policies and procedures be required to define the market impact threshold with reference to a metric other than net purchases or net redemptions? If we require policies and procedures, should we specify the market impacts and dilution costs that a fund’s swing pricing program must address, rather than specifying specific principles and calculation methodologies?
91. Are there circumstances in which
it would not be possible to estimate the market impact factor with a high degree of accuracy? If so, what modifications should we make to the proposal?
92. Would our proposed swing
pricing requirement cause or incentivize investors to move their assets out of the funds that must implement swing pricing into other investment vehicles that do not use swing pricing, such as ETFs, collective investment trusts (‘‘CITs’’), or separately managed accounts? What are the potential effects associated with these decisions? For example, when would such movements occur (e.g., before the end of the compliance period for a swing pricing requirement, if adopted, or over a longer time horizon)? Would retirement plan sponsors or others remove mutual funds as investment options if swing pricing is required? In the case of separately managed accounts, should the Commission take any action with respect to how the Investment Company Act may apply to investment advisory programs seeking to provide the same or similar professional management services on a discretionary basis to a large number of advisory clients having relatively small amounts to invest? 217
93. Would a swing pricing
requirement change the behavior of funds? For example, would it cause any changes to fund strategies or practices?
94. How might swing pricing affect
investor behavior in a period of liquidity stress? Would swing pricing increase fund resilience by reducing the first-mover advantage that some investors may seek during periods of market stress? Would swing pricing encourage investors to redeem smaller amounts over a longer period of time because investors will not know whether the fund’s flows during any given pricing period will trigger swing pricing and, if so, the size of the swing factor for that period?
95. Based on historical data, how
would our swing pricing framework affect funds’ transaction prices under normal market conditions?
96. Rather than requiring funds to
adopt a swing pricing requirement, should we provide more than one approach to mitigate dilution and require each fund to implement an antidilution tool, but permit each fund to determine its own preferred approach? If so, which anti-dilution tool options should the rule provide? Should we, for example, allow a fund to adopt swing pricing, a liquidity fee (i.e., purchase and/or redemption fees), or dual pricing? 218 Are there other options that would be appropriate under this approach? Would funds’ use of different approaches benefit investors by increasing investor choice or, conversely, would these differences confuse investors or make it more difficult for them to compare funds with each other?
97. The current rule requires a fund’s
board of directors to approve the fund’s swing pricing policies and procedures and to designate the persons responsible for swing pricing. Should we require board involvement in the day-to-day administration of a fund’s swing pricing program in addition to its compliance oversight role? How might funds maintain segregation between portfolio management and swing pricing administration? Should a fund’s chief compliance officer have a designated role in overseeing how the fund applies the proposed swing pricing requirement?
98. The current rule requires a fund’s
board to review, no less frequently than annually, a report prepared by the swing pricing administrator on the fund’s use of swing pricing, including the effectiveness of the fund’s policies and procedures and any material changes to them since the last report. Should we require board review of a swing pricing report more or less frequently than annually? Should we require less frequent board review over time (e.g., every quarter for the first year after implementation and then less frequently in following years as the fund gains experience implementing the swing pricing program under various market conditions)? Should we require the fund to disclose any material inaccuracies in the swing pricing calculation to the board (e.g., as they arise, no less frequently than quarterly, or at some other frequency)? Would this disclosure requirement be additive, or would fund boards already receive information about material inaccuracies in the swing pricing calculation in the course of existing board oversight? 219
99. In addition to the proposed
requirement that funds would publicly

220Although not all funds calculate their NAVs as of 4 p.m. ET, throughout this release we use 4 p.m. ET as the time as of which a fund calculates its NAV unless otherwise noted. 221As discussed above in section II.B, swing pricing would be required for all registered openend management investment companies other than money market funds and ETFs. The proposal would not affect the operation of current rule 22c–1 for money market funds or ETFs, as well as unit investment trusts (which are also subject to rule 22c–1). 222See proposed rule 22c–1(a)(3). 223Funds generally compute their NAVs once per day, although some funds compute their NAVs multiple times per day. For simplicity, this discussion assumes that a fund computes its NAV once per day. 224See Amendments to Rules Governing Pricing of Mutual Fund Shares, Investment Company Act Release No. 26288 (Dec. 11, 2003) [68 FR 70388 (Dec. 17, 2003)] (‘‘2003 Hard Close Proposing Release’’). 225We understand that the hard close employed in these other jurisdictions is not necessarily the same as the hard close approach we are proposing. For example, we understand it is common in some other jurisdictions for the required time of receipt of orders by the fund to be several hours before the time as of which the fund values its holdings. 226See, e.g., 2003 Hard Close Proposing Release, supra note 224 (discussing investigations by Commission staff of suspected late trading, which suggested that, at the time, late trading of fund shares was not an isolated event). See, also, e.g., In the Matter of Steven B. Markovitz, Investment Company Act Release No. 26201 (Oct. 2, 2003); In the Matter of Theodore Charles Sihpol, III, Investment Company Act Release No. 27113 (Oct. 12, 2005); In the Matter of Legg Mason Wood Walker, Inc., Investment Company Act Release No. 27071 (Sept. 21, 2005); In the Matter of Canadian Imperial Holdings, Inc. and CIBC World Markets Corp., Investment Company Act Release No. 26994 (July 20, 2005); In the Matter of Brean Murray & Co., Inc., Investment Company Act Release No. 26761 (Feb. 17, 2005). 227See, e.g., Rule 38a–1 Adopting Release, supra note 219 (adopting rule 38a–1 under the Act, which requires written policies and procedures reasonably designed to prevent violation of the securities laws, oversight of compliance by the fund’s service providers, and designation of a chief compliance officer). 228See proposed rule 22c–1(a)(3). 229See definitions of ‘‘Eligible order’’ and ‘‘Pricing time’’ in proposed rule 22c–1(d). report their swing factor adjustments on Form N–PORT, should funds also be required to post that same information on their websites? If so, how promptly should website reporting be required (e.g., weekly, monthly, quarterly, annually)? Are there other ways to provide this information to investors?
C. Hard Close
Currently if an investor submits an order to an intermediary to purchase or redeem fund shares, that order will be executed at the current day’s price as long as the intermediary receives the order before the time the fund has established for determining the value of its holdings and calculating its NAV (typically 4 p.m. ET).220 The fund, however, might not receive information about that order until much later, sometimes as late as the next morning. We are proposing amendments to rule 22c–1 under the Act to require a hard close for those funds that are required to implement swing pricing.221 The proposed hard close requirement would provide that a direction to purchase or redeem a fund’s shares is eligible to receive the price established at the current day’s price solely if the fund, its designated transfer agent, or a registered securities clearing agency (collectively, ‘‘designated parties’’) receives an eligible order before the pricing time as of which the fund calculates its NAV.222 Orders received after the fund’s established pricing time would receive the next day’s price.223 In 2003, the Commission proposed a similar hard close requirement but did not adopt the proposed amendments.224 The proposed hard close amendments would serve multiple goals, such as facilitating mutual funds’ ability to operationalize swing pricing by ensuring that funds receive timely flow information, modernizing and improving order processing, as well as helping to prevent late trading.

Purpose and Background
We are proposing to require all registered open-end funds (other than money market funds and ETFs) to implement swing pricing in order to combat dilution. Our hard close proposal is designed to support the proposed swing pricing amendments by facilitating the more timely receipt of fund order flow information. To implement the proposed swing pricing requirement, mutual funds need sufficient net order flow information to determine whether to apply a swing factor, and the size of that swing factor, before they finalize that day’s price. Based on staff outreach with foreign regulators and asset managers that operate in Europe, we understand that a hard close is common in other jurisdictions in which funds currently implement swing pricing, and use of a hard close in those jurisdictions facilitates the receipt of timely flow information to inform swing pricing decisions.225 The proposed hard close requirement would facilitate the more timely receipt of order flow information by requiring that the fund, its transfer agent, or a clearing agency receive all orders that are eligible to receive that day’s price before the fund computes its NAV. Beyond facilitating swing pricing, our proposed hard close amendments to rule 22c–1 also would help prevent late trading of fund shares. Because a financial intermediary currently can submit an order that it received before 4 p.m. ET to a designated party after 4 p.m. ET for execution at that day’s NAV, there is a risk that an intermediary could unlawfully alter orders using after-hours information to benefit the intermediary or its clients. The Commission and others uncovered several instances of late trading in the early 2000s.226 While the Commission adopted rules to address concerns about late trading, we believe that the hard close proposal, when coupled with our current rules, would more effectively prevent late trading.227 For example, some fund intermediaries are not subject to examination by the Commission and staff, and we are unable to examine whether those intermediaries permit or engage in unlawful late trading. By proposing to require that all purchase and redemption orders be received by the fund, its transfer agent, or a registered clearing agency by 4 p.m. ET, the proposal would prevent intermediaries from altering orders after 4 p.m. ET or unlawfully misrepresenting that an order was received before 4 p.m. ET and entitled to that day’s price. We believe that the proposed amendments would aid in the elimination of late trading through intermediaries by requiring certain SEC-regulated parties to receive orders before the NAV is computed to receive that day’s price. The proposed hard close requirement would also modernize and improve order processing and reduce operational risks, as discussed below.
Pricing Requirements
Under the proposed rule, an eligible order to purchase or redeem would receive the price for the next pricing time after a designated party receives the order.228 We propose to define the terms ‘‘pricing time’’ and ‘‘eligible order’’ for purposes of the rule.229 Eligible orders would receive a price based on the current NAV as of the next pricing time, which would include an adjustment to the NAV to include the swing factor, as applicable. Consistent with the current rule, the fund’s board of directors would be required to establish a ‘‘pricing time,’’ which would be defined as the time or times of day as of which the fund calculates the current NAV of its redeemable shares pursuant to the rule (typically 4 p.m. ET). The price of a fund’s shares would typically be finalized several hours after the pricing time, giving funds time to calculate the current NAV, apply any

230See supra section II.B.3 (discussing how a fund whose shares are purchased in an exchange transaction can estimate the size of the inflow for purposes of the proposed swing pricing requirement). 231Although orders would have to be received by Fund/SERV or the designated transfer agent by 4 p.m. ET to ensure same-day pricing, the clearing agency and designated transfer agent each may complete its processing after the pricing time. 232See proposed rule 22c–1(d). The term ‘‘transfer agent’’ has the same meaning as in section 3(a)(25) of the Exchange Act [15 U.S.C. 78c(a)(25)] and does not include underlying or sub-transfer agents. A fund may designate more than one transfer agent in its registration statement. 233The irrevocability of an order does not prevent a fund from rejecting an order and does not affect the ability of a fund to maintain policies and procedures for correcting bona fide errors. swing factor, and finalize and publish the fund share price. For purposes of the proposed hard close requirement, an eligible order to purchase or redeem fund shares would have to supply certain information about the size of an investor’s intended trade. This approach is intended to facilitate swing pricing by providing mutual funds with information they can use to calculate investor flows. In addition, this approach requires that trading intentions are clear before 4 p.m., which would further help prevent late trading. Specifically, we propose to define the term ‘‘eligible order’’ to mean a direction to purchase or redeem a specific number or value of fund shares. For example, an eligible order would include the direction to purchase or sell either (1) a specific number of shares of a fund (e.g., 100 shares, or all the shares held in the account), or (2) an indeterminate number of shares of a specific value (e.g., $10,000 of shares of the fund). The proposed definition of eligible order also would include exchange orders. An exchange refers to the process in which an investor initiates an order to purchase shares of a fund using the proceeds from a contemporaneous order to redeem shares of another fund. When an exchange is initiated, two transactions are created—a redemption of securities and a purchase. We understand that exchanges are often between funds in the same fund complex, however, exchanges can occur between funds in different complexes. In either case, exchanges often are processed as a single transaction so that both the redemption and purchase components of the exchange receive same-day pricing. For exchanges involving a fixed number of shares on the redemption leg, the amount and number of shares of the second fund to be purchased will not be known until the NAV of the first fund is determined, which will be after the NAV is struck after 4 p.m. ET. For example, if an investor submits an order to redeem 100 shares of Fund A and invest the redemption proceeds in Fund B, the amount of the redemption proceeds from Fund A is not known until
Fund A determines its price for that day and, likewise, the purchase amount for Fund B is not known until that time.230 Under our proposed rules, this exchange transaction would qualify as an eligible order so that these contemporaneous transactions may continue to occur. To receive that day’s price, a designated party must receive the eligible order before the pricing time.231 The fund’s designated transfer agent is a registered transfer agent that is designated in the fund’s registration statement filed with the Commission.232 Currently, NSCC is the only registered clearing agency for fund shares, which operates its Fund/SERV service for processing fund transactions. The proposed rule would specify that eligible orders are irrevocable as of the next pricing time after a designated party receives the order. The proposed requirement of irrevocability of an eligible order is designed to prevent the cancellation or modification of orders by investors or intermediaries after the pricing time applicable to the order.233 Preventing the cancellation or modifications of orders after the pricing time would help avoid continuing adjustments to the investor flow information that a fund uses to make swing pricing decisions. In addition, the alteration or cancellation of fund orders after the pricing time may be used as a means to facilitate late trading as fund investors may become aware of new market information after the order has been submitted and after the pricing time. We request comment on the proposed approach to implementing the hard close requirement, including:
100. Should we make any changes to
the definitions included in the proposed rule? Is the definition of ‘‘eligible order’’ clear and understandable? Is the definition of ‘‘designated transfer agent’’ clear and understandable? Is the definition of ‘‘pricing time’’ clear and understandable’’? Are there other terms we should define?
101. Should the proposed hard close
requirement permit exchanges, as proposed? If not, what goals of the proposed hard close requirement would be supported by no longer permitting exchanges?
102. Should the definition of ‘‘eligible
order’’ require orders to be irrevocable as of the pricing time, as proposed? Should funds be permitted to correct bona fide errors under a hard close, as proposed? If not, how should errors be resolved? Are there other reasons why an eligible order should not be considered irrevocable as of the pricing time?
103. Should the definition of ‘‘eligible
order’’ include directions to purchase or redeem a specific percentage of fund shares in an account or a specific percentage of an account’s value?
104. To what extent do designated
parties already time stamp orders based on the time of receipt? Should we include new requirements for each designated party to time stamp order information for purposes of the hard close requirement?
105. Should we include funds,
designated transfer agents, and registered clearing agencies as designated parties, as proposed? Would allowing registered clearing agencies to receive eligible orders for purposes of the hard close delay the ability of the fund’s swing pricing administrator to assess investor flow information to make swing pricing decisions? If so, how long would this delay be?
106. Beyond the proposed designated
parties, are there other parties involved in processing order information that should be eligible to receive eligible orders before the pricing time so that orders may receive that day’s NAV? For example, should a fund’s principal underwriter qualify as a designated party and, if so, why? To what extent do direct investors or intermediaries today place orders with a fund’s principal underwriter or directly with the fund’s transfer agent?
107. Should we limit the proposed
hard close requirement to funds that must implement swing pricing under the amendments to rule 22c–1, as proposed?
108. The proposed amendments to
rule 22c–1 would establish different requirements for money market funds, transactions by authorized participants with ETFs, and unit investment trusts than for all other open-end funds, which would be required to implement a hard close. Would investors, funds, or intermediaries be confused by the different pricing requirements that would be created by the proposed amendments to rule 22c–1? If so, what confusion would be created? What party to a transaction would bear that confusion? Would additional burdens be created by having different pricing requirements under proposed rule 22c– 1 for these different types of registered investment companies?

234See infra section III.C.3 discussing the estimated costs of the hard close proposal on funds, designated parties, intermediaries, and investors. 235 Intermediaries that take advantage of netting likely would be unable to eliminate batch processing altogether since netting necessitates definition of a period over which trades are netted and a process that collects eligible customer orders and nets them together into a single order for submission to a fund. Message-based communication is less likely to be implemented when netting is utilized. 236The term ‘‘confirmation,’’ for the purposes of this release, unless otherwise indicated, refers to the process by which a fund accepts a purchase or redemption order. The confirmation process discussed in this section is different from the confirmations required by 17 CFR 240.10b–10 (Exchange Act rule 10b–10). Confirmations under rule 10b–10 require broker-dealers to provide specific disclosures in writing to customers at or before the completion of a transaction. See rule 10b–10 under the Exchange Act. 237See infra section II.C.3.b for additional complexity and possible points of failure in current order processing practices. 238An order may be rejected for a variety of reasons including, among others, the intermediary is not set up to transact with a particular fund, an order to sell is for more than the number of shares held, or an order to purchase is less than the fund’s investment minimum.
3. Effects on Order Processing,
Intermediaries and Investors, and Certain Transaction Types The proposed hard close would require changes to current order processing practices. Although modernizing these practices is intended to reduce operational risk and enhance resilience, in addition to the benefits related to swing pricing and helping deter late trading, we recognize these changes would also involve costs.234 a. Order Processing Improvements The system updates that would support the implementation of a hard close may provide additional benefits by requiring modernization of how orders are processed. Today, some intermediaries net their customers’ purchase and redemption orders in a given fund against each other, meaning that an intermediary combines and offsets the value of purchase and redemption activity across multiple customer accounts. Instead of netting purchases and redemptions together, some other intermediaries maintain separation between purchase orders and redemption orders. After aggregating customers’ orders, intermediaries then submit orders in one or more batches, with most orders submitted to the designated party after 4 p.m. ET. As a result of the proposed hard close requirement, some intermediaries may opt to discontinue infrequent or even once-a-day batch processes for submitting orders and instead adopt more frequent batch processing approaches that result in more frequent order submission throughout the business day. Some intermediaries may even elect to utilize message-based communications for order flow, in which orders are submitted on a nearreal-time basis.235 We understand based on industry outreach that some intermediaries currently do not submit orders throughout the day to facilitate customers’ ability to cancel or correct orders intra-day, before the orders are submitted to a designated party. If intermediaries continue to provide this capability to customers under a hard close, they would likely either: (1) need to develop a process with designated parties for cancelling and correcting orders submitted to a designated party before the pricing time (as eligible orders are irrevocable under the proposal as of the pricing time, but not before); or (2) submit orders to a designated party relatively close in time to the pricing time, instead of throughout the day. If an intermediary submits orders more often or earlier in the day, it would be less vulnerable to an intra-day disruption within its own operational environment. Orders that have been submitted prior to a disruption are able to be accepted and acknowledged by a fund, even if the intermediary experiences delays in its own processing. This improves the intermediary’s operational resilience, since some operational activities on which the intermediary is dependent will be able to continue. Similarly, earlier order submission should also result in earlier confirmations from the fund.236 As such, the chances increase for an intermediary to submit an order and receive a confirmation even if
the fund’s transfer agent has a disruption later in the day. This reduces an intermediary’s vulnerability to disruptions in others’ operational processing, further improving the intermediary’s operational resilience. Collectively, as all intermediaries, funds, and fund transfer agents process orders more frequently, operational resilience across all market participants improves.237 The proposed hard close would also eliminate cancellations and corrections that are submitted after the pricing time. As a result, an investor or intermediary would bear the cost, if any, of the errors leading to a cancel or correct order. We believe it would be unfair for a fund’s shareholders to bear the cost of an error in this case, as the investor or intermediary was the cause of that error. For errors that were the intermediary’s responsibility, the intermediary should be solely accountable for correcting the error and, if necessary, compensating the investor. We understand that currently some intermediaries and funds have complex processes for posting cancellations and corrections, including processes for funds to bill intermediaries for errors. In addition, the proposed hard close requirement would improve the confirmation process for funds. The confirmation process helps ensure the accuracy of the trade that will be settled. Until the fund provides a confirmation, an intermediary does not know whether the order will be accepted or rejected. Under current practice, we understand that because of the delay in intermediaries submitting orders, funds likewise issue order confirmations on a delayed basis. When an intermediary must submit all orders by a certain time under the hard close proposal, funds would be able to issue confirmations to intermediaries earlier. We believe that timelier confirmations by funds would support the reduction of operational risks and improve market resiliency by providing certainty to intermediaries and investors about whether orders are accepted or rejected at an earlier point in the process, meaning they have more time to work toward settlement of the trade or determine how to manage a rejected order.238 Further, intermediaries similarly may be able to issue trade confirmations required by rule 10b–10 of the Exchange Act to their customers on a timelier basis, although an intermediary will need to wait until the price is published before it can calculate the net money or number of shares to issue the trade confirmation to its customer. Requiring a hard close may also facilitate settlement modernization. Many funds settle purchases and redemptions on a T+1 basis, and the proposed hard close could help improve the settlement process by providing complete information about eligible orders on the trade date. In addition, providing funds with more timely and accurate information about the fund’s daily flows under the proposed hard close would allow funds to make portfolio and risk management decisions based on more complete and accurate
flow information than is available under current practices. Currently, some funds may rely on projected flows when making investment decisions, though these projections may be unreliable because of orders that the fund does not receive until the next day, including cancellations and corrections. Other funds may instead rely on flow information posted at the custodian because of its accuracy, but this

239While the proposed hard close requirement would require intermediaries to transmit eligible orders before 4 p.m. ET, intermediaries would still be able to process orders after 4 p.m. for purposes of execution and settlement, as they currently do today. For example, after receiving the NAV the intermediary would then be able to determine the net money to be paid to the investor or to be collected. 240See Comment Letter of The Principal Financial Group on 2003 Hard Close Proposing Release, File No. S7–27–03 and Comment Letter of ASPA on 2003 Hard Close Proposing Release, File No. S7–27–03. The comment file for the 2003 Hard Close Proposing Release, where these comment letters can be accessed, is available at https:// www.sec.gov/rules/proposed/s72703.shtml. information is delayed. For example, for a fund that settles on T+1, the custodian often will post the flow at the end of the day on T+1, which may not be visible to the portfolio manager until the morning of T+2. With a hard close, however, flow information should be available from the transfer agent on the night of the trade date. In addition, by eliminating the possibility that the fund could receive additional orders after the pricing time, including cancellations and corrections, the data available that night would be more reliable. Similarly, a fund managing its risk would be able to do so more effectively by having access to accurate flow data more quickly. Ultimately, the proposed hard close requirement is designed to further the Commission’s mission to protect investors and reduce risk by improving the timeliness of order flow information communicated to the fund. b. Effects on Intermediaries The proposed amendments would require changes in the ways funds and intermediaries process fund purchase and redemption orders. As discussed above, intermediaries generally submit aggregated and, in some cases netted, orders in one or more batches, often after 4 p.m. ET. Some intermediaries submit orders directly to the fund’s transfer agent or to Fund/SERV, while some intermediaries rely on other intermediaries, such as clearing brokers or retirement platforms, to submit orders to the transfer agent or Fund/ SERV. In addition, some intermediaries’ systems do not initiate batch processing until a fund’s final NAV is received or until final NAVs are received for all funds offered on their platforms. In response to the proposed hard close requirement, funds and intermediaries would need to make significant changes to their business practices, including updating their computer systems, altering their batch processes, or integrating new technologies that facilitate faster order submission. Intermediaries would need to reengineer their systems to ensure disseminated order information reaches the transfer agent or Fund/SERV before 4 p.m., unless they determine to process fund orders at the next day’s price as a matter of practice.239 For intermediaries with reliance on ‘‘downstream’’ intermediaries,
coordination in the timing of order communication will be essential to ensure orders reach the fund, transfer agent, or registered clearing agency prior to the deadline. In addition, Fund/SERV may need to run more batch cycles in the period leading up to 4 p.m. than it does today, as currently batch cycles run into the evening and overnight to receive and process orders from intermediaries. We understand that retirement plan recordkeepers may face particular challenges with adhering to the proposed hard close requirement.240 Retirement plan recordkeepers may employ a method of order processing that relies on receiving the current day’s NAV before submitting orders. Funds do not typically receive the order flow information for transactions from retirement plan recordkeepers until well after the day’s NAV has been calculated. These order flows are delayed, we understand, due to the calculations that the retirement plan recordkeepers complete under plan rules as well as to legacy systems that require the final NAV before finalizing the order. For retirement plan recordkeepers, we understand that current recordkeeping systems require that day’s NAV before the participant’s plan instructions may be applied to the participant’s order. Once the order has been processed through the investment instructions specific to the participant’s plan, it can be placed for execution. In addition, retirement plan recordkeepers may perform compliance and other checks on orders before finalizing the orders for submission post-NAV strike. We understand that the time it currently takes between when some retirement plan recordkeepers begin to process their orders and when the order is finally submitted to the fund can take upward of six hours due to the limitations of their current processing systems and hardware. We believe that retirement plan recordkeepers would need to substantially update or alter their processes and systems to accommodate the proposed hard close requirement to submit orders more quickly. In the event compliance and other checks are required, plans may need to utilize the prior day’s NAV to estimate the share or dollar size of an order for those orders to receive same day pricing.
c. Intermediary Cut-Off Times
To help ensure that order flow information is provided to a designated party before the established pricing time, the proposed rule would likely cause some intermediaries to set their own internal cut-off time for receiving orders to purchase or redeem fund shares that is earlier than the pricing time established by the fund. Intermediaries may use earlier cut-off times to provide time to transmit order flow information to a designated party so those orders receive that day’s price. Investors, therefore, depending on the entity through which an investor is transacting (e.g., a broker-dealer, retirement plan recordkeeper, or the fund’s transfer agent), may have different deadlines for the same fund for submission of orders to receive that day’s price. For example, an investor submitting an order to a fund’s transfer agent might have until 3:59 p.m. ET to submit its order, while an investor submitting an order to an introducing broker would likely have to submit its order earlier to provide enough time for the introducing broker to send the order to the clearing broker and for the clearing broker to send it to the transfer agent or to Fund/SERV. Investors transacting through intermediaries may lose some flexibility in when they may submit orders through an intermediary to receive that day’s price as intermediaries may institute earlier cut-off times. Because technology has advanced since the Commission last considered a hard close in 2003, we generally do not believe, however, that intermediaries would need to establish cut-off times significantly earlier than the pricing time set by the fund. We recognize, however, that layered cut-off times may occur when an intermediary uses one or more tiers of other intermediaries to submit orders, and that cut-off times generally would be earlier for investors submitting orders to lower-tier intermediaries. We also recognize that intermediaries that net order activity or rely on batch processing may require additional time to support such netting or batch activities, while those intermediaries that submit orders individually through message-based communications may have a higher volume of orders submitted, but a shorter time between order submission by an investor and order receipt by a fund, transfer agent, or registered clearing agency. While the proposed hard close requirement generally would cause intermediaries to establish earlier cut-off times, the proposed rule would not prevent an intermediary from

241For example, according to one source, in 2021, 4.1% of defined contribution plan participants took withdrawals, and at the end of Dec. 2021, 12.5% of participants of plan participants had loans outstanding. See ICI Research Report, Defined Contribution Plan Participants’ Activities, 2021 (Apr. 2022), available at https://www.ici.org/ system/files/2022-04/21_rpt_recsurveyq4.pdf. 242Rule 22c–1 already affects investors differently based on the time zone in which the investor lives. Investors located in time zones other than the eastern time zone are subject to different cut-off times today. For example, 4 p.m. ET is 10 a.m. Hawaii time, meaning that an investor in Hawaii has to submit its order before 10 a.m. to receive that day’s NAV if the fund’s pricing time is 4 p.m. ET. 243See infra section III.C.3 discussing that some investors may be affected by the proposed hard close requirement if they desire to transact later in the day in response to market events and are limited in their ability to change intermediaries or place orders with the fund’s transfer agent. transmitting orders it received after its internal deadline but before 4 p.m. ET on an individual basis to the fund’s transfer agent or to Fund/SERV in order to receive that day’s price. d. Effects on Certain Transaction Types We recognize that the proposed hard close requirement could extend completion times for certain types of transactions, where the specific number or value of fund shares to be purchased or redeemed is unknown until that day’s price is available. For example, under certain retirement plan rules, certain transactions, such as plan loans or withdrawals, currently remain incomplete until all fund positions in the investor’s accounts are valued using that day’s prices. Specifically, some plan provisions specify a hierarchy for drawing from different investments to accommodate participant loan or withdrawal requests. As an example, the plan may require the sale of shares in Fund A to pay the loan or withdrawal before the sale of shares in Fund B. In this case, until that day’s final price for Fund A shares is available, the retirement plan recordkeeper may not know if the value of the participant’s investment in Fund A is sufficient to pay the loan or withdrawal amount on its own, or if satisfying the loan or withdrawal request in full will also require redemptions from Fund B. Under the hard close proposal, although plans would not be required to change their rules governing these kinds of transactions, transaction requests that are subject to hierarchy rules may take one or more additional days to complete than they would currently. This is because the retirement plan recordkeeper would no longer be able to wait until final prices are available before calculating and submitting one or more redemption orders to satisfy the requested plan transaction. In the above example, this would mean that the recordkeeper would likely submit an order to redeem shares of Fund A on
the first day and may submit an order to redeem shares of Fund B on a subsequent day if the loan or withdrawal is not fully funded. We understand that these transactions typically are a small percentage of overall retirement plan flows and that plan participants generally do not receive immediate execution of loan or withdrawal requests today.241 Thus, we believe the aggregate effect of the proposed hard close requirement on such transactions would not be significant. As another example, the proposed hard close requirement could extend the period of time for executing an investor’s request to rebalance its holdings to a target asset allocation or model portfolio. We understand that currently these requests may be facilitated by first valuing the investor’s existing positions, based on final prices for that day, and then submitting orders that would result in the desired allocation. The proposed rule would not permit these orders to receive same-day pricing if they are submitted after the pricing time, and therefore may require the intermediary to achieve the desired rebalancing through a series of orders over more than one day or to rebalance using prices from the prior day. In addition, the proposed hard close might affect current order processing for funds of funds. We understand that a lowertier fund in a fund of funds structure may not receive purchase or redemption orders from upper-tier funds until well after 4 p.m. Under the proposed rule, the lower-tier fund (or another designated party) would have to receive an upper-tier fund’s orders to purchase or redeem the lower-tier fund’s shares before the lower-tier fund’s pricing time to receive that day’s price for the orders. e. Effects on Investors The extent to which the hard close proposal would affect investors largely depends on the value investors place on their ability to obtain same-day pricing for orders initiated in the period immediately before 4 p.m. ET or on the complex transaction types discussed above.242 Most fund shareholders are long-term investors, and thus we believe that most fund orders are not time sensitive. In addition, because of advances in technology, it seems likely that intermediaries would set cut-off times that are only incrementally earlier than current cut-off times. As a result, it seems likely that many investors would experience a significant change in when they must submit their orders to intermediaries. For those investors who place a premium on being able to place orders up until 3:59 p.m. ET, they generally could place orders with the fund’s transfer agent to retain this option.243 While we understand that investors may experience a change in how late they may transact through intermediaries that set earlier cut-off times as a result of our proposed rule, overall the proposal is intended to better protect shareholders’ interests by operationalizing swing pricing to combat shareholder dilution and enhancing fund resiliency. We request comment on the
effects of the proposed hard close on order processing, intermediaries and investors, and on different transaction types:
109. Should we require funds to
implement the proposed hard close requirement? Are there alternatives to the proposed hard close requirement that we should implement? Would the proposed hard close requirement help funds operationalize swing pricing? Would the proposed hard close requirement help prevent late trading? Are the Commission’s efforts to modernize fund order processing supported by the proposed hard close requirement?
110. What steps would intermediaries
be required to take to operationalize the proposed hard close requirement? Are there operational impediments to funds implementing the proposed hard close requirement? Are there operational impediments for intermediaries, transfer agents, and/or registered clearing agencies in implementing the proposed hard close requirement? Are there other operational changes that would be helpful to operationalize swing pricing?
111. Would retirement plan providers
need to make changes to plan rules in order to accommodate compliance with a hard close? Are plan rules able to be altered for plans that are currently owned, or would alterations only be feasible on a going forward basis? If a change in plan rules would be necessary, how would plan rules need to be altered? How would plan participants be affected by changes to plan rules?
112. Would the proposed rule affect
intermediaries’ ability to net order flow? Would intermediaries move to messagebased communications, where orders are transmitted to the transfer agent or registered clearing agency as they are received, in response to the proposed hard close requirement?
113. Would elimination of
cancellations and corrections that designated parties currently may receive

244See infra section III.C.2.a (discussing the potential effects on intermediaries and other market participants if funds were to publish their prices later than they currently do). after the pricing time streamline processing and reduce costs for funds and/or designated parties and, if so, by how much? Would costs for investors be affected by the elimination of these cancellations and corrections?
114. Should there be any exceptions
from the proposed hard close requirement for exigencies or types of parties? For example, should there be exceptions for certain scenarios (e.g., emergencies), fund types (e.g., funds of funds), or intermediaries (e.g., retirement plan recordkeepers)? If so, what should be the parameters of such exceptions? For example, should we permit investor orders to receive sameday pricing treatment as the result of an emergency, if the intermediary is unable to send orders or a designated transfer agent or clearing agency is unable to receive orders? Should an emergency exception be conditioned on the board or the chief executive officer of the intermediary, transfer agent, or clearing agency certifying to the nature and duration of the emergency and, in the case of an intermediary, that the intermediary received the orders before the applicable pricing time? Should we permit conduit funds, which invest all their assets in another fund and must calculate their NAV on the basis of the other fund’s NAV, and which include master-feeder funds and insurance company separate accounts, to receive same-day pricing? Should we provide an exception to permit certain intermediaries, such as retirement plan recordkeepers, to receive same-day pricing for the orders they submit, even if not received by a designated party before the pricing time, as long as the relevant intermediary received the orders before the pricing time? Should there be other conditions associated with such an exception, such as a requirement to provide advance notice of certain flow information to the fund or another designated party?
115. Should we provide an exception
from the proposed hard close requirement for certain transaction types (e.g., retirement plan loans or withdrawals or certain rebalancing transactions)? Should we amend the definition of eligible order to include these or other transaction types? If so, what information should we require the intermediary to supply to a designated party before the pricing time to qualify for same-day pricing? Should retirement plan recordkeepers or other intermediaries be permitted to estimate order flow information for specific transaction types, like loans or withdrawals? Would the estimates be prepared using the prior day’s price, or through some other method?
116. If exceptions to the hard close
were permitted, how would that affect the proposed swing pricing requirement?
117. Would the proposed hard close
requirement help retirement plan recordkeepers to reduce their batch processing cycles and, if so, how?
118. Should the rule permit a fund or
other designated party to impose a cutoff for orders received before that day’s NAV computation? For example, if the time for an order to receive that day’s NAV is 4 p.m. ET, should the fund be permitted to impose an earlier time of day, say 2 p.m. ET, as an earlier cut-off time to receive orders? Would the ability to disconnect the cut-off time for receiving orders from the pricing time help facilitate swing pricing by providing additional time to calculate the swing factor?
119. If different funds adopted
different cut-off times for receipt of orders pursuant to rule 22c–1, would intermediaries and transaction processing systems be able to accommodate such differences on a fund specific basis? How would different cut-off times affect investors? Would it be confusing or challenging for investors if there were variation among funds’ cut-off times?
120. If most funds continue to
calculate their NAVs as of 4 p.m. ET and, as proposed, funds are required to implement swing pricing and are subject to a hard close, would funds have sufficient time between 4 p.m. ET and when they publish their prices to assess their flow information and apply the proposed swing pricing requirement, including determination of a swing factor, as applicable? If not, how might funds adjust their practices to provide more time to make swing pricing determinations? For example, would funds publish their prices later than they typically do, which is currently several hours after the pricing time? 244 Are there any changes we could make to facilitate later publication of prices, if needed? As another example, would funds begin to calculate their NAVs as of an earlier time than 4 p.m. ET? What affect, if any, would such a change have on transaction processing and the valuation of the fund’s investments?
121. How would the proposed hard
close requirement affect investors? For example, what percentage of investors place orders shortly before 4 p.m., and how important is it for those investors to receive that day’s price as opposed to the next day’s price? When intermediaries establish their own cutoff times by which customers must place orders to receive that day’s price, would these cut-off times be close to 4 p.m. ET as a result of competition among intermediaries and customer demand? Are intermediaries able to accelerate the time between receiving an order and relaying that order to a designated party compared to current practice? Would it be confusing or challenging for investors if there were variation among intermediaries’ cut-off times? Are there circumstances in which intermediaries would transmit orders received after their internal cutoff times and before 4 p.m. ET to a fund’s transfer agent or to Fund/SERV individually to receive same-day pricing? Would this increase the risk of errors or otherwise be burdensome on funds or intermediaries?
122. Should the rule initially require
that funds receive order flow information by a time that is after the pricing time in order to ‘‘phase in’’ the proposed hard close requirement? For example, instead of requiring a designated party to receive all of a fund’s order flow information by 4 p.m. ET each day, should we initially require receipt of order flow information by the designated party one to two hours after the pricing time with the goal of eventually moving the time of receipt to before the pricing time? Would a delayed phase in of the proposed hard close requirement be compatible with the proposed swing pricing requirement? If so, how would a fund determine whether to swing its NAV if it does not have all of its order flow information until after the pricing time?
123. We understand that
intermediaries currently may adjust trade amounts to account for commissions or other fees. Would the proposed hard close requirement affect how these adjustments are made? If so, should we make any changes to the proposed approach to better accommodate such adjustments?
124. Would earlier confirmations from
a fund to an intermediary reduce an intermediary’s vulnerability to disruptions? Would intermediaries process orders more frequently under a hard close? If so, would more frequent order processing increase the resiliency of funds and transfer agents? If not, why not?
125. Would intermediaries need to set
earlier cut-off times than is the current practice for investors in order to get orders to a designated party before the pricing time? If so, how early? How

245See rule 22c–1(a), (b)(1), and (d); proposed rule 22c–1(a). 246See 2003 Hard Close Proposing Release, supra note 224, at n.26. 247See rule 22c–1(a)(1), (a)(2), and (c); proposed rule 22c–1. 248For example, we propose to replace references to ‘‘orders’’ in the current rule with references to ‘‘directions’’ to purchase or redeem, which is intended to distinguish between the concept of eligible orders that we propose to add for purposes of the proposed hard close requirement and directions to purchase or redeem shares of other registered open-end investment companies that are not subject to the proposed hard close requirement. As another example, we propose to incorporate the term ‘‘pricing time’’ into provisions of the rule that are not specific to the hard close requirement for cohesion of the rule. 249Although certain U.S. funds may use liquidity fees for redemptions, they are rarely used to address dilution, other than in the case of short-term trading of fund shares. See rule 22c–2 under the Act. The use of redemption fees and anti-dilution levies in Europe varies to some extent by jurisdiction. For example, Irish-domiciled funds are more likely to have adopted anti-dilution levies than Luxembourgdomiciled funds. Overall, however, we understand that swing pricing was more widely used by European fund complexes in Mar. 2020 than redemption fees or anti-dilution levies. See ICI, Continued much time do intermediaries need to process order flow information?
126. Should the rule require that
funds set a uniform cut-off time for orders to be received by intermediaries? If the rule requires a uniform cut-off time, should we also require that a fund disclose the cut-off time, such as in the fund’s prospectus? Would funds, collectively, establish consistent cut-off times for these purposes, or would intermediaries need to manage different fund-specific cut-off times?
127. Some intermediaries may
establish earlier cut-off times in order to accommodate a hard close. Would investors that want to make an order up until 3:59 p.m. place orders with a fund’s transfer agent instead of with an intermediary to preserve this flexibility? Are there limitations on certain investors’ abilities to place orders with the transfer agent instead of through an intermediary?
128. Would some intermediaries
choose to no longer distribute open-end funds that would be subject to the hard close requirement in order to avoid compliance costs? In addition, would retirement plan providers be more likely to replace mutual funds as plan investment options with ETFs or CITs? If so, how would this affect investors?
4. Other Proposed Amendments to Rule
22c–1
The proposed amendments would retain the requirements of the current rule concerning the frequency and time of determining the NAV, but would reorganize and reword those provisions.245 The proposed amendment would use the phrase ‘‘based on the current net asset value of such security established for the next pricing time,’’ as opposed to ‘‘based on the current net asset value of such security which is next computed’’ in the current rule. While its substance is already required, this amendment would codify in the rule text that orders received after the pricing time, but before calculation of the NAV is complete, do not receive same-day pricing.246 We also propose to reorganize certain other provisions of rule 22c–1, including the existing exceptions to the rule’s forward pricing requirement.247 In addition, we propose to revise certain terminology in the rule.248 We are also proposing to remove the provision from rule 22c–1 that would allow funds not to calculate their current NAV on days in which changes in the value of the fund’s securities will not materially affect the current NAV. We believe this provision is no longer necessary because a fund generally would need to determine its current NAV in the first instance before it could conclude with certainty that changes in the value of the fund’s securities would not materially affect the fund’s current NAV. We request comment on the other proposed amendments to rule 22c–1, including:
129. Are our proposed amendments to
provide that orders received after the pricing time, but before calculation of the NAV is complete, do not receive same-day pricing sufficiently clear?
130. Should we retain the current
provision in rule 22c–1 that allows a fund not to calculate its NAV on days when the changes in the value of the fund’s portfolio securities do not materially affect the current NAV? If so, how would this affect the ability of a fund to implement swing pricing? Do any funds rely on this provision today? If so, what are the scenarios in which a fund relies on this provision? How are changes in the value of the fund’s securities determined if the fund is not valuing the underlying securities and computing the NAV on a daily basis?
5. Amendments to Form N–1A
Open-end funds use Form N–1A to register under the Investment Company Act and to register offerings of their securities under the Securities Act. Item 11 of Form N–1A requires a fund to describe how it prices its shares. Item 11(a) specifically requires that funds state when they calculate the NAV and that the price at which a purchase or redemption is effected is based on the next NAV calculation after the order is placed. We are proposing to amend this disclosure to also require, if applicable, that funds disclose that if an investor places an order with a financial intermediary, the financial intermediary may require the investor to submit its order earlier than the fund’s pricing time to receive the next calculated NAV. As discussed above, intermediaries may set different times by which investors must have their purchase or redemption orders in place to receive that day’s price. We believe that this proposed disclosure is important so that investors may understand the potential variability in the time by which intermediaries may require an order to be placed to receive a particular day’s price. We request comment on the proposed amendments to Form N–1A, including:
131. Would the proposed requirement
for funds to disclose in their prospectuses that orders placed with intermediaries may need to be submitted earlier to receive that day’s price be helpful to investors?
132. In addition to the proposed
disclosure requirements, are there additional disclosures relating to the proposed hard close requirement that we should require? Should funds be required to disclose the cut-off times of their intermediaries in their distribution network? If so, where should this disclosure be located (e.g., in the fund’s registration statement or on its website)? What potential challenges, if any, would a fund encounter in providing an up-todate list of intermediary cut-off times? D. Alternatives to Swing Pricing and a Hard Close Requirement

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

Experiences of European Markets, UCITS, and European ETFs During the COVID–19 Crisis (Dec. 2020), available at https://www.ici.org/doc-server/ pdf%3A20_rpt_covid4.pdf. 250For instance, on a day the fund has net redemptions, swing pricing adjusts a fund’s NAV downward, and investors who purchase the fund’s shares that day buy at a discount. On a day when a fund has net purchases, swing pricing adjusts a fund’s NAV upward, and investors who sell the fund’s shares that day sell at a premium. Swing pricing must account for these discounts or premiums that other investors are receiving to fully address dilution. 251For example, some funds impose redemption fees under rule 22c–2 under the Investment Company Act. See supra note 67 for a discussion of how many funds we estimate apply redemption fees. 252See infra section III.E.2 (noting certain omnibus accounting practices that may make a liquidity fee operationally difficult). Swing pricing, on the other hand, would require some funds and intermediaries to create new systems and operational procedures, but once those are in place, swing pricing would be incorporated in the process by which a fund strikes its NAV and sets the transaction price (including any swing of the NAV). Intermediaries would then effect customer transactions at the transaction price, as they do today, without further operational changes or coordination with the fund. 253See supra section II.C.3.a (discussing that some intermediaries currently net orders, while others separately submit purchase and redemption orders). 254While money collected from the fee would not be available to the fund until the intermediary remits payment, we understand that a fund would reflect the fee amount it is owed as an accrual until the fund receives the fee payment. The accrual would help prevent declines in the fund’s NAV that would otherwise result from any delay in remittal. Proper booking of the accrual would, however, require the intermediary to inform the fund of the fee amount on an accurate and timely basis. liquidity fee would apply as a separate charge to a transacting investor and would not change the fund’s price. A liquidity fee could be used to impose liquidity costs on purchasing or redeeming investors and address dilution, much like a swing pricingrelated price adjustment. We recognize that a liquidity fee framework could have certain advantages over a swing pricing requirement. For example, liquidity fees provide greater transparency for redeeming or purchasing investors of the liquidity costs they are incurring. Liquidity fees also provide a mechanism for imposing liquidity costs directly on purchasing or redeeming investors, without adjusting the transaction price for investors who are trading in the other direction.250 In addition, some funds and their intermediaries are currently equipped to apply certain purchase and/or redemption fees.251 However, the proposed swing pricing requirement may have several advantages over liquidity
fees for relevant open-end funds. With swing pricing, a fund can pass liquidity costs on to redeeming or purchasing investors in a fair and equal manner, without any reliance on intermediaries to achieve fair and equal application of costs. Liquidity fees may require more coordination with a fund’s intermediaries than swing pricing because fees need to be imposed on a transaction-by-transaction basis by each intermediary involved—which may be difficult with respect to omnibus accounts that intermediaries may create to aggregate all customer activity and holdings in a fund.252 Funds and their transfer agents may contract with intermediaries to have them impose liquidity fees under these circumstances, which may include a review of contractual arrangements with fund intermediaries and service providers to determine whether any contractual modifications are necessary or advisable to ensure that liquidity fees are appropriately applied to beneficial owners of fund shares. While we could require intermediaries to submit purchase and redemption orders separately to transact in a fund’s shares, which could allow funds and their transfer agents to apply fees directly, this type of requirement would also involve some operational costs. Requiring intermediaries to submit purchase and redemption orders separately would require operational changes for some intermediaries because they would no longer be able to net otherwise offsetting customer purchases and redemptions.253 In addition, the volume of transactions that transfer agents and Fund/SERV process would increase if netting were not permitted. Further, unlike swing pricing, the amount collected from a liquidity fee is not available to the fund for a period of time until the intermediary remits to the fund the amount charged.254 If the fund is under stress, the unavailability of the amount collected from fees might cause the fund to incur other costs it might not have otherwise incurred, such as costs associated with selling investments to pay redemptions when the fee amount, if remitted, would have helped the fund pay those redemptions. There are many potential variations of a liquidity fee framework. The trigger for applying fees could be based on net flows, similar to swing pricing, or other indicators that a fund’s trading costs are increasing (e.g., widening spreads or reduced liquidity of the fund’s portfolio investments). Alternatively, a fee could apply to all trades of a given type (for example, all redemption orders). When a fee applies, the determination of the size of the liquidity fee could be either dynamic to reflect changing costs or simplified to remain relatively static. As for how the fee is processed, it could be applied to the purchase or sale or could be processed separately from the trade. As an example, similar to the proposed swing pricing requirement, a dynamic liquidity fee could be calculated to reflect certain costs (e.g., spread, other transaction costs, and market impact)
a fund is likely to incur to meet redemptions or invest the proceeds from subscriptions based on the direction and magnitude of that day’s flows. Dynamic liquidity fees that may change in size from one day to the next may involve greater operational complexity and cost than swing pricing, as intermediaries would have to identify and apply different fee amounts for each fund in which their clients transact each day. This approach also generally would necessitate timely flow information if the fee were processed as part of a transaction, similar to the proposed swing pricing requirement. If the fee were processed separately from the transaction and applied to an investor’s account on a delayed basis, a fund would likely have more time to receive flow information than under the proposed swing pricing requirement, which could avoid the need for a hard close or related alternatives. Delayed application of the fee, however, may raise complications related to collecting fee amounts from investors, particularly when an investor has otherwise redeemed the full amount of its holdings. Follow-on fees also significantly increase the number of transactions to process, and may complicate reporting for custodians and advisers in situations where a transaction may occur in one reporting period but the fee related to the transaction is not applied until the next reporting period. In addition, an intermediary may face difficulties projecting upcoming cash balances in its client accounts if there are upcoming fees to be charged, but the amounts of those fees are unknown. The fund itself may also have challenges with projecting its own cash balance if it cannot predict when accrued fees will be received from each intermediary. Instead of a dynamic liquidity fee, we could require a simplified liquidity fee. A simplified liquidity fee, for example, could be a set percentage of the transaction amount, such as 1%. Or it could be a default fee, such as 1%, that a fund could adjust up (possibly up to a cap) or down as it determines is in the best interest of the fund. A simplified liquidity fee could apply to both purchases and redemptions, given that both purchases and redemptions can contribute to dilution. Under this type

255We discuss an alternative in which a liquidity fee would apply when a fund’s trading costs are significantly increasing in more detail in section II.D.3.b. 256See infra section II.D.3.b. for additional discussion and requests for comment about such an approach. of approach, fees could be equivalent for both transactions, or fees could be higher on one side and lower on the other (for example, a purchase fee of 0.25% and a redemption fee of 1%). Alternatively, we could require a onesided simplified fee that applies to redemptions only or to purchases only, with the premise that a fee charged on redemptions could also help to offset dilution that may result from purchases (or vice versa). Because all shareholders purchase and redeem the fund’s shares during the life of an investment, a onesided fee would apply to all shareholders at some point and could help mitigate dilution that fund investors collectively contribute to through their purchase and redemption activity. A simplified liquidity fee would not necessarily require flow information. For instance, if a simplified fee applied only to redemptions, a set fee could apply to all redemptions or only to redemptions when the fund’s trading costs are significantly increasing, such as in times of stress.255 If the dependency on flow information is removed, a simplified liquidity fee likely could be processed as part of a transaction, avoiding the need to process a fee as a separate follow-on transaction. The size of a simplified liquidity fee likely would be more predictable for investors and intermediaries than a dynamic fee or swing pricing. This would enhance transparency and would likely be easier to implement. While the size of the fee generally would be known in advance, it may or may not be easy to predict when a fee would apply. For example, if a fee applied to all redemptions, then investors and intermediaries would have certainty on when fees would apply. However, if fees applied only in certain circumstances, such as when trading costs are materially increasing or the fund has experienced net redemptions over multiple consecutive days, then application of a fee may be more difficult to predict, particularly if a fund’s threshold for applying a fee is non-public or based on factors that are difficult for other market participants to observe or predict. An approach where it is difficult to predict when a fee would apply could help avoid preemptive redemptions in anticipation of fees applying in the near future, but it would also be less transparent. In addition, if liquidity fees are applied rarely, then application of a fee might be viewed as a sign that a fund is under stress, which could incentivize further redemptions, particularly if the fee amount is viewed as minimal. Between dynamic and simplified fees, a dynamic fee would better reflect the costs associated with fund purchases or redemptions on a given day. A simplified fee, however, would be less costly to implement because,
among other things, it would not necessarily require a hard close or any alternatives to the hard close to provide actual or estimated flow information. While a simplified fee would be less sensitive to the fluctuating costs associated with fund purchases or redemptions, this fee would aid in the offset of costs stemming from purchase and redemption activity and could assist with the mitigation of investor dilution. On balance, we are proposing a swing pricing requirement because it may have operational advantages or be better tailored to mitigate dilution relative to liquidity fee options, but we request comment on using a liquidity fee framework to impose liquidity costs and whether a liquidity fee alternative may have fewer operational or other burdens than the proposed swing pricing requirement while still achieving the same overall goals of reducing shareholder dilution.
133. How do the operational
implications of swing pricing, as proposed, differ from the operational implications of a dynamic liquidity fee framework (e.g., one where liquidity fees vary in size and increase during periods of stress)? What are the operational implications of a requirement for mutual funds to impose a liquidity fee that can change in size and that may need to be applied with some frequency (up to daily)? Are fund intermediaries equipped to apply dynamic fees on a regular basis? Would funds have insight into whether and how intermediaries apply these fees to redeeming investors?
134. If we adopt a liquidity fee
framework instead of a swing pricing framework, should a fund be required to apply a liquidity fee under the same circumstances in which a fund would be required to adjust its net asset value under the proposed swing pricing requirement? Should a fund be required to use the same approach to calculating a liquidity fee as the proposed approach to calculating a swing factor? Should the same board oversight framework apply under this approach as the proposed swing pricing requirement (e.g., with the board approving the fund’s liquidity fee policies and procedures and designating a liquidity fee administrator, and such administrator would report periodically to the board)?
135. Should funds be required to
apply liquidity fees to all redemption or purchase orders, or should liquidity fees apply only upon a trigger event? If so, under what circumstances should a fee apply? For example, should liquidity fees apply when trading costs are materially increasing? 256 Should liquidity fees apply when a fund has had net outflows over multiple consecutive days? If so, should net outflows be of a certain size (e.g., 2%, 5%, or 10%) and over what period of time should net outflows trigger a fee (e.g., 2, 3, or 4 consecutive days)? Would this approach help mitigate dilution, or would it contribute to firstmover advantages and potentially result in unfair application of fees?
136. Should a liquidity fee apply to
both purchasing and redeeming investors? Alternatively, should a liquidity fee apply to redeeming investors only or to purchasing investors only?
137. Should funds be required to
maintain records related to the application of liquidity fees? For example, should funds be required to maintain records of the dates on which the fund applied liquidity fees and in what amount? If application of liquidity fees is subject to fund or board discretion, should a fund be required to maintain records documenting why the fund did or did not apply liquidity fees under certain circumstances?
138. Should liquidity fees apply to
purchase or redemption orders of a specific size only? If so, what size? How operationally feasible would such an approach be? Would it create incentives for investors to modify their order amounts in an effort to avoid a fee, such as by holding smaller amounts of a fund’s shares at multiple intermediaries or splitting up a purchase or sale order over multiple days? How should such an approach treat separate accounts managed by the same adviser, such as separate accounts managed through a wrap program?
139. Should a liquidity fee framework
have an exclusion for purchase or redemption orders of a de minimis amount? How should we identify an order for a de minimis amount? Should it be a set dollar figure (e.g., $2,500 or less), a set percentage of the fund’s net assets, or a set amount that would be collected from application of a fee (e.g., $50 or less)? Should the amount of a de

257See rule 22c–2(c)(5) (defining a shareholder information agreement as a written agreement under which a financial intermediary agrees, among other things, to provide certain information to a fund promptly upon request, including taxpayer identification number of all shareholders who have purchased, redeemed, transferred, or exchanged fund shares held through an account with the financial intermediary, and the amount and dates of such activity). 258Under rule 11a–3, an offering company may cause a security holder to be charged a redemption fee in connection with an exchange offer, subject to certain conditions. See rule 11a–3(b)(2); rule 11a– 3(a)(7) (defining a redemption fee as a fee that a fund imposes pursuant to rule 22c–2). 259See Item 3 of Form N–1A. 260See Instruction 2(b) to Item 3 of Form N–1A (excluding money market fund liquidity fees imposed in accordance with rule 2a–7 from the definition of ‘‘redemption fee’’). minimis exclusion be adjusted for inflation over time?
140. How should the amount of the
liquidity fee be determined? Should the liquidity fee be dynamic but based only on that day’s spreads? Should it include other transaction costs, including market impact? Instead of a dynamic fee amount that could change daily, should the fee amount be based on a fund’s historical trading costs and evaluated periodically, such as annually, quarterly, or monthly? Should the fee be a flat percentage established by rule (such as 0.5%, 1%, or 2%), or should the fee increase as net redemptions or net purchases, illiquidity, or other variables increase? Should the fee amount be based on reasonably expected transaction costs but, if a fund cannot reasonably estimate those costs, it can use a default fee amount set by rule? If so, what should that default fee amount be (e.g., 0.5%, 1%, 2%, or 3%)? Should the rule include a default fee amount that funds can always choose to use, with the option to use a higher or lower amount if such amount is determined to be in the best interest of the fund? Should there be a minimum or maximum fee amount, such as a 0.25% minimum or a 2% maximum?
141. If we adopt a liquidity fee
framework instead of a swing pricing framework, are there any ways to simplify the application of fees to investors that invest through an intermediary, such as investors in an omnibus account, to facilitate funds or fund transfer agents applying fees directly to investor purchases or redemptions occurring through an omnibus account? For example, should fund intermediaries be required to separately submit purchase and redemption orders, rather than net them, in order to transact in a fund’s shares? What would the operational consequences of such a requirement be for fund intermediaries and for investors? To what extent do intermediaries already submit purchase and redemption orders separately, and does this practice vary by type of intermediary (for example, are brokerdealers more likely to submit separate purchase and redemption orders than retirement plan recordkeepers)? Would there be consequences for fund transfer agents, Fund/SERV, or others associated with increased order volume or other changes that would result from a requirement to submit purchase and redemption orders separately? What changes, if any, would funds or fund transfer agents need to make to be equipped to apply liquidity fees directly? If submission of purchase and redemption orders separately is necessary to implement a liquidity fee framework, is it necessary for the Commission to mandate receipt of orders in this way to ensure compliance by all market participants? If purchase and redemption orders may be submitted on a net basis, as some intermediaries do currently, how would a fund accrue for liquidity fees in a timely manner? Should the Commission require fund transfer agents to apply liquidity fees directly and, if so, why or why not?
142. If we adopt a dynamic liquidity
fee framework, would it be as reliant on timely flow information as the proposed swing pricing requirement? For example, could funds and intermediaries apply a dynamic fee to a transacting investor after an order begins to be processed at that day’s NAV but before the trade settles? Could dynamic fees be applied after settlement, or would that create challenges in collecting a fee from investors who redeemed the full amount of their holdings? If a fee applies on a delayed basis, how should investors be notified of the application of a fee? Would it be preferable to apply a simplified fee that may less accurately reflect the costs of investor transactions and may mitigate dilution with less precision, but that could be applied at the same time an order is processed? Are there any other factors to consider when deciding between dynamic and simplified liquidity fees?
143. If we adopt a liquidity fee
framework, should we require that the same liquidity fee amount apply to all share classes (for example, if a liquidity fee is 1% on a given day, the 1% fee must apply to all share classes)? Alternatively, should we permit the fee amount to differ among classes (for example, a 1% fee for one class and a 0.5% fee for another class) and, if so, why?
144. Should a liquidity fee apply
differently based on the type of fund or the type of intermediary through which an investor trades? If so, what would be the basis for the differences in how a liquidity fee applies?
145. What investor flow information,
if any, would be required to implement a liquidity fee alternative? To the extent that a liquidity fee alternative requires timely investor flow information, should the alternative be paired with the proposed hard close requirement? Are there different considerations or effects related to the proposed hard close requirement if we were to require funds to use a liquidity fee? Would it be effective to implement the liquidity fee alternative with an alternative to the hard close requirement discussed below, such as indicative flows, estimated flows, or delayed cut-off times for intermediaries?
146. Should a liquidity fee
requirement be implemented through amendments to rule 22c–2 or through a new rule? To what extent would information that financial intermediaries agree to provide under a shareholder information agreement be important for funds to receive under a liquidity fee framework? 257 Is there other information funds would need to receive from financial intermediaries to determine that liquidity fees are appropriately applied? Should we amend the definition of shareholder information agreement to require that information, or are there other mechanisms for funds to receive that information (e.g., distribution agreements)? Are there other rules we should amend if we adopt a liquidity fee requirement, such as rule 11a–3 under the Act, which permits application of certain fees in connection with an exchange offer notwithstanding section 11(a) of the Investment Company Act? If we amend rule 11a–3, should the rule treat a liquidity fee in the same way as a redemption fee, as defined in that rule? 258
147. How should funds be required to
disclose liquidity fees to investors? Should liquidity fees be reflected in the prospectus fee table, as mutual fund (other than money market fund) redemption fees currently are? 259 Or, similar to money market fund liquidity fees, should liquidity fees be excluded from the prospectus fee table? 260 Should funds be required to disclose the circumstances in which they would impose liquidity fees in the prospectus? If a liquidity fee only applies on some days, should the fund be required to disclose on its website that it is applying a liquidity fee that day and the size of the fee? Should funds be required to report information about

261See Swing Pricing Adopting Release, supra note 11, at n.40. Swing pricing would permit a fund to continue to transact using one price, as they do today (instead of transacting using separate prices for purchasing and redeeming shareholders). 262For example, jurisdictions that permit dual pricing include the UK, Ireland, Australia, and Hong Kong. See Jin, et al, supra note 163, at n.6 and accompanying text. 263See Swing Pricing Adopting Release, supra note 11, at section II.A.3.g. liquidity fees that are imposed? For example, should a fund be required to report on Form N–PORT the dates the fund imposed liquidity fees (or the number of days on which fees were applied) and the amount of the fee applied on each occurrence? If a fund or its board has discretion on when to apply liquidity fees, should a fund be required to disclose why a liquidity fee was or was not imposed under certain circumstances? Should funds be required to report other information about liquidity fees or report information in other locations, such as in shareholder reports, on fund websites, or in Forms N–CEN or N–RN? Would any existing items on Form N– PORT, Form N–CEN, Form N–1A, Form N–RN, or other forms need to be modified if we were to adopt a liquidity fee framework instead of swing pricing?
148. How quickly do intermediaries
currently remit to funds the amounts collected from purchase or redemption fees applied to customer accounts? If remittal currently is delayed, what are the causes of delay? If we adopted a liquidity fee, would funds reflect any delayed liquidity fee payment as an accrual? Under a liquidity fee approach, should intermediaries be required to remit payments to funds within a certain amount of time after a purchase or redemption? If so, what is an appropriate amount of time for remittal (e.g., on the day of settlement or within one or two days after settlement)? For example, should we adopt a rule that would provide that a fund must prohibit an intermediary from purchasing the fund’s shares in nominee name on behalf of others if the intermediary does not remit payment on a timely basis? Are there other appropriate consequences for an intermediary that has a pattern or practice of late payments, such as a requirement that orders from such an intermediary may not receive today’s price and will be executed on a subsequent day at that day’s price in order to otherwise limit the dilutive effects of purchase and sale orders received through that intermediary since fees are not paid in a timely manner? Should we require a fund to charge an additional surcharge to an intermediary that does not remit payment on a timely basis? Should funds be required to report the names of intermediaries who are delayed in remitting payment and the amount due? If so, where should funds provide this information (for example, Form N– PORT, Form N–CEN, fund websites, or registration statements)?
149. Would a liquidity fee
requirement have different effects on investor behavior than a swing pricing requirement? For example, because application of liquidity fees is more observable than application of swing pricing, would liquidity fees be more likely to affect investors’ decisions of whether to purchase or redeem fund shares? b. Dual Pricing We also considered the use of dual pricing as an anti-dilution measure. A fund that uses dual pricing would quote two prices—one for incoming shareholders (reflecting the cost of buying portfolio securities in the market), and one for outgoing shareholders (reflecting the proceeds the fund would receive from selling portfolio securities in the market).261 Dual pricing is permitted and used by some funds in certain foreign jurisdictions.262 In comparison to swing pricing and liquidity fees, we believe that dual pricing may impose additional operational burdens and complexity on fund intermediaries, service providers, and other third parties as they would need to handle two share prices on each trade date. We understand that mutual fund order processing systems currently are designed to accommodate only one price, which is applied both to trades and valuation, and a fund’s share price feeds into many analyses that intermediaries, funds, or others would need to update if there were two share prices, such as rebalancing activity. In addition, as recognized above, there would be operational costs associated with intermediaries needing to submit purchase and redemption orders separately, rather than netting purchase and redemption orders. In addition, with a dual pricing framework, we would also address effects on a fund’s financial statements and performance reporting, as the Commission has already done for swing pricing.263 If we were to adopt a dual pricing framework, we could use the same general framework as in swing pricing. Under this approach, a fund would use its ‘‘GAAP’’ NAV (i.e., the amount of net assets attributable to each share of capital stock outstanding at the close of the period) in its statement of assets and liabilities and in performance reporting, while it would use its two transaction prices in reporting the dollar amounts received for shares sold and paid for shares redeemed in its statement of changes in net assets and reflect the impact of dual pricing in the fund’s financial highlights. Similar to liquidity fees, dual pricing could be either dynamic (e.g., calculated to reflect spread, other transaction costs, and market impact a fund is likely to incur to meet redemptions or invest the proceeds from subscriptions and based on the magnitude of those flows) or simplified (e.g., a constant spread around a fund’s NAV). Dynamic dual pricing generally would necessitate timely flow information, similar to the proposed swing pricing requirement. However, simplified dual pricing may not necessitate timely flow information. Between these two types of dual pricing, a dynamic approach would better reflect the costs
associated with the magnitude of fund purchases or redemptions on a given day. Under a simplified dual pricing framework, there also is the potential for either redeeming or subscribing investors to be over-charged for transaction costs that their investing activity does not trigger, because the fund would adjust its NAV for both subscribing and redeeming investors daily without regard to whether the fund has net inflows or net outflows on a given day. A simplified approach, however, would be less costly to implement because, among other things, it would not require a hard close or any alternatives to the hard close to provide actual or estimated flow information. On balance, we are proposing a swing pricing requirement because it may have operational advantages over dual pricing. We request comment on using a dual pricing framework to impose liquidity costs on transacting shareholders and whether a dual pricing alternative may have fewer operational or other burdens than the proposed swing pricing requirement or a liquidity fee alternative while still achieving the same overall goals of reducing shareholder dilution.
150. How do the operational
implications of swing pricing, as proposed, differ from the operational implications of dual pricing? As dual pricing involves calculating and applying two prices on each trade date, would that approach involve operational burdens and complexity for fund intermediaries, service providers, and other third parties that would not exist with a single price under our proposed swing pricing framework?
151. If we adopt a dual pricing
framework instead of a swing pricing framework, how should the spread around the NAV be determined? For example, should the spread around the

264See supra section II.D.1.
265We provide additional illustrative examples of potential alternatives and pairings in section II.D.3. NAV be constant or calculated daily or at some other frequency to reflect transaction costs? If the latter, which transaction costs (e.g., spread, other transaction costs, and market impact)? Under a dual pricing framework, would funds need the same investor flow information that is needed for swing pricing, or would implementation of dual pricing be less dependent on investor flow information?
152. Should a dual pricing
requirement apply differently based on the type of fund or the type of intermediary through which an investor trades? If so, what would be the basis for the differences in how dual pricing applies?
153. If we adopt a dual pricing
framework, should we address the effects of two transaction prices on a fund’s financial statements and performance reporting in a manner similar to how the Commission has addressed the effects of swing pricing (i.e., by clarifying that the GAAP NAV must be used in some cases, while transaction prices are used in others)? Are there additional implications of two transaction prices that we would need to address and that would lead to a different result than our current swing pricing approach?
154. Under a dual pricing framework,
which value of the fund’s shares would market participants use for analyses that currently are based on a fund’s NAV, such as rebalancing a client’s holdings of different funds to achieve a desired asset allocation or reflecting the value of an investor’s holdings on an account statement? If we adopt dual pricing, should we provide guidance on which value to use for these or other purposes?
155. Are there differences between
liquidity fees and dual pricing that make one a better framework than the other to address dilution? If so, what are the differences and why is one better than the other (e.g., differences in tax treatment, if any)?
156. What investor flow information,
if any, would be required to implement a dual pricing alternative? To the extent that a dual pricing alternative requires timely investor flow information, should the alternative be paired with the proposed hard close requirement? Are there different considerations or effects related to the proposed hard close requirement if we were to require funds to use dual pricing? Would it be effective to implement the dual pricing alternative with an alternative to the hard close requirement discussed below, such as indicative flows, estimated flows, or delayed cut-off times for intermediaries?
157. If we adopt a dual pricing
framework, what other changes should be made to the proposal as a result? For example, what reporting should be required on Form N–PORT, Form N– CEN, Form N–1A, Form N–RN, or other forms used by funds that would be subject to the framework? Would any existing reporting items on these or other forms need to be modified if we were to adopt a dual pricing framework instead of swing pricing? Are there other rules (e.g., rule 11a–3 under the Act) that would require changes if we adopt an alternative framework?
158. Would a dual pricing framework
affect investor behavior differently than a swing pricing framework or a liquidity fee framework?
2. Alternatives to a Hard Close
We are proposing to require a hard close for open-end funds that are subject to the proposed swing pricing requirement. Under this proposal an eligible order to purchase or redeem any redeemable security of such a fund would be executed at the current day’s price only if the fund, its designated transfer agent, or a registered clearing agency receives the order before the fund calculates its NAV. This proposal is designed to facilitate the operation of swing pricing as well as to help prevent late trading and to modernize order processing. In connection with the swing pricing proposal, we have also considered whether there are alternative methods by which a fund would be able to generate sufficient investor flow information to determine whether to apply swing pricing on a given day. As discussed above, swing pricing requires that funds have significant information about their order flows to determine with accuracy if the fund should impose a swing factor and to determine what that swing factor should be. Instead of requiring that funds operationalize swing pricing based on actual order flow information received before the pricing time, we have also considered whether reasonable estimates, calculated by either the fund or the intermediary, would provide sufficiently accurate information for a swing pricing determination. We have also considered whether later cut-off times for flow information and the publication of the day’s NAV would facilitate swing pricing. We discuss each alternative below. We also considered how these alternatives would work if, rather than require swing pricing, we were to require funds to adopt liquidity fees or dual pricing.264 Although the below discussion focuses on swing pricing, we believe similar considerations would apply in the case of liquidity fees or dual pricing (to the extent a liquidity fee or dual pricing regime, like swing pricing, was based on the amount of net flows), and these alternatives therefore also could be used in combination with a liquidity fee or dual pricing approach.265 a. Indicative Flows We considered whether, instead of requiring a hard close, we should require that funds receive indicative flow information from intermediaries by an established time. This approach would require that intermediaries (e.g., broker-dealers, banks, and retirement plan recordkeepers) calculate an estimate for what they anticipate the given flows for a particular day to be either before the fund’s pricing time or a set time thereafter (e.g., by 4:30 p.m. ET or 5 p.m. ET). Consistent with current practices, intermediaries could submit final order flow information after the pricing time once the intermediary has received and calculated the final flows for the day. For example, we could consider orders to be eligible to receive that day’s price if, in the case of orders submitted through an intermediary: (1) the intermediary receives the orders from investors before 4 p.m. ET; (2) the intermediary provides estimated
order flow to the fund by the identified time; and (3) the intermediary provides final order information by the next morning. Under this approach, a fund would be permitted to use the indicative flow information provided by intermediaries to determine whether a swing factor should be applied to that day’s NAV. In order to calculate the indicative flow information, intermediaries would need to generate an estimated flow based on, among other things, the actual flows that they have received before the pricing time and the prior day’s price, as well as any indicative historical information that is available if the indicative flow information is provided to the fund before the pricing time. Alternatively, the intermediary could provide summary net flow information (for example, estimated net purchases of $3 million, estimated net redemptions of 250,000 shares, and the purchase of an unknown quantity of fund shares with proceeds from redeeming 100 shares from a different identified fund), and the fund could apply the prior day’s NAV to arrive at an estimated net flow. Intermediaries would need to update

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

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

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

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

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

269For purposes of this section, the term ‘‘fund’’ refers to registrants that currently are required to report on Form N–PORT, including open-end funds, registered closed-end funds, and ETFs registered as unit investment trusts, and excluding money market funds and small business investment companies. 270The proposal would also make a conforming edit to the filing instructions for Form N–PORT. See proposed 17 CFR 274.150(a). 271We would also make conforming changes to General Instruction A of Form N–PORT and rule 30b1–9 to remove references to the requirement for a fund to maintain in its records the information that is required to be included on Form N–PORT no later than 30 days after the end of each month; this would no longer be necessary because the information would be filed with the Commission. See Proposed General Instruction A of Form N– PORT; proposed rule 30b1–9. 272 Id; proposed General Instruction F of Form N– PORT. As is the case currently, if the due date falls on a weekend or holiday, the filing deadline would be the next business day. 273Because reports are due 60 days after the end of a fund’s fiscal quarter, deadlines vary based on the fund’s fiscal year. As an example, depending on a given fund’s fiscal year, reports on Form N–PORT that included information for Mar. 2020 were due between June 1, 2020, and July 30, 2020. For instance, for funds with fiscal years ending Dec. 31, Sept. 30, June 30, or Mar. 30—which is just under half of all funds—the due date of the filing was May 30, 2020. Because this was a Saturday, the filing deadline was extended until the next business day on Monday, June 1. See General Instruction A to Form N–PORT. 274See Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR 81870 (Nov. 18, 2016)] (‘‘Reporting Modernization Adopting Release’’), at section II.A; Investment Company Reporting Modernization, Investment Company Act Release No. 31610 (May 20, 2015) [80 FR 33589 (June 12, 2015)] (‘‘Reporting Modernization Proposing Release’’). 275See Reporting Modernization Adopting Release, supra note 274, at section II.A. 276See id., at paragraph following n.453. amounts in their prospectuses, or their methods for calculating fee amounts?
197. Should the fund’s board be
required to approve the fund’s written policies and procedures defining the trigger event(s) and how the fund will determine the amount of the fee? Should the board be required to approve any material changes to the policies and procedures? Should other board oversight be required? Should the board have to determine that a fee is appropriate every time a trigger event occurs before the fund can impose a fee? Or should the board be required to designate a liquidity fee administrator that would be responsible for determining when liquidity fees apply and the size of the fee? Should the definition of a liquidity fee administrator mirror the proposed definition of a swing pricing administrator? If not, what changes should be made? Similar to the proposed swing pricing requirement, should a liquidity fee administrator be required to provide periodic reports to the board (at least annually) that describe: (1) the administrator’s review of the adequacy of the policies and procedures identifying the fund’s trigger event and the effectiveness of their implementation, including the effectiveness in mitigating dilution; (2) any material changes to the liquidity fee policies and procedures since the date of the last report (if such material changes are not subject to board approval); and (3) the administrator’s review and assessment of the fund’s method for determining the size of the liquidity fee?
198. What are the operational
implications of this approach for funds and intermediaries? Would intermediaries be able to apply a liquidity fee on the same day the fund announces its imposition? What effects would this approach have on investors?
199. If liquidity fees are only applied
rarely under this approach, how would that affect fund and intermediary preparedness for imposing fees? Would it increase investor sensitivity to fees and increase the likelihood of preemptive redemptions?
200. Should we pair a requirement to
adjust a fund’s current NAV to reflect spread costs on days the fund estimates it will have net redemptions with a requirement to apply a liquidity fee when trading costs increase? Would this combined framework address dilution from net redemptions in a manner similar to the proposed swing pricing requirement without the costs of a hard close? E. Reporting Requirements

Amendments to Form N–PORT
Registered management investment companies and ETFs organized as unit investment trusts are required to file periodic reports on Form N–PORT about their portfolios and each of their portfolio holdings as of month-end.269 While the reports provide monthly information to the Commission, funds file these reports on a quarterly basis with a 60-day delay, and the public only has access to information for the third month of each quarter. We are proposing to require reports on Form N– PORT to be filed within 30 days of month-end, which would be followed by public availability of much of the reported information 60 days after month-end. We are also proposing to require an open-end fund that is subject to classification requirements in the liquidity rule to provide information regarding the aggregate percentage of its portfolio represented in each of the three proposed liquidity categories, which would be publicly available. The reported aggregate percentages would include adjustments to give effect to other aspects of the proposal. Finally, we are proposing amendments relating to funds’ use of swing pricing, conforming amendments to reflect the proposed amendments to rule 22e–4, and amendments to certain entity identifiers. a. Filing Frequency We are proposing to amend rule 30b1–9 and Form N–PORT to require funds to file reports on Form N–PORT on a more timely basis, with changes to both the frequency with which a fund would file reports on Form N–PORT and when the reports are due.270 Specifically, rather than filing monthly reports with the Commission 60 days after the end of each fiscal quarter, we are proposing to require that funds file reports on a monthly basis.271 These monthly filings would be due within 30 days after the end of the month to which they relate and would be made public 60 days after the end of the month to which they relate.272 As an example, currently a fund files Form N–PORT reports for the first, second, and third months of each fiscal quarter with the Commission 60 days after the end of the third month of the quarter. Under the proposal, funds would separately file reports for the first, second, and third months of the quarter, with each month’s report due within 30 days of month-end. These changes are intended to provide more timely information regarding the fund’s portfolio, including its liquidity profile. Both the current quarterly reporting cadence and the 60- day delay after the end of the quarter before reports are due make it difficult to use reported data to assess events that are developing quickly, or to identify early warning signs of potential distress. By the time the information is filed, it is at least two, and could be as many as four, months out of date.273 As proposed in 2015 and adopted in 2016, Form N–PORT would have provided for monthly filings with the Commission, within 30 days after the end of each month.274 Only reports for every third month would have been available to the public.275 The Commission
originally required monthly portfolio reporting because it would be useful for fund monitoring, particularly in times of market stress.276 The Commission originally required funds to file each monthly report within 30 days of month end because more delayed data would reduce the utility of the information to the Commission and lag times of more than 30 days would

277See id., at nn.461–462 and accompanying text. 278See Statement on Cybersecurity (Sept. 20, 2017), available at https://www.sec.gov/news/ public-statement/statement-clayton-2017-09-20; see also Testimony before the Financial Services and General Government Subcommittee of the Senate Committee on Appropriations (June 5, 2018), available at https://www.sec.gov/news/testimony/ testimony-financial-services-and-generalgovernment-subcommittee-senate-committee. 279See Amendments to the Timing Requirements for Filing Reports on Form N–PORT, Investment Company Act Release No. 33384 (Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)] at nn.36–39 and accompanying text. 280See Electronic Submission of Applications for Orders under the Advisers Act and the Investment Company Act, Confidential Treatment Requests for Filings on Form 13F, and Form ADV–NR; Amendments to Form 13F, Investment Company Act Release No. 34635 (June 23, 2022) [87 FR 38943 (June 30, 2022)], at section II.C. 281As evidence mounted that an invasion was likely to occur, funds may have adjusted their exposure to securities that could be affected, but Commission staff were unable to review this on a market-wide basis until months after the invasion due to the delay in receiving information. 282See, e.g., Reporting Modernization Proposing Release, supra note 274, at section IV.A. See also 2015 Proposing Release, supra note 31, at text accompanying n.562. 283See proposed General Instruction F of Form N–PORT. 284We also propose to include additional information about the aggregate liquidity profiles of fund portfolios. See infra section II.E.1.c. 285See Reporting Modernization Adopting Release, supra note 274, at section II.A.4. make monthly reporting impractical, as reports would overlap with preparation time.277 Before the date funds would have been required to comply with this requirement, the Commission experienced a cybersecurity incident that resulted in unauthorized access to certain nonpublic information on the EDGAR system.278 As part of the Commission’s ongoing assessment of its internal cybersecurity risk profile, the Commission re-evaluated and modified the filing frequency for reports on Form N–PORT. The Commission required funds to file a report with the Commission for each month in the fund’s fiscal quarter no later than 60 days after the end of each fiscal quarter and to maintain in their records the information that is required to be included on Form N–PORT not later than 30 days after the end of each month. In making this change, the Commission stated that it significantly reduced the sensitivity of the nonpublic data, but that the staff would continue to monitor and solicit feedback on the data received and the use made (or expected to be made) of such data in furtherance of the Commission’s statutory mission, as well as cybersecurity considerations and other matters deemed relevant by the staff.279 The Commission applies controls and systems for the use and handling of filing
systems for confidential information and associated confidential data in a manner that reflects the sensitivity of the data and is consistent with the maintenance of its confidentiality. The Commission also has gained additional experience in receiving and maintaining sensitive portfolio data on the EDGAR system. This experience includes, for example, the existing non-public portions of Form N–PORT, which are subject to controls and systems designed to protect their confidentiality, as well as confidential treatment requests for reports on Form 13F.280 Market events have reinforced the need for timely data regarding funds’ portfolios and the liquidity of those portfolios. For example, disruptions in the markets for Treasury securities and corporate bonds began near the end of the first quarter of 2020, but many funds’ reports on Form N–PORT reflecting these events were not due until June 1, 2020, or as late as the end of July 2020. This meant that Commission staff were not able to review monthly filings, for example, to assess and analyze how the events were affecting funds or identify issues for further inquiry. Similarly, the Russian invasion of Ukraine began in late February 2022, when many funds were just filing their reports for the final quarter of 2021. This meant that when Commission staff were reviewing data to assess funds’ exposures to securities that could be affected by the invasion, the data was several months out of date.281 As a result, during major market events, the staleness of Form N–PORT data limits the Commission staff’s ability to develop a comprehensive understanding of the market. The stale data also can impede our ability to contribute fully to interagency discussions of and responses to market events. Although funds are required to maintain the monthly data and produce it to Commission staff upon request, any such production would be done on an individual basis. In addition, making individual requests requires Commission staff to determine the appropriate funds from which to collect data, which can be particularly challenging when Commission staff is responding to market events but may not have the market data necessary to determine quickly which funds to prioritize in responding to the event. Requiring funds to file monthly reports on Form N–PORT within 30 days of the end of each month, consistent with the filing frequency the Commission initially adopted for Form N–PORT, would enhance our ability to effectively oversee and monitor the activities of investment companies in order to better carry out our regulatory functions, consistent with the goals of Form N–PORT reporting.282 We request comment on the proposed changes to the timing and frequency with which fund would be required to file reports on Form N–PORT, including:
201. As proposed, should we require
that funds file reports on Form N–PORT on a monthly, rather than quarterly, frequency? Because funds are currently required to maintain the information required to prepare their reports on Form N–PORT on a monthly basis, within 30 days after the end of the reporting period, would they have any increased burden due to filing such information monthly, within 30 days after the end of the reporting period, as proposed?
202. As proposed, should we shorten
the deadline for filing reports on Form N–PORT to 30 days after the end of the reporting period? Should we instead use a different deadline, such as 15, 45, or 60 days after the end of the reporting period?
203. Should we, as proposed, revise
General Instruction A of Form N–PORT and rule 30b1–9 to remove the requirement for a fund to maintain in its records the information that is required to be included on Form N–PORT no later than 30 days after the end of each month because this information would be filed with the Commission under the proposal? b. Publication Frequency We are proposing to make funds’ monthly reports on Form N–PORT public 60 days after the end of each monthly reporting period.283 Currently, only the report for the third month of every quarter is made public, meaning the proposal would triple the amount of data made available to investors on Form N–PORT in a given year. Thus, the proposal would enhance the ability of investors to review and monitor information about their funds’ portfolios.284 We continue to believe that publication of information collected on Form N–PORT can benefit investors by assisting them in making more informed investment decisions.285 The public availability of monthly information, rather than information only for the third month of each quarter, may enhance these benefits. For example, institutional investors could directly use

286See Reporting Modernization Adopting Release, supra note 274, at text accompanying n.488. See also Investment Company Reporting Modernization, Investment Company Act Release No. 32936 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)] (noting same concerns). 287 Id. But see Morningstar Comment Letter on Reporting Modernization Proposing Release, File No. S7–08–15, available at https://www.sec.gov/ comments/s7-08-15/s70815-355.pdf (discussing data that funds providing more frequent disclosure do not appear to exhibit lower returns as a result of predatory behavior). 288Reporting Modernization Adopting Release, supra note 274, at text accompanying nn.494–499 and accompanying text. 289See 17 CFR 270.6c–11(c)(1)(i); ExchangeTraded Funds, Investment Company Act Release No. 33646 (Sep. 25, 2019) [84 FR 57162 (Oct. 24, 2019)] (‘‘ETF Release’’), at section II.C.4 (stating that, although a few commenters raised concerns about front running or free riding if certain ETFs were required to provide full daily portfolio transparency, the Commission believed it was likely that all current ETFs that may rely on the rule already provide full portfolio transparency as a matter of market practice). In addition, a small number of ‘‘nontransparent’’ ETFs have received an exemptive order from the Commission permitting them not to disclose their portfolio holdings on a daily basis. As of Mar. 31, 2022, there were 45 nontransparent ETFs. Several of these nontransparent ETFs voluntarily disclose their complete portfolios on a monthly basis with a onemonth lag. 290For example, we understand that a majority of funds provide monthly information regarding their portfolios to a third-party data aggregator. Individual investors are able to review the holdings reported by funds providing data to the aggregator using an analysis tool for which the aggregator charges a fee. 291 In addition, because we propose to make funds’ reports on Form N–PORT available for every month, investors could use Form N–PORT to monitor how their funds respond to events regardless of when they occur. For example, investors in some funds have access to Form N– PORT filings for Mar. 2020, while investors in other funds do not. This is because Form N–PORT data is publicly available for the third month of each fund’s fiscal quarter, but fiscal quarters vary among funds. 292Section 45(a) of the Investment Company Act requires information in reports filed with the Commission pursuant to the Act be made public unless we find that public disclosure is neither necessary nor appropriate in the public interest or for the protection of investors. For the reasons discussed above, we preliminarily believe that keeping the data for the first and second months of a fund’s calendar quarter confidential until the expiration of the 60-day period provided by the proposal is necessary or appropriate in the public interest for the protection of investors. 293Form 13F is due 45 days after the end of each calendar quarter,
meaning that every third month, a fund’s disclosure on Form N–PORT would not be the first mandatory disclosure of its portfolio. Funds currently have the ability to designate certain holdings for the third month in every quarter as ‘‘miscellaneous securities,’’ which are not disclosed publicly on Form N–PORT. Because we propose that all filings would eventually become public, we are extending this to filings for each month. See text accompanying infra note 319. the monthly information reported on Form N–PORT to evaluate fund portfolios and assess the potential for returns and risks of a particular fund, and other investors may benefit from third-party analysis of the monthly data. When the Commission first adopted Form N–PORT, it recognized potential negative effects from frequent publication of Form N–PORT data. For example, the Commission acknowledged the risk that frequent public disclosure could allow market participants to use funds’ reports on Form N–PORT to engage in predatory trading such as front-running.286 The Commission also recognized that more frequent public disclosure could permit free riding on a fund’s research or trading expenditures by allowing other market participants to copy the fund’s trades.287 In determining to maintain the status quo of quarterly public reporting based on the fund’s fiscal quarters, the Commission stated that it was important to assess the impact of the data reported on Form N–PORT on the mix of information available to the public, and the extent to which these changes might affect the potential for predatory trading, before determining whether more frequent or more timely public disclosure would be beneficial to investors in funds.288 Since the adoption of Form N–PORT, funds’ practices with respect to disclosure of information about their portfolios have continued to evolve. For example, many funds, including actively managed funds, voluntarily provide their complete portfolio holdings on their websites on a monthly basis, typically lagged 30 days. Further, ETFs, including actively managed ETFs, generally are required to provide transparency into their portfolio holdings on a daily basis.289 Many funds also provide monthly information about their portfolio holdings to third party data aggregators, generally with a lag of 30 to 90 days, which in turn make them available to investors for a fee. We believe this demonstrates that investor demand for monthly portfolio holdings already exists and that funds providing the information have determined the potential for predatory trading is justified by the benefit to investors. The proposal would simply allow all investors to receive similar data without paying a fee.290 Thus, we believe that many funds already provide public transparency of their portfolio holdings more frequently than the proposal would require, and that our proposal would level the playing field by standardizing the reporting timelines for all funds, putting the data in a single location
that all investors can access without charge, and using a standardized format that enables investor analysis of reported data.291 In addition, under the proposal, the public information for each fund’s monthly report on Form N–PORT would not be publicly available until 60 days after the end of the month, which is the same delay that currently exists for funds’ reports for the third month of every quarter. This is designed to balance the benefits to investors of more frequent portfolio disclosure, while also retaining the existing 60-day delay, which we believe is appropriate in order to make the disclosed positions less timely and thus less likely to facilitate predatory trading practices.292 As a result, and given that the proposal would provide data for additional monthly periods but would not change the current 60-day delay in making funds’ reports on Form N–PORT public, the proposal is intended to mitigate opportunities for predatory trading or free riding of funds’ trading strategies.293 Furthermore, the proposal is intended to benefit investors through increased transparency of Form N–PORT information, especially because it is provided in structured format and made in a single, centralized database. Giving investors access to this information in monthly reports on Form N–PORT may result in investors being better able to monitor the portfolios of their funds in a systematic fashion, and assist investors in choosing the investment products that most closely align with their desired levels of risk, asset exposures, and liquidity profiles. The proposed reporting requirement also takes into account the cybersecurity risk profile of the information we are collecting. Under the proposal, we would receive the monthly information 30 days after the end of each month. Because the monthly information reported on Form N–PORT would be made public 30 days after it is filed with the Commission, the Commission would retain less confidential information than under the final rules the Commission adopted in 2016. This is because, under the proposal, information for each month would become public shortly after filing instead of information in only the third month of each quarter being publicly disclosed. Currently, certain information reported on Form N–PORT is nonpublic, even in the report for the third month of the quarter that is otherwise publicly available. This aspect of the form is unchanged in this proposal, and that information—which includes liquidity classifications for individual portfolio investments— would remain nonpublic in individual reports. However, Commission staff may publish aggregate or other anonymized information about the nonpublic

294See General Instruction F of Form N–PORT. 295See proposed Item B.12.a of Form N–PORT. 296See proposed Items B.8 and B.12.b of Form N– PORT. In certain situations, the adjustments could result in the amounts of a fund’s investments in all three categories not summing to 100% of assets. For example, the reduction in the reportable amount of highly liquid assets may be greater than the increase in the reportable amount of illiquid assets, resulting in the percentages of the fund’s assets in each category summing to an amount below 100%. Funds would be required to increase their reported amounts of moderately liquid investments if necessary to make the amounts the fund reports sum to 100%. See proposed Item B.12.b of Form N– PORT. 297See Liquidity Rule Adopting Release, supra note 8, at section III.C.6.c. 298See id., at text accompanying n.621. 299See Investment Company Liquidity Disclosure, Investment Company Act Release No. 33046 (Mar. 14, 2018) [83 FR 11905 (Mar. 19, 2018)] (‘‘2018 Liquidity Disclosure Proposing Release’’) at nn.9–13 and accompanying text. 300See 2018 Liquidity Disclosure Adopting Release, supra note 22. For discussion generally of the Commission’s stated rationale for making this change, see generally id. and 2018 Liquidity Disclosure Proposing Release, supra note 299. elements of reports on Form N– PORT.294 We request comment on the proposed changes to the frequency with which funds’ reports on Form N–PORT would be made public, including:
204. Should we, as proposed, make
funds’ reports on Form N–PORT public on a monthly basis, 60 days after the end of the month to which they relate? How would investors use the additional information? Are there other potential users of public portfolio disclosures, including third-party users that provide services to investors, who find the additional information useful, and through whom investors could benefit indirectly?
205. Many funds already provide
monthly information about their portfolio holdings on their websites. Would investors benefit from having centralized information on Form N– PORT that includes all funds, rather than having to look at each fund’s website? Would investors benefit from having the information in a structured format rather than the format the fund uses on its website? Would the proposed requirement reduce costs for investors who currently use data aggregators to obtain holdings information regarding the funds in which they invest?
206. Should the lag between filing
and publication be extended, for example to 45 days after filing, or shortened, for example to 15 days after filing? Should reports be made public immediately upon filing?
207. Previously, some have suggested
that more frequent public disclosure could raise costs for investors due to predatory trading or copy-catting of fund strategies. Given that the proposal would provide data for additional monthly periods but would not change the current 60-day delay in making funds’ reports on Form N–PORT public, would the proposal raise costs for investors due to predatory trading or copy-catting? What empirical data exists that supports these assertions?
208. Would actively managed
nontransparent ETFs, which generally do not disclose their complete portfolios on a daily basis, be affected by the proposed requirement to disclose their portfolio on a 60-day delay differently than other actively managed funds, and should we permit these funds to disclose their portfolios less frequently as a result?
209. Do funds voluntarily publish
data about their portfolios to compete for investors, notwithstanding potential effects on their performance?
210. Are there certain items on Form
N–PORT that we propose to make public on a monthly basis that should only be public on a quarterly basis? If so, why is monthly disclosure of the relevant item neither necessary nor appropriate in the public interest or for the protection of investors?
c. Public Reporting of Aggregate
Liquidity Classifications We are proposing to require that funds’ monthly reports on Form N– PORT would include the percentage of a fund’s assets that fall into each of the three liquidity categories.295 To give effect to the proposed adjustments to a fund’s calculations of its level of highly liquid investments and illiquid investments in the liquidity rule, a fund would be required to make the same adjustments to its reported amount of highly liquid investments and illiquid investments, rather than simply report the percent of assets the fund has classified in each category. Specifically, a fund would reduce its reported amount of highly liquid assets by the amount of highly liquid assets that it posts as margin or collateral for derivatives transactions that are not highly liquid and by the amount of the fund’s liabilities. A fund also would increase its reported amount of illiquid assets by the amount of collateral available upon exit of illiquid derivatives transactions.296 The fund’s adjustments are intended to more accurately reflect the availability of assets to meet redemptions. We propose to require that a fund’s reported aggregate liquidity classifications include these adjustments, rather than report the adjustments separately, to make it easier for investors to understand the information a fund reports about its liquidity. The public disclosure framework we are proposing is similar to the framework the Commission adopted in
2016.297 At that time, the Commission
determined to require a fund to publicly disclose the aggregate percentage of its portfolio assets representing each of the classification categories to balance some commenters’ concerns about potential adverse effects that could arise from public reporting of detailed portfolio liquidity information with investors’ need for improved information about funds’ liquidity risk profiles.298 As funds began to implement the liquidity rule’s classification requirements, and before funds were required to provide public disclosure of aggregate liquidity classifications, the Commission received additional information about the potential challenges and concerns of publicly disclosing a fund’s aggregate liquidity profile at that time, namely the risk that the data would be subjective, that it was presented in isolation, and that it lacked the context of other disclosures about the fund.299 In response, the Commission replaced this disclosure with narrative liquidity disclosure in
2018.300 In removing the requirement to
report aggregate liquidity classifications, the Commission stated that the subjectivity involved in the classification process raises concerns when applied to public disclosure. Specifically, the Commission expressed concern that the quantitative presentation of the aggregate liquidity information may imply precision and uniformity in a way that obscures its subjectivity, and that funds may face incentives to classify their investments as more liquid in order to make their funds appear more attractive to investors, while also potentially increasing the risk of herding if funds adjusted their portfolios in response to the disclosure requirement. In addition, the Commission believed that it would not be appropriate to adapt Form N– PORT to provide narrative context to help investors appreciate the fund’s liquidity risk profile and the subjective nature of classification. The Commission judged at that time that effective disclosure of liquidity risks and their management would be better achieved through prospectus and shareholder report disclosure rather than Form N–PORT, and adopted a requirement to disclose in a narrative format a brief discussion of the operation and effectiveness of its liquidity risk management program in the fund’s shareholder reports. The

301See, e.g., supra section II.A.1. To the extent a fund would be incentivized to manage its portfolio so as to report higher amounts of highly liquid investments, we believe this would be consistent with the focus in section 22 of the Act on preserving the redeemability of open-end funds. 302Tailored Shareholder Reports Adopting Release, supra note 26, at text accompanying n.463. 303See, e.g., Comment Letter of Consumer Federation of America on 2020 Tailored Shareholder Reports Proposing Release, File No. S7–09–20 (‘‘[S]trongly encourag[ing] the Commission to reconsider its decision’’ to remove aggregate liquidity disclosure and characterizing narrative disclosure as ‘‘boilerplate.’’); see also Comment Letter of Tom and Mary on 2020 Tailored Shareholder Reports Proposing Release, File No. S7–09–20 (‘‘We think funds should be required to disclose their aggregate liquidity bucketing in their annual report. We believe this information is important to investors and will help them appreciate any liquidity risk.’’). The comment file for the 2020 Tailored Shareholder Reports Proposing Release, where these comment letters are available, is at https://www.sec.gov/comments/s7- 09-20/s70920.htm. 304See, e.g., Comment Letter of Ubiquity on 2020 Tailored Shareholder Reports Proposing Release, File No. S7–09–20 (‘‘Disclosure [of liquidity information in narrative format] is currently worthless and even with’’ the proposed changes which were designed to retain the narrative format, it ‘‘will continue to be worthless.’’); see also Comment Letter of Tom Williams on 2020 Tailored Shareholder Reports Proposing Release; Feedback Flier of Olivia Brightly on 2020 Tailored Shareholder Reports Proposing Release. 305See, e.g., Comment Letters of Morningstar Trustees, ICI, SIFMA. Fidelity, Dechert, James Angel, Lisa Barker, and T. Rowe Price on 2020 Tailored Shareholder Reports Proposing Release. 306See Tailored Shareholder Reports Adopting Release, supra note 26. 307See, e.g., supra section II.A.1 and note 301. 308See Reporting Modernization Adopting Release, supra note 274, at text following n.486 (‘‘Form N–PORT is not primarily designed for disclosing information to individual investors . . .’’). intent of the narrative framework was to provide investors with a holistic view of the liquidity risks of the fund and how effectively the fund’s liquidity risk management program managed those risks on an ongoing basis over the reporting period.301 In practice, though, the narrative disclosure did not meaningfully augment other disclosure requirements.302 Instead, based on staff experience with several years of shareholder reports covering a range of market conditions, including a market crisis in March 2020 that included substantial liquidity concerns for certain securities, we found that the narrative disclosure often appeared as a lengthy, boilerplate recitation of the requirements of rule 22e–4 that was not tailored to a particular fund and did not change as conditions
in the market changed. For example, many funds’ liquidity disclosures did not change after the events of March 2020, even for funds that invested in assets that had experienced severe liquidity issues. This meant that investors had limited information about the liquidity of fund investments or how the fund managed that liquidity risk through these stressful events. We believe that this prevented investors from fully evaluating the liquidity risks associated with a particular fund for purposes of making more informed investment decisions. Investors and funds have made similar observations. In 2020, when the Commission proposed amendments designed to streamline fund shareholder reports, some commenters requested that we require funds to disclose their aggregate liquidity buckets.303 Other commenters stated that the narrative disclosure is not particularly relevant to investment decision making.304 Several other commenters also stated that they believed the narrative disclosure should be moved from shareholder reports.305 We recently adopted amendments that remove the requirement to disclose the narrative disclosure in the shareholder reports.306 Our proposed amendments to the liquidity rule, along with the years of experience that funds have gained in complying with the current rule, also have made the concerns the Commission identified in 2018 less relevant. Since 2018, the staff has conducted outreach with numerous market participants, including fund complexes, liquidity classification vendors, and others, and we are proposing several changes to rule 22e– 4 that would prescribe additional parameters for many aspects of the classification process. These changes include introducing the concept of a 10% stressed trade size, establishing a minimum value impact standard, and removing asset class classifications, which would reduce subjectivity in classifications and reduce variation in funds’ classification practices, even if incentives for a fund to mis-classify its investments remain.307 These changes are intended to reduce the risk of subjectivity impeding an investor’s understanding. To the extent that subjectivity remains, investors reviewing this information on Form N–PORT also will have access to additional information in fund prospectuses and shareholder reports, which are delivered directly to investors. Prospectuses and shareholder reports would provide additional information about the fund and context for the liquidity disclosure in Form N– PORT, such as information about the factors affecting a fund’s risks, returns, and performance.308 In addition, the fact that the aggregate liquidity information would be required to change as liquidity conditions in the market change, and that investors would be able to review these changes on a monthly basis and compare them against the fund’s prior reports would provide additional context for investors who desire this information. Investors could also compare the fund’s reports to reports of similar
funds, which could aid their understanding by allowing them to focus on the differences. Finally, the proposed aggregate liquidity disclosure could improve the mix of information available to investors. Though reports on Form N–PORT do not provide information regarding a fund’s investment strategy and risk factors, the information reported on Form N–PORT may complement the other information already available to investors in order to allow them to develop a fuller understanding of the fund and its risks. We request comment on the proposed public availability of the aggregate liquidity classifications funds would report on Form N–PORT, including:
211. Should we, as proposed, require
funds to report publicly information regarding the aggregate percentage of their portfolio in each of the three proposed liquidity classification categories? Should we, as proposed, require that this information be reported publicly on a monthly basis and, if not, what factors are unique to liquidity information that should result in it being publicized on a different frequency than other information on Form N–PORT? Instead of, or in addition to, the percentages of a fund’s investments in each of the three proposed liquidity categories, should we require additional information to be reported? Is there any additional context, such as narrative disclosure, that would also be useful to investors? Should that narrative disclosure be located in Form N–PORT or somewhere else (e.g., a fund prospectus, shareholder report, or website)?
212. Instead of, or in addition to,
aggregate liquidity information, should we require position-level liquidity classifications to be reported publicly on Form N–PORT? Should we instead require position-level liquidity classifications to be reported publicly on a different form, such in a fund’s annual and semi-annual reports? How frequently should this information be reported? Would position-level liquidity reporting improve funds’ liquidity classifications by allowing the public to review and scrutinize liquidity classifications? Would position-level liquidity reporting improve consistency in classification practices across funds by allowing funds to see how other

309See Item C.21 of current Form N–CEN. 310See proposed Item B.11 of Form N–PORT. Funds would be instructed to respond with ‘‘N/A’’ when appropriate. 311We also propose to add a definition of ‘‘swing factor’’ to Form N–PORT, which would cross reference the definition of this term in proposed rule 22c–1(d). See General Instruction E of proposed Form N–PORT. 312See Item B.5 and Item B.6 of current Form N– PORT. 313See Item B.5 and Item B.6 of proposed Form N–PORT. similarly situated funds had classified the same or similar investments? Would position-level liquidity reporting improve investor access to or understanding of liquidity information, or would this information be difficult for investors to synthesize or understand? Would position-level liquidity reporting simplify the reporting framework for funds if this disclosure were in lieu of separate aggregate presentations? Would changes to the proposal, such as changes to how funds report the effect of the collateral they hold against derivatives that are not highly liquid, or the effect of liabilities, be necessary if we were to require position-level liquidity reporting? Would there be potential negative effects of position-level liquidity reporting? For example, would position-level liquidity reporting result in investors being able to infer information about a fund or company, such as being able to determine that a fund has material nonpublic information about an issuer because the fund categorizes the issuer’s securities as illiquid? Would position-level liquidity reporting result in funds’ counterparties engaging in predatory trading practices with funds, for example by adjusting the prices they bid for certain assets of a fund due to granular knowledge of how the fund categorizes the liquidity of its portfolio?
213. Should we, as proposed, require
adjustments to the percentages of funds’ assets in the proposed liquidity categories to account for certain derivatives transactions? Should we instead require information about derivatives transactions to be reported separately? Should certain derivatives transactions be treated differently for these purposes, for example by making differing adjustments based on whether a derivative is exchange-traded, centrally cleared, made with certain categories of counterparty, or otherwise? Should we require differing adjustments for derivatives transactions depending on the purpose, for example whether they are intended to hedge currency or interest rate risks associated with one or more specific equity or fixed-income investments held by the fund as described in rule 18f–4(c)(4)(i)(B)? Are there any changes we should make to aid investor understanding of how funds’ use of derivatives affects their liquidity?
214. We propose to require that if the
reported sum of a fund’s investments in each of the three categories does not equal 100%, the fund must adjust the percentage of assets attributed to the moderately liquid investment category so that the sum of the fund’s investments in each category equals 100%. Should we take a different approach, such as making the adjustment optional, or permitting a fund to report aggregate percentages that do not sum to 100%? Should we permit or require funds to provide additional information, such as an explanatory note that the totals have been adjusted and the amount of the adjustment? Are there other metrics for which we should permit or require funds to modify the reported amounts?
215. Would fund prospectuses and
shareholder reports delivered directly to investors provide sufficient context for the fund’s aggregate liquidity information that would be disclosed on Form N–PORT under the proposal? Because Form N–PORT is not delivered to investors, would investors who have sought out Form N–PORT disclosure in the first instance be more likely to consider the information in the context of other publicly available information about the fund? If investors would not have sufficient context when reviewing Form N–PORT, should we address this by requiring that funds send their most recent report on Form N–PORT to investors when they send other communications, such as their periodic reports or prospectus updates?
216. Instead of, or in addition to,
including information regarding funds’ aggregate liquidity profiles in Form N– PORT, as proposed, should we require that it be included in other documents, such as funds’ annual and semi-annual shareholder reports? If so, should the disclosure included in funds’ annual and semi-annual shareholder reports, or other documents, differ from what we propose to include in Form N–PORT? For example, should any disclosure in funds’ annual and semi-annual shareholder reports, or other documents be in a different format, such as a pie chart, or also include narrative disclosure to allow funds to provide additional context? d. Other Proposed Amendments to Form N–PORT In addition to our proposed amendments to require more timely reporting of information and to enhance public transparency of funds’ portfolio holdings and liquidity classifications, we are proposing a few additional amendments to Form N–PORT. These additional amendments include a new reporting item related to swing pricing, amendments to certain existing items to account for the proposal to make monthly Form N–PORT information available to the public, other conforming amendments to reflect the proposed amendments to rule 22e–4, and amendments to certain entity identifiers. In connection with our proposed amendments to swing pricing, we are proposing to require enhanced transparency into the frequency and amount of a fund’s swing pricing adjustments. Currently, if a fund were to engage in swing pricing, it would only be required to report on Form N–CEN if the fund engaged in swing pricing during a given year and, if so, the swing factor upper limit established by the fund.309 We are proposing to remove that reporting requirement on Form N– CEN and replace it with a new reporting requirement on Form N–PORT that would require information about the number of times the fund applied a swing factor during the month and the amount of each swing factor applied.310 To recognize that a swing factor adjustment could be positive (when the fund has net purchases) or negative (when the fund has net redemptions), we propose to specify that a fund must use a plus sign before a positive swing factor and a minus sign before a negative swing factor.311 More frequent and detailed information about a fund’s use of swing pricing is intended to help the Commission assess the size of the price adjustments funds are making during normal and stressed market conditions, as well as how often funds apply swing factor adjustments. The public may also benefit from this information to help facilitate an understanding of the frequency and size of swing factor adjustments. In addition, we are proposing to amend items that currently require funds to report certain return and flow information for each of the preceding three months.312 Rather than require information for the preceding three months, we are proposing to instead require a fund to report that information only for the month that the Form N– PORT report covers.313 The
Commission currently requires return and flow information for the preceding three months in a single report to provide investors access to monthly data for a given quarter, given that investors currently only have access to Form N– PORT reports for the third month of

314See Reporting Modernization Adopting Release, supra note 274, at paragraphs accompanying nn.225, 232, and 250. 315See id., at paragraphs accompanying nn.225 and 250. 316See Part F of proposed Form N–PORT. Currently, Part F of Form N–PORT does not require information for the second and fourth quarters of the fund’s fiscal year for the same reason. See Item 6 of Form N–CSR and Reporting Modernization Adopting Release, supra note 274, at section II.J. 317 Id. at section II.A.2.j. 318 Id. 319See Part D of current Form N–PORT. The form permits funds to report as ‘‘miscellaneous securities’’ an aggregate amount of portfolio investments that does not exceed 5% of the total value of the fund’s portfolio investments, provided that the securities included in this category are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders, or set forth in any registration statement, application, or report to shareholders or otherwise made available to the public. 320See Reporting Modernization Adopting Release, supra note 274, at text following n.424. 321See id. at n.421 and accompanying text. 322See Reporting Modernization Adopting Release, supra note 274, at section II.A.2.h (requiring that information about miscellaneous securities be reported to the Commission on a nonpublic basis). 323See Instructions to Item C.7 in proposed Form N–PORT. 324See Item B.8 in proposed Form N–PORT; General Instruction E (Definitions) in proposed Form N–PORT. 325See Item B.8 in proposed Form N–PORT. The proposed revisions would require a fund to report the value of its highly liquid investments that are assets that are posted as margin or collateral in connection with moderately liquid or illiquid investments, and would require a fund to report the value of any margin or collateral posted in connection with an illiquid derivatives transaction, where the fund would receive the value of the margin or collateral if it exited the derivatives transaction. 326See Item B.7.b in proposed Form N–PORT. each quarter.314 Monthly data for the preceding three months was also intended to avoid a potential investor misperception that one month’s returns or flows represented returns or flows for the full quarter.315 Because, under our proposal, investors would have access to monthly Form N–PORT reports, we propose to amend the period for which a fund must report return and flow information to align with monthly public reporting. For similar reasons, we are proposing to amend Part F of Form N–PORT, which currently requires a fund to attach its complete portfolio holdings for the end of the first and third quarters of the fund’s fiscal year, presented in accordance with Regulation S–X, within 60 days after the end of the reporting period. We are proposing to require funds to file this disclosure within 60 days of the end of the reporting period for each month, with the exception of
the last month of the fund’s second and fourth fiscal quarters, because the latter portfolio holdings information is already available in funds’ annual and semi-annual reports.316 That is, we propose that funds would be required to file the portfolio disclosure on Part F of Form N–PORT ten times per year, instead of the current requirement to file twice per year. When the Commission adopted Part F of Form N–PORT, it recognized that not all investors may prefer to receive portfolio holdings information in a structured XML format, and instead might prefer portfolio holdings schedules presented using the form and content specified by Regulation S–X.317 The Commission stated that requiring funds to attach these portfolio holdings schedules to reports on Form N–PORT would provide the Commission, investors, and other potential users with access to funds’ current and historical portfolio holdings for those funds’ first and third fiscal quarters, as well as consolidate these disclosures in a central location, together with other fund portfolio holdings disclosures in reports on Form N–CSR for funds’ second and fourth fiscal quarters.318 In conformance with the proposed requirement for funds to file their structured portfolio schedules on a monthly basis, and to make the monthly disclosure more useable for investors, we propose to amend Part F of Form N–PORT so that investors would be able to access unstructured portfolio schedules presented in accordance with Regulation S–X on the same frequency. Similarly, we are proposing to amend
Part D of Form N–PORT regarding
miscellaneous securities to align with the proposal to make monthly Form N– PORT reports publicly available. Form N–PORT currently contemplates that detailed information about miscellaneous securities, which would remain nonpublic, would only be included in reports filed for the last month of each fiscal quarter.319 This is because today all information reported on Form N–PORT for the first and second months of each quarter is nonpublic, which means there is no need for funds to designate any of their investments for those reporting periods as miscellaneous securities.320 Although our proposed shift from quarterly to monthly public reporting is intended to improve public transparency of funds’ portfolio holdings, we continue to believe that treating information related to miscellaneous securities as nonpublic may serve to guard against the premature release of those securities positions and thus deter front-running and other predatory trading practices, and that for this reason public disclosure of miscellaneous securities continues to be neither necessary nor appropriate in the public interest or for the protection of investors.321 At the same time, it is important for the Commission to receive more detailed information about miscellaneous securities holdings so the Commission has a complete record of the portfolio for monitoring, analysis, and checking for compliance with Regulation S–X.322 As a result, we are proposing to amend
Part D of Form N–PORT to remove the
language that limits reporting of nonpublic information about individual miscellaneous securities holdings to reports filed for the last month of each fiscal quarter. The proposed amendment would allow funds in their monthly Form N–PORT reports to report publicly the aggregate amount of miscellaneous securities held in Part C, while requiring funds to provide more detailed information in Part D about the individual holdings in the miscellaneous securities category to the Commission on a nonpublic basis. We are also proposing amendments to Form N–PORT to reflect the proposed amendments to rule 22e–4. For example, because we are proposing to remove the concept of a reasonably anticipated trade size from rule 22e–4, we are proposing to replace references to this concept in an instruction related to classifying portions of a single holding in multiple liquidity categories with references to the stressed trade size concept.323 We are also proposing to revise the liquidity classifications a fund will report to reflect the revisions to the liquidity categories in rule 22e–
4.324 Because we are proposing
improvements to the way that a fund treats collateral for certain derivatives transactions when calculating whether it holds sufficient assets to meet its highly liquid investment minimum or holds an amount of illiquid assets that exceeds the 15% limit, we also are proposing to revise the information open-end funds must report about the collateral posted as margin or collateral in connection with certain derivatives transactions.325 We are similarly proposing to revise the information a fund would report about the fund’s highly liquid investments to reflect that not all highly liquid investments will count toward the fund’s highly liquid investment minimum.326 In addition to reflecting changes to rule 22e–4, these changes are also designed to provide additional information to Commission staff regarding a fund’s level of highly liquid assets and illiquid assets and the

327See General Instruction E of proposed Form N–PORT. 328See Items B.4, C.1, C.10, and C.11 of proposed Form N–PORT. 329See Liquidity Rule Adopting Release, supra note 8, at n.973. 330 Item C.21 of Form N–CEN is proposed to be revised to require disclosure on liquidity classification services, as described above. effect of derivatives transactions on that amount. In addition, we propose to amend certain items and definitions related to entity identifiers in the form. Specifically, we propose to amend the definition of LEI in the form to remove language providing that, in the case of a financial institution that does not have an assigned LEI, a fund should instead disclose the RSSD ID assigned by the National Information Center of the Board of Governors of the Federal Reserve System, if any.327 Instead of classifying an RSSD ID as an LEI for these purposes, we propose to provide separate line items where a fund would report an RSSD ID, if available, in the event that an LEI is not available for an entity.328 This change is designed to improve consistency and comparability of information funds report about the instruments they hold, including issuers of those instruments and counterparties to certain transactions.
217. Should we require funds to
report the number of times the fund applied a swing factor and each swing factor applied, as proposed? Should we require the median, highest, and lowest (non-zero) swing factor applied for each reporting period on Form N–PORT, rather than require disclosure of each swing factor applied?
218. Should we require funds to
provide additional information about swing pricing in Form N–PORT reports, such as the swing pricing administrator’s determination to use a lower market impact threshold or lower inflow swing threshold, if applicable? Should we separately require funds to disclose information about market impact factors, such as how many times a market impact factor was included in the swing factor each month and the size of those market impact factors (e.g., either the size of any market impact factor applied, or the median, highest, and lowest (non-zero) amount)? Should we require funds to provide information about their imposition of redemption fees under rule 22c–2, which funds can use to recoup some of the direct and indirect costs incurred as a result of short-term trading strategies, such as market timing? If so, should we require funds to disclose in reports on Form N– PORT the number of times they imposed redemption fees during the period and the amount of the fees? Should funds be required to itemize each fee charged, disclose the total amount charged during the period and the average fee charged, or some other presentation?
219. Instead of, or in addition to,
requiring information about swing pricing on Form N–PORT, should we require funds to provide information about their use of swing pricing in other locations? For example, would investors find this information more accessible if it were on fund websites, in registration statements, or in shareholder reports?
220. Should we require funds to
provide return and flow information only for a single month, as proposed, or should we continue to require funds to provide return and flow information for the preceding three months? Even though investors would have access to monthly reports on Form N–PORT, is it helpful to have return or flow information for previous months in a single report to have a readily available point of comparison?
221. Should we amend Form N–PORT
to continue to maintain the confidentiality of information about a fund’s miscellaneous securities for each reporting period, as proposed? Are there other conforming amendments we should make to align Form N–PORT reporting requirements with the proposed changes to the frequency funds must file these reports and the timeline for filing and public availability?
222. Should we amend Form N–PORT
to require a fund to attach its complete portfolio holdings presented in accordance with Regulation S–X within 60 days after the end of each month except for the last month of the fund’s second and fourth fiscal quarters, as proposed? Should we instead require a fund to file this information on a different frequency, such as every month, without exception? Should we maintain the current filing schedule? Should we require funds to attach this information within a different timeframe, such as no later than 45 days or 75 days after the end of the reporting period? If we make changes to other aspects of the proposal, such as changes to the frequency funds file reports on Form N–PORT, the delay between the end of the reporting period and filing, or the time at which filings are made public, should we also make conforming changes to Part F?
223. Are our proposed amendments to
remove references to the concept of a reasonably anticipated trade size in Form N–PORT and replace them with references to the stressed trade size effective? Are there other conforming amendments we should make to align Form N–PORT with the liquidity rule amendments?
224. Should we, as proposed, amend
Form N–PORT to require funds to identify the value of margin or collateral the fund has posted as margin or collateral in connection with an illiquid derivatives transaction in order to provide a complete picture of the amount of illiquid investments for purposes of the liquidity rule’s 15% limit?
225. As proposed, should we amend
the definition of LEI in the form and provide a separate item for providing an RSSD ID as an identifier, as applicable?
2. Amendments to Form N–CEN
We are proposing amendments to Form N–CEN to identify and provide certain information about service providers a fund uses to fulfill the requirements of rule 22e–4. The amendments would require a fund to:
(1) name each liquidity service provider; (2) provide identifying information, including the legal entity identifier and location, for each liquidity service provider; (3) identify if the liquidity service provider is affiliated with the fund or its investment adviser; (4) identify the asset classes for which that liquidity service provider provided classifications; and (5) indicate whether the service provider was hired or terminated during the reporting period. This information would allow the Commission and other participants to track certain liquidity risk management practices.329 As liquidity classification services have become more widely used, the proposal would require information about whether and which liquidity service providers are used, for what purpose, and for what period. Among other things, this information would help us better understand potential trends or outliers in funds’ liquidity classifications reported on Form N– PORT; for example, by analyzing classifications trends of specific vendors, we might distinguish patterns in how classifications might differ due to vendor models or data. As described above, we also propose to remove the current disclosure in Item C.21 of Form N–CEN and replace it with a new reporting requirement on Form N–PORT to provide enhanced transparency into the frequency and amount of a fund’s swing pricing adjustments.330 In addition, consistent with our proposed amendments to the definition of LEI in Form N–PORT, we are proposing to make the same changes

331See Items B.16, B.17, C.5, C.6, C.9, C.10, C.11, C.12, C.13, C.14, C.15, C.16, C.17, D.12, D.13, D.14, E.2, F.1, F.2, F.4, and Instructions to Item G.1 of proposed Form N–CEN. 332See ETF Release, supra note 289. 333See proposed rule 22e–4(a) and proposed rule 22c–1(d); General Instruction E of proposed Form N–CEN and General Instruction E of proposed Form N–PORT. 334See proposed rule 31a–2(a)(2). 335See J.P. Morgan Investment Management Inc., et al., Investment Company Act Release No. 34180 (Jan. 21, 2021). See also section 38(a) of the Act, 15 U.S.C. 80a–37(a). 336See Liquidity FAQs, supra note 79. 337See proposed rule 22c–1(b); Item B.11 of proposed Form N–PORT; and Item 6(d) of proposed Form N–1A. 338See proposed rule 22c–1(a); Item 11(a) of proposed Form N–1A. 339See proposed rule 22e–4. in Form N–CEN to separate the concepts of LEIs and RSSD IDs.331 We request comment on the proposed amendments to Form N–CEN:
226. Would the proposed reporting on
liquidity classification service providers assist investors and funds in better understanding how liquidity risk is managed at a fund? Should any other information be provided about the liquidity classification service provider?
227. Should we require any
information about a fund’s use of swing pricing on Form N–CEN? How would this information relate to the information we propose to require on Form N–PORT?
228. As proposed, should we amend
Form N–CEN to separate the concepts of LEI and RSSD ID? As proposed, should funds be required to provide an RSSD ID, if available, when an LEI is not available? F. Technical and Conforming Amendments In September 2019, the Commission adopted new rule 6c–11 to allow ETFs that satisfy certain conditions to operate without obtaining an exemptive order from the Commission.332 We are proposing to make a technical amendment to the definition of ETF in rules 22e–4 and 22c–1, as well as in Forms N–CEN and N–PORT, as a result of this rulemaking. Specifically, the proposed amendments would replace language in each definition that refers to ‘‘an exemptive rule adopted by the Commission’’ with a direct reference to rule 6c–11.333 We are also proposing to make a conforming amendment to rule 31a–2. Specifically, this proposed amendment to the recordkeeping rule would replace the reference to the current swing pricing provisions in rule 22c–1(a)(3) with a reference to the proposed swing pricing provisions in rule 22c–1(b).334 G. Exemptive Order Rescission and Withdrawal of Commission Staff Statements In light of the scope of our proposed amendments to the liquidity rule, and pursuant to our authority under the Act to amend or rescind our orders when necessary or appropriate to the exercise of the powers conferred elsewhere in the Investment Company Act, we are proposing to rescind an exemptive order that relates to rule 22e–4.335 As this order’s representations and conditions, and the relief provided, are predicated on rule 22e–4 in its current form, the proposed amendments, if adopted, would render the order moot, superseded, and inconsistent with the final rule amendments. In addition, staff in the Division of Investment Management is reviewing its no-action letters and other statements addressing compliance with rules 22e–4 and 22c– 1 to determine which letters and other staff statements, or portions thereof, should be withdrawn in connection with any adoption of this proposal. Upon the adoption of any final rule amendments, some of these letters and other staff statements, or portions thereof, would be moot, superseded, or otherwise inconsistent with the final rule amendments and, therefore, would be withdrawn. The staff review would include, but would not necessarily be limited to, the staff no-action letters and other staff statements listed below:
• Investment Company Liquidity Risk
Management Programs Frequently Asked Questions (April 10, 2019);
• Reflow, SEC Staff No-Action Letter
(July 15, 2002);
• Charles Schwab & Co., Inc., SEC
Staff No-Action Letter (July 7, 1997);
• Investment Company Institute, SEC
Staff No-Action Letter (Feb. 9, 1973);
• United Benefit, SEC Staff No-Action
Letter (July 13, 1971);
• Investment Company Institute, SEC
Staff No-Action Letter (Mar. 24, 1970); and
• Investment Companies: Share
Pricing: SEC Staff Views, Investment Company Act Release No. 5569 [34 FR 383 (Dec. 27, 1968)]. Additionally, the staff statements, or portions thereof, may be withdrawn following the relevant underlying transition period discussed in section II.H below, if adopted, as determined appropriate in connection with the staff’s review of those staff statements. We request comment on the proposed rescission or withdraw of past Commission or staff statements, and specifically on the following items:
229. Are there additional letters or
other statements, or portions thereof, that should be withdrawn or rescinded? If so, commenters should identify the letter or statements, state why it is relevant to the proposed rule, how it or any specific portion thereof should be treated, and the reason.
230. If the amendments to the
liquidity rule are adopted, are there any questions and responses in the staff FAQs that would still be relevant and helpful to retain?336 H. Transition Periods We propose to provide a transition period after the effective date of the proposed amendments to give affected funds sufficient time to comply with any of the proposed changes and associated disclosure and reporting requirements, if adopted, as described below. Based on our experience, we believe the proposed compliance dates would provide an appropriate amount of time for funds to comply with the proposed rules, if adopted.
• Twenty-Four-Month Compliance
Date. We propose that 24 months after the effective date of the amendments, all registered open-end management investment companies, except for money market funds and exchangetraded funds, must comply with the proposed swing pricing requirement in rule 22c–1, as well as the swing pricing disclosures applicable to these funds in the proposed amendments to Forms N– PORT and N–1A.337 We also propose that 24 months after the effective date of the amendments, funds, transfer agents, registered clearing agencies, and intermediaries must comply with the proposed ‘‘hard close’’ requirement in rule 22c–1, and funds must comply with related disclosure requirements we propose to require in Form N–1A.338
• Twelve-Month Compliance Date.
The proposed compliance period for all other aspects of the proposal is 12 months after the effective date of the amendments, if adopted, and includes the following:
Æ The proposed amendments to rule 22e–4, which include: (1) amending the rule’s liquidity categories, including reducing the number of liquidity categories from four to three; (2) providing specific and consistent standards that funds would use to classify investments, including by setting a stressed trade size and defining when a sale or disposition would significantly change the market value of an investment; and (3) requiring daily classifications; 339 and Æ The proposed amendments to Forms N–PORT and N–CEN, except the swing pricing-related disclosure on Form N–PORT.

340Section 22(e) of the Act establishes a shareholder right of prompt redemption in openend funds by requiring such funds to make payments on shareholder redemption requests within seven days of receiving the request. 341Unless otherwise specified, we use the term ‘‘less liquid’’ in this section to refer to investments that are on the lower end of the liquidity spectrum, and not solely investments that are classified as ‘‘less liquid investments’’ under the current rule 22e–4. 342See infra section III.B.3 for additional discussion of these issues. 343See supra section I.B for a detailed discussion of the Mar. 2020 market events. 344See infra section III.B.3 for additional discussion. 345See e.g., Bing Zhu & Rene´-Ojas Woltering, Is Fund Performance Driven by Flows into Connected Funds? Spillover Effects in the Mutual Fund Industry, 45 J. Econ. & Fin. 544, no. 9 (2021). See infra section III.B.3 for additional discussion. 346See supra sections I and II for the discussion of regulatory experience. We request comment on the proposed transition dates, and specifically on the following items:
231. Are the proposed compliance
dates appropriate? If not, why not? Is a longer or shorter period necessary to allow affected funds to comply with one or more of these particular amendments, if adopted? If so, what would be a recommended compliance date? Should we provide a longer compliance date for smaller funds, and if so what should this be (for example, 36 months for compliance with the swing pricing requirements, and 18 months for the other aspects of the proposal)? How should we define a ‘‘smaller fund’’ for this purpose? For example, should a smaller fund be a fund that, together with other investment companies in the same group of related investment companies, has net assets of less than $1 billion as of the end of its most recent fiscal year?
232. In particular, is a longer period
necessary for funds to comply with the proposed removal of the less liquid investment category and the amendment to the scope of illiquid investments? How long might it take for funds and other parties to reduce the settlement times for bank loans and other investments that funds currently classify as less liquid investments? Is a longer period necessary for retirement plan recordkeepers or other intermediaries to make necessary changes to their systems?
233. Should the compliance dates be
staggered for certain provisions? For example, should the compliance date for the hard close occur prior to the compliance date for swing pricing?
III. Economic Analysis
A. Introduction
The Commission is mindful of the economic effects, including the benefits and costs, of the proposed amendments.
Section 2(c) of the Act, Section 202(c) of
the Advisers Act, and Section 3(f) of the Exchange Act direct the Commission, when engaging in rulemaking where it is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. In addition, Section 23(a)(2) of the Exchange Act, requires the Commission, when making rules under the Exchange Act, to consider among other matters the impact that the rules would have on competition, and prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The analysis below addresses the likely economic effects of the proposed amendments, including the anticipated benefits and costs of the amendments and their likely effects on efficiency, competition, and capital formation. The Commission also discusses the potential economic effects of certain alternatives to the approaches taken in this proposal. Open-end funds serve as intermediaries between investors seeking to allocate capital and issuers seeking to raise capital by pooling a portfolio of investments and selling the shares of this portfolio to investors. A prominent feature of open-end funds is the mismatch between the immediate liquidity funds provide to their shareholders 340 and the potential illiquidity of fund portfolio investments (‘‘liquidity mismatch’’). In order to pay net redemptions or invest proceeds from net subscriptions, a fund generally incurs trading costs, which can, among other things, take the form of bid-ask spreads, commissions, markups, markdowns, or market impact (the tendency of large trades to shift prices in the market). Therefore, the liquidity mismatch can lead to non-negligible trading costs associated with selling the fund’s less liquid portfolio investments in order to meet investor redemptions or buying portfolio investments in order to accommodate investor subscriptions.341 As such, the liquidity mismatch and associated trading costs in the open-end fund sector present several potential problems, including: (1) funds may not be able to meet the statutory obligation to satisfy investor redemptions within seven days without incurring significant trading costs; (2) fund investors are subject to the risk of dilution; (3) fund investors’ anticipation that they may be diluted may create a first-mover advantage that incentivizes them to redeem their shares before other investors do; and (4) fire sales that can be provoked by an increased pressure to meet redemptions could further disrupt already stressed markets.342 Market stress events, such as the one that occurred during March 2020, may exacerbate these issues.343 For example, during stress events investors may rebalance away from some investments into others for many reasons, including but not limited to, their general risk tolerance,
legal or investment policy restrictions, or short-term cash needs. To the extent that such rebalancing activity is correlated across investors of the same fund or is correlated with deterioration in the liquidity of the fund’s underlying assets, trading costs for the funds’ underlying investments may increase and non-transacting fund shareholders may become exposed to increased dilution risk, which may lower future fund returns. In addition, the risk of investor dilution associated with the illiquidity of funds’ underlying investments may create a first-mover advantage that could lead to increased mutual fund redemptions.344 Fund managers may not fully incorporate potential future fund shareholder dilution into their investment decisions for several reasons. First, potentially misaligned incentives between fund shareholders and fund managers may cause some fund managers to hold portfolios with liquidity levels that could be insufficient to meet redemptions without imposing significant dilution costs on non-transacting fund investors, especially during periods of market stress. Second, fund investors may not have granular and timely enough information to adequately assess the extent of the liquidity risk they are taking on and, therefore, cannot discipline the extent to which a fund manager exposes the fund’s shareholders to dilution risk. Finally, to the extent that first-mover advantage can lead to anticipatory mutual fund redemptions that could impose costs on other market participants, 345 fund managers do not necessarily have an incentive to factor such costs into their investment decisions. In light of these issues and our associated regulatory experience, 346 the proposal seeks to further address liquidity externalities in the open-end fund sector. In particular, we expect the proposal to: (1) enhance open-end funds’ liquidity; (2) improve funds’ antidilution and resilience mechanisms for

347We recognize that factors other than dilution related to trading costs—such as dilution from falling asset prices (market risk) and from potential differences between prices of underlying investments used for a fund’s net asset value calculation and execution prices for these investments—may also contribute to the first-mover advantage in redemptions and potential runs in open-end funds. These and other considerations are discussed in greater detail in section III.B.3 below. 348See Nicolas Valderrama, Can the Liquidity Rule Keep Mutual Funds Afloat? Contextualizing the Collapse of Third Avenue Management Focused Credit Fund, 70 Cath. U. L. Rev. 317 (2021). See also Landon Thomas Jr., A New Focus on Liquidity After a Fund’s Collapse, N.Y. Times, Jan. 11, 2016, available at https://www.nytimes.com/2016/01/12/ business/dealbook/a-new-focus-on-liquidity-after-afunds-collapse.html. 349See e.g., Antonio Falato et. al., Financial Fragility in the COVID–19 Crisis: The Case of Investment Funds in Corporate Bond Markets, 123 J. Monetary Econ. 35 (2021). The authors discuss how the Federal Reserve bond purchase program helped to reverse mutual funds’ outflows during the Mar. 2020 period. 350See supra section II.A. 351See e.g., Mikhail Simutin, Cash Holdings and Mutual Fund Performance, 18 Rev. Fin. 1425, no. 4 (2014), See also Aleksandra Rz´eznik, Skilled Active Liquidity Management: Evidence from Shocks to Fund Flows, (Jul. 29, 2021), available at SSRN: https://ssrn.com/abstract=4106412 (retrieved from SSRN Elsevier database). 352See e.g., Sergey Chernenko & Adi Sunderam, Liquidity Transformation in Asset Management:
Evidence From the Cash Holdings of Mutual Funds (National Bureau of Economic Research (NBER) working paper no. w22391, Jul. 11, 2016), available at https://ssrn.com/abstract=2807702. 353See supra sections II.B and II.C. 354See e.g., CSSF Paper, supra note 61; Dunghong Jin et. al., Swing Pricing and Fragility in Open-End Mutual Funds 35 Rev. Fin. Stud. (2022); Benjamin King & James Semark, Reducing Liquidity Mismatch in Open-Ended Funds: A Cost-Benefit Analysis (Bank of England working paper no. 975, Apr. 22, 2022), available at https://ssrn.com/ abstract=4106646. 355See CSSF Paper, supra note 61; Claessens & Lewrick, supra note 61; ESMA, Recommendation of the European Systemic Risk Board (ESRB) on Liquidity Risk in Investment Funds (Nov. 12, 2020), available at https://www.esma.europa.eu/ document/recommendation-european-systemicrisk-board-esrb-liquidity-risk-in-investment-funds. 356See supra section II.E. 357See Liquidity Rule Adopting Release, supra note 8. any given level of liquidity; and (3) increase the transparency of open-end funds’ liquidity management practices. Together, the proposed amendments may mitigate liquidity externalities in the open-end fund sector by improving the ability of funds to meet redemptions without imposing significant trading costs on investors. This, in turn, may reduce the first-mover advantage associated with the dilution from trading costs and curtail run risk in open-end funds, 347 which is consistent with recent analyses discussing how more robust liquidity management may mitigate this risk.348 The proposed amendments may also reduce the likelihood or the extent of future government interventions.349 The proposed amendments to the liquidity risk management (‘‘LRM’’) program 350 are designed to support funds’ ability to meet redemptions without significant trading costs, such as larger haircuts associated with less liquid investments that open-end funds may hold in their portfolios. Although less liquid investments generally offer a higher return, the trading costs associated with selling these assets during periods of increased redemptions may offset this risk premium, potentially resulting in a lower overall return for fund investors.351 Therefore, a more robust liquidity management program that requires funds to hold more highly liquid investments may benefit fund investors in the longer term. In addition, requiring funds to hold a greater share of highly liquid investments may help limit the price impact that funds impose on underlying markets when they sell less liquid assets to meet investor redemptions, especially during periods of market stress.352 The goal of the proposed swing pricing and hard close requirements is to reduce the dilution of non-transacting fund shareholders by charging redeeming and subscribing investors the trading costs they impose on a fund, 353 which may mitigate the first-mover advantage associated with the dilution from trading costs. Although swing pricing has not yet been
implemented by any fund in the U.S., usage of swing pricing in other jurisdictions has been shown in certain cases to mitigate redemption pressure during periods of elevated market volatility.354 We recognize that swing pricing may not always fully reduce the potential firstmover advantage associated with increasing trading costs and discourage associated investor redemptions.355 However, even in these cases, we believe that investors would nevertheless benefit from the proposed requirement because it would reduce the dilution of non-transacting fund shareholders, regardless of the amount of trading activity by redeeming or subscribing investors. Coupled with the proposed amendments to the LRM program and the proposed swing pricing and hard close requirements, the proposed reporting and public disclosure requirements are aimed at promoting transparency and facilitating investors’ understanding of liquidity risk in the open-end fund sector, as well as promoting transparency regarding funds’ application of liquidity management tools.356 As a result, the proposed public disclosure requirements may aid investors in making more efficient portfolio allocation decisions. Many of the benefits and costs discussed below are difficult to quantify. For example, we lack data that would help us predict how funds may adjust the liquidity of their portfolios in response to the proposed liquidity rule amendments; the extent to which investors may reduce their holdings in open-end funds as a result of the proposed swing pricing requirement and other amendments; the extent to which investors may move capital from mutual funds to other investment vehicles, such as closed-end funds, ETFs, or CITs; and the reduction in dilution costs to investors in open-end funds as a result of the proposed amendments (which would depend on investor subscription and redemption activity and the liquidity risk of underlying fund investments). Form N– PORT data is not sufficiently granular to allow such quantification, and many of these effects will depend on how affected funds and investors would react to the proposed amendments. While we have attempted to quantify economic effects where possible, much of the discussion of economic effects is qualitative in nature. We seek comment on all aspects of the economic analysis, especially any data or information that would enable a quantification of the proposal’s economic effects. B. Baseline

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

358See rule 22e–4(b)(1)(ii)(A).
359See rule 22e–4(b)(1)(ii)(C). In addition, funds currently are also required to exclude highly liquid assets that are posted as margin or collateral in connection with non-highly liquid derivatives transactions when determining whether the fund primarily holds highly liquid assets. See rule 22e– 4(b)(1)(iii)(B). 360Funds’ current practices in classifying the liquidity of their investments and otherwise complying with rule 22e–4 may take consideration of the staff’s Liquidity FAQs. See, e.g., supra note 79. 361See rule 22e–4(b)(1)(ii). 362See rule 22e–4(b)(1)(iv). 363See rule 22e–4(b)(1)(iv)(A) and rule 22e– 4(b)(1)(iii)(A)(3); Form N–RN Parts B through D. 364See rule 22e–4(b)(1)(iii). 365See supra note 176. 366See Adoption of rule 2a–4 Defining the Term ‘‘Current Net Asset Value’’ in Reference to Redeemable Securities Issued by a Registered Investment Company, Investment Company Act Release No. 4105 (Dec. 22, 1964) [29 FR 19100 (Dec. 30, 1964)]. 367For purposes of discussions of filing requirements on Form N–PORT, the term ‘‘fund’’ refers to registrants that currently are required to report on Form N–PORT, including open-end funds, registered closed-end funds, and ETFs registered as unit investment trusts, and excluding money market funds and small business investment companies. 368See supra note 289. ‘‘illiquid investments,’’ which cannot be sold or disposed of in current market conditions in seven calendar days or less. A fund may generally classify and review its investments by asset class unless the fund or adviser has information about any market, trading, and investment-specific considerations that it reasonably expects to affect significantly the liquidity characteristics of an investment compared to the fund’s other portfolio holdings within that asset class.358 Among other requirements, open-end funds generally are required to determine a minimum amount of highly liquid investments they should maintain. In addition, all open-end funds are prohibited from acquiring any illiquid investment if, immediately after the acquisition, the funds would have invested more than 15% of their net assets in illiquid assets; however, an investment in a liability position, such as a derivative, is not subject to this limitation. Under the current rule, a fund is required to identify the percentage of the fund’s highly liquid investments that it has posted as margin or collateral in connection with derivatives transactions that the fund has classified as less than highly liquid.359 In classifying its investments under the current rule, a fund analyzes how quickly it can sell an investment without the sale ‘‘significantly’’ changing the investment’s market value. Funds are required to determine two key inputs for this analysis. The first is the fund’s reasonably anticipated trade size.360 Reasonably anticipated trade size interacts with a fund’s assessment of future redemption/subscription activity: for example, if the fund would anticipate selling a
large position relative to trading volume, the sale may depress the price. The second is the determination of what constitutes a ‘‘significant’’ change in value. In both cases, the rule allows funds to make their own reasonable assumptions. Rule 22e–4 currently requires that funds review their liquidity classifications at least monthly in connection with reporting on Form N– PORT, and more frequently if changes in relevant market, trading, and investment-specific considerations are reasonably expected to materially affect one or more of their investments’ classifications.361 The current rule also requires a fund to monitor and take timely actions related to the liquidity of its investments, including changes to its liquidity profile. Specifically, the rule prohibits a fund from acquiring any illiquid investment, if immediately after the acquisition, the fund would have invested more than 15% of its net assets in illiquid investments that are assets.362 In addition, the rule requires a fund to provide timely notice to its board, and to the Commission on Form N–RN, if the fund exceeds the 15% limit on illiquid investments, or if there is a shortfall of the fund’s highly liquid investments below its highly liquid investment minimum for seven consecutive calendar days.363 Rule 22e–4 currently requires a fund to determine a highly liquid investment minimum if it does not primarily hold investments that are highly liquid. Funds that are subject to the highly liquid investment minimum requirement must determine a highly liquid investment minimum considering several factors, review this minimum at least annually, and adopt policies and procedures to respond to a shortfall of the fund’s highly liquid investments below the minimum.364 The current exclusion for funds that invest primarily in highly liquid investments provides some discretion to determine the level of highly liquid investments that constitutes primarily. b. Swing Pricing Currently, the rule allows open-end funds that are not excluded funds to use swing pricing. The required swing pricing policies and procedures provide that funds must adjust their NAV per share by a single swing factor or multiple factors that may vary based on the swing threshold(s) crossed once the level of net purchases into or net redemptions from such fund has exceeded the applicable swing threshold for the fund. The current rule permits a fund to determine its own swing threshold for net purchases and net redemptions, based on a consideration of certain factors the rule identifies.365 The fund’s swing factor is permitted to take into account only the near-term costs expected to be incurred by the fund as a result of net purchases or net redemptions on that day and may not exceed an upper limit of 2% of the day’s NAV per share. The determination of whether the fund’s level of net purchases or net redemptions has exceeded the applicable swing threshold is permitted to be made based on receipt of sufficient information
about the fund investors’ daily purchase and redemption activity to allow the fund to reasonably estimate whether it has crossed the swing threshold with high confidence. This investor flow information may consist of individual, aggregated, or netted orders, and may include reasonable estimates where necessary. In addition, rule 2a–4 requires, when determining the NAV, that funds reflect changes in holdings of portfolio securities and changes in the number of outstanding shares resulting from distributions, redemptions, and repurchases no later than the first business day following the trade date. This calculation method provides funds with additional time and flexibility to incorporate last-minute portfolio transactions into their NAV calculations on the business day following the trade date, rather than on the trade date.366
c. Reporting Requirements
Registered management investment companies and ETFs organized as unit investment trusts are required to file periodic reports on Form N–PORT about their portfolios and each of their portfolio holdings as of month-end.367 Funds file these reports on a quarterly basis, with each report due 60 days after the end of a fund’s fiscal quarter. Only information about the fund’s holdings for the third month of each fiscal quarter is available to the public. In addition to the publicly available information on Form N–PORT, investors also have access to information about the holdings of ETFs, including actively managed ETFs, which generally are required to provide transparency into their portfolio holdings on a daily basis.368 Many funds also provide monthly information about their portfolio holdings to third

369See General Instruction E of proposed Form N–PORT and Instructions to Item G.1 of the Form N–CEN. 370We note that this practice differs from other jurisdictions. See supra note 225. 371See Item 11(a) of Form N–1A. 372See supra section II.C.3.d. 373See https://www.dtcc.com/wealthmanagement-services/mutual-fund-services/fundserv. 374 Id. 375See supra section I.B for a more detailed discussion about use of swing pricing in Europe. 376See supra note 225. party data aggregators, generally with a lag of 30 to 90 days, which in turn make them available to the public for a fee. Registered investment companies other than face amount certificate companies also report census-type information to the Commission annually on Form N–CEN, including information related to fund service providers and whether a fund engaged in swing pricing during the fiscal year and if so, what was the upper limit for the swing factor. The current definition of LEI in Forms N–PORT and N–CEN provides that, in the case where a financial institution does not have an assigned LEI, a fund should instead disclose the RSSD ID assigned by the National Information Center of the Board of Governors of the Federal Reserve System, if any.369 Item 6 of Form N–1A also requires disclosure of a fund’s use of swing pricing if the fund chooses to use swing pricing. Specifically, these provisions require that a fund that uses swing pricing explains the fund’s use of swing pricing, including its meaning, the circumstances under which the fund will use it, and the effects of swing pricing on the fund and investors, as well as the upper limit the fund has set on the swing factor. Open-end funds are also required to file Form N–RN with the Commission if more than 15% of the registrant’s net assets are, or become, illiquid investments as defined in rule 22e–4 and if a registrant’s holdings in assets that are highly liquid investments fall below its highly liquid investment minimum for more than 7 consecutive calendar days. The form is required to be filed within one business day of the occurrence of these events.
2. Overview of Certain Industry Order
Management Practices
Mutual fund orders can be submitted to funds directly or via an intermediary. An order will be executed at a given day’s NAV if an intermediary—rather than solely the fund, its designated transfer agent, or a registered securities clearing agency—receives the order by the fund’s pricing time, typically 4 p.m. ET, unless an intermediary specifically established an earlier cut-off time for investor orders. In particular, a financial intermediary currently can submit an order that it received before 4 p.m. ET to a designated party after 4 p.m. ET for execution at that day’s NAV.370 A fund discloses in its prospectus its pricing time and that a purchase or redemption is effected at a price that is based on the next NAV calculation after the order is placed.371 After a fund finalizes its NAV calculation for a day, it disseminates the NAV to pricing vendors, media, and intermediaries, typically between 6 p.m. ET and 8 p.m. ET. We understand that certain intermediaries use orderprocessing systems that require knowledge of a fund’s NAV. In addition, certain investor orders may also require knowledge of a fund’s NAV before the order is sent to the fund.372 As a result, a fund does not receive certain orders until after the fund distributed its NAV. For example, most retirement plan recordkeepers currently do not process orders from investors until they receive a fund’s NAV and funds typically receive orders from these intermediaries the next morning. We understand that for orders submitted to funds by an intermediary, an intermediary may net orders to varying degrees before their submission to a fund, a practice known as omnibus accounting. In addition, intermediaries may submit one or more netted orders at a single time, or may submit netted orders in batches at different times. For example, if an intermediary does not submit orders until after it has received the fund’s final price, it may submit a single order to the fund that reflects the net dollar amount or the number of fund shares to be purchased or redeemed across all investors that submitted orders through that intermediary. If an intermediary does not wait until the fund’s final price is received, it may submit two orders: one order expressed in the net number of shares purchased or sold and one order expressed in the net amount of dollars purchased or sold. Other intermediaries may aggregate orders at finer levels, providing aggregate purchase and sale figures separately. While netting practices vary, they may generally save intermediaries money, to the extent that intermediaries incur per transaction costs when submitting orders to a fund. Intermediaries may track investor orders to various degrees before they send the finalized orders to funds. As such, the processing time of investor order may vary depending on the tracking and netting process of an intermediary. For example, retirement accounts track holdings and trades at the level of individual participants. Each participant account
typically has multiple sub accounts that are organized by contribution type or source (pretax, after-tax, employer match, profit sharing, and other). We understand that, at least according to some plan rules, compliance restrictions require plans to track an account according to contribution type or source. For example, we understand that in at least some 401(k) plans, the third party administrator or retirement plan recordkeeper receives participant trades at the participant account level, after which, trades must be pro-rated (usually done based on today’s market value) and posted to each contribution type or source. The administrator or recordkeeper then aggregates all participant trades for a particular plan and sends them to the trustee/custodian. The trustee then posts the aggregated plan trades on a trust/custody system (i.e., for mandatory plan reporting purposes). Most trust companies then aggregate all of their client trades at the asset level, generally to minimize trading or NSCC costs. A significant portion of mutual fund orders is processed through NSCC’s Fund/SERV platform. Within this platform, there exists a separate system that processes orders from defined contribution plans called Defined Contribution Clearance & Settlement (‘‘DCC&S’’). Fund/SERV for nonretirement clients allows firms to submit orders in currency, shares, or exchanges before knowing the NAV.373 DCC&S, on the other hand, as a matter of practice does not initiate order processing until the recordkeeper/third party administrator receives NAVs, as well as daily and periodic distribution (dividend and capital gain) rates.374 We recognize that the current industry practices related to intermediaries’ order submissions prevent funds from knowing their final net flows until later hours, which may be one reason why no funds in the U.S. have implemented the optional swing pricing. We also recognize that swing pricing has been employed in Europe, including by U.S.-based fund managers that also operate funds in Europe.375 There can be various reasons why swing pricing has been successfully implemented in certain jurisdictions. For example, we understand that intermediary order submission practices in Europe differ from those in the U.S.,376 allowing funds to have more complete flow information before funds’ pricing time. Another factor that may contribute to successful implementation of swing pricing in Europe is that the

377See Aggregated Balance Sheet of the Euro Area Pension Fund Sector, Section 1.1.1, European Central Bank Statistical Data Warehouse, available athttps://sdw.ecb.europa.eu/reports.do? node=1000006465. 378See Aggregated Balance Sheet of Euro Area Investment Funds, Section 1.1.2, European Central Bank, Statistical Data Warehouse, available at https://sdw.ecb.europa.eu/reports.do? node=1000003516. 379See infra section III.B.4.ii. 380See Press Release, Cerulli Associates, Europe’s Defined Contribution Market Is Set to Keep Growing, (Mar. 3, 2022), available at https:// www.cerulli.com/press-releases/europes-definedcontribution-market-is-set-to-keep-growing. 381For example, suppose a fund is fully invested in an underlying asset which can be bought at $1.01 and sold at $0.99. If the NAV is struck at the ‘‘mid,’’ the fund’s share price is $1, and that is what redeeming investors receive for each fund share redeemed. However, after paying the spread costs, the fund receives only $0.99 for each unit of the underlying asset that is sold to meet redemptions. The fund therefore needs to sell more of its underlying asset position relative to the size of the redemptions it experiences, reducing the assets held by non-transacting shareholders and the fund’s subsequent NAV. For example, if 10% of the fund’s investors redeem their shares at the NAV of $1, the fund needs to sell 10% / $0.99 = 10.1% of its underlying asset position to meet redemptions and pay the spread costs. This leaves the remaining 90% of fund shares held by non-transacting fund investors with 100%¥10.1% = 89.9% of the fund’s prior asset position. Valued at the mid-price of $1, this reduces the fund’s NAV to 89.9% / 90% = $0.999. 382We recognize that fund investors can also be diluted due to factors other than trading costs or stale pricing, such as market risk. Market risk can also result in accretion for non-transacting fund investors. For example, if a fund redeems shareholders at an NAV of $100 based on market prices at the time NAV is struck, but is then able to liquidate assets at a higher valuation on subsequent days due to changes in market prices, the value of shares held by non-transacting shareholders will increase beyond the increase due solely to the change in the value of the underlying investments held by the fund. While the value of the fund’s holdings can go both up and down, such market risk amplifies the risk fund shareholders would otherwise experience. However, since market prices may be very difficult to forecast, the degree to which such dilution contributes to the first-mover advantage is unclear. 383The Commission adopted rule 2a–5 in Dec. 2020, and the compliance date for funds was Sept. 8, 2022. See Valuation Adopting Release, supra note 110. 384See, e.g., Jaewon Choi et. al., Sitting Bucks:
Stale Pricing in Fixed Income Funds, 145 J. Fin. Econ. 296, no. 2, Part A, (Aug. 2022). 385The examples in the figure assume that a fund holds a portfolio of assets whose value is constant and that liquidating any portion of the portfolio to meet redemptions incurs a haircut of 10%. By assuming that the value of the asset does not change, the examples isolate the effect of trading costs on dilution from the effects of other sources of dilution such as market risk or stale NAVs. See supra note 384. The haircut assumption in these stylized examples is used purely for illustrative purposes; haircuts on most assets held by open-end funds generally tend to be smaller. 386We recognize that under the current rule 2a– 4 under the Investment Company Act, funds are permitted to reflect changes in their portfolio holdings in the first NAV calculation following the trade date and, thus, are not required to include today’s trades in the calculation of today’s NAV. 387We recognize that there may be other operational considerations that result in this common practice. Therefore, even if a fund has complete order flow information before the trading day is over, it may choose to trade at a later date to accommodate today’s redemptions. European mutual fund sector does not depend as much as the U.S. mutual fund sector on defined contribution retirement plans. According to ECB’s investment fund statistics, as of Q2 2022, pension funds held approximately EUR 1.4 trillion (10%) in investment fund shares 377 out of 14.8 trillion in aggregate value of European investment fund shares issued.378 This is in contrast to U.S. where 54% of all mutual fund assets were held in retirement accounts as of Q1 2022.379 Further, according to one estimate, defined contribution retirement plans which, at least in the U.S., have certain transactions that require knowledge of NAV in order to be processed by an intermediary represent only 17% of Europe’s total pension assets.380
3. Liquidity Externalities in the Mutual
Fund Sector
As discussed above, the liquidity mismatch can lead to non-negligible trading costs (e.g., spread or market impact costs) associated with selling the fund’s less liquid portfolio investments in order to meet investor redemptions or buying portfolio investments in order to accommodate investor subscriptions. The magnitude of these costs can vary depending on market conditions, the liquidity of the underlying investments held in a fund’s portfolio, and the size of funds’ transactions in the market. Consequently, if investors transact at a NAV that does not account for ex-post trading costs, investors remaining in the fund have to bear these trading costs because they are ultimately reflected in the fund’s future NAV.381 Therefore, the value of shares held by non-transacting investors can be diluted due to the trading costs associated with the past trading activity of transacting fund investors, lowering the future returns of non-transacting fund shareholders. We recognize that factors other than trading costs may contribute to dilution. For example, some funds may hold investments that do not have an active and robust secondary market (e.g., highyield bonds or municipal securities), making them opaque and difficult to accurately price in a timely manner, especially during times of market stress when some of these assets may stop trading. In such events, the last reported prices for these assets may be prices realized during pre-stress market conditions. As a result, the risk that the fund’s NAV may be based on ‘‘stale’’ information if contemporaneous information about an asset’s current value is unavailable or less reliable may increase. If a fund’s NAV on a given date is based on such stale information, net redemptions at that NAV can dilute non-transacting fund shareholders when assets are eventually sold at prices that reflect their true, lower value.382 Prior to the compliance date with the recent rule 2a–5,383 which aims to improve fund valuation practices, the stale pricing phenomenon has been documented in fixed income funds, and has been found to contribute to strategic redemptions.384 However, we recognize that while trading costs are strictly dilutive, pricing based on stale information can also result in accretion for non-transacting fund investors if realized sale prices are higher than prices that were based on stale information and used for the NAV calculation. The stylized example illustrated in
Figure 4 below shows how trading costs
can dilute a fund that experiences net redemptions under two scenarios.385 Under the first scenario (the dotted line), the fund is able to sell investments to accommodate redemptions prior to striking its NAV for the day and to reflect these trades as well as trading costs in the calculated NAV for that day.386 This scenario is a theoretical benchmark that shows the minimum amount of dilution that must occur in order to accommodate redemptions. Under the second scenario (the solid line), the fund trades to accommodate redemptions after striking its NAV for the day. This scenario is generally the way U.S. funds currently accommodate investor redemptions, possibly because funds do not have complete order flow information before the end of the trading day.387

388To the degree that funds determine their NAV using holdings as of the prior trading day, such practices may also contribute to dilution. 389To model the effect of net subscriptions, the example assumes that any new cash received by the fund is invested in the same underlying portfolio of investments, and that doing so incurs the same 10% spread cost. Redemptions are represented as negative net flows to the left of 0 on the x-axis and subscriptions are represented as positive net flows to the right of 0 on the x-axis. We recognize that dilution due to subscriptions does not occur until a fund incurs costs investing the subscription proceeds. Therefore, a fund that holds its subscription proceeds in cash indefinitely will not experience dilution. While these two scenarios result in similar dilution for lower levels of redemptions, larger levels of redemptions can contribute nonlinearly to higher fund dilution under the second scenario.388 This occurs because increasing redemptions result in increasing trading costs for the fund. These trading costs are borne solely by shareholders remaining in the fund, the number of which decreases as more investors redeem. Under this hypothetical scenario, the fund eventually runs out of assets to sell and is unable to meet further redemptions. In contrast, under the theoretical benchmark, the trading costs are borne by both redeeming investors and investors remaining in the fund; therefore, the shareholder base absorbing the trading costs remains constant regardless of the extent of redemptions. Accordingly, dilution increases proportionally to the amount of redemptions and the corresponding increase in trading costs.
Figure 5 removes the theoretical
benchmark scenario illustrated in Figure 4 and focuses on how dilution affects both redemptions and subscriptions when trading to accommodate investor transactions occurs after the fund’s NAV has been struck.389 EP16DE22.004</GPH>
Figure 4: Dilution Effects of Different Trading Timelines over 1 Day.
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390See, e.g., Kuan-Hui Lee, The World Price of Liquidity Risk, 99 J. Fin. Econ. 136 (2011). See also Viral V. Acharya & Lasse H. Pedersen, Asset Pricing with Liquidity Risk, 77 J. Fin. Econ. 375 (2005). See also Lubos Pastor & Robert Stambaugh, Liquidity Risk and Expected Stock Returns, 111 J. Pol. Econ. 642 (2003). 391 In an open-end fund context, fund inflows are sensitive to fund returns, which can incentivize fund managers to take on more risk. See, e.g., Jaewon Choi & Mathias Kronlund, Reaching for Yield in Corporate Bond Mutual Funds, 31 Rev. Fin. Stud. 1930 (2018); Jon A. Fulkerson et. al., Return Chasing in Bond Funds, 22 J. Fixed Income, 90 (2013); Ferreira, Miguel A., et al., The FlowPerformance Relationship around the World, 36 J. Banking & Fin. 1759, no. 6 (2012). 392See, e.g., Linlin Ma et. al., Portfolio Manager Compensation in the U.S. Mutual Fund Industry, 74(2) J. Fin. 587 (2019). See also Abhishek Bhardwaj et. al., Incentives of Fund Managers and Precautionary Fire Sales (Oct. 29, 2021), available at https://ssrn.com/abstract=3952358. 393Liquidity mismatch between assets and liabilities is a mechanism that creates bank run dynamics that is well-accepted in the academic literature. See, e.g., Douglas Diamond & Philip Dybvig, Bank Runs, Deposit Insurance, and Liquidity, 91 J. Pol. Econ., 401 (1983). 394See Third Avenue Trust and Third Avenue Management LLC; Notice of Application and Temporary Order, Investment Company Act Release No. 31943 (Dec. 16, 2015). See also note 348. 395See Qi Chen et. al., Payoff Complementarities and Financial Frailty: Evidence From Mutual Fund Outflows, 97 J. Fin. Econ. 239 (2010). See also Itay Goldstein et. al., Investor Flows and Fragility in Corporate Bond Funds, 126 J. Fin. Econ. 592 (2017); Continued The theoretical example in Figure 5 illustrates that the dilutive effect of trading costs is asymmetric for redemptions and subscriptions: while redemptions and subscriptions are similarly dilutive for small levels of net flows, their effects are different for more extreme levels of net flows. This occurs because a fund is not able to redeem 100% of its shares due to the non-linear impact of trading costs related to meeting redemptions being absorbed solely by investors remaining in the fund, as described above. In contrast, the trading costs related to subscriptions are shared by both new subscribers and existing fund shareholders, which limits the maximum amount of dilution that can occur due to subscriptions. The simplified examples above illustrate that non-transacting fund investors are exposed to the dilution risk that arises from accommodating redemptions and subscriptions of transacting fund investors. Incentives of mutual fund managers may not be sufficient to alleviate this risk for various reasons. For example, it is possible that investors do not have enough information to fully understand the nature of the risk they are exposed to by investing in funds that hold less liquid investments.
In addition, investors in a fund may have varying preferences for risk and return, with some investors preferring investments with higher expected returns. Although investments that face increased liquidity risk may deliver such higher returns, the returns of funds that hold these investments may also be subject to greater amounts of volatility.390 A fund manager may choose to hold investments that are less liquid because of their potentially higher returns, or because they offer exposure to a different set of risks (e.g., some investments may be less correlated with the market) than other investments in the fund’s portfolio. Because higher returns tend to be associated with future inflows, it is possible that a fund manager’s incentives are tilted towards earning higher returns relative to the risk they are taking on (though the opposite is also possible).391 In particular, to the extent that holding less liquid investments may increase a fund’s return (e.g., during normal market conditions) and consequently its AUM, which determine the amount of management fees a fund manager collects, the fund manager may choose to over-invest in such assets,392 not accounting for potential future trading costs these investments may impose on a fund if the market conditions change, which would result in a higher dilution risk for the fund’s investors. Investors may currently lack sufficiently granular information to monitor for this possibility and to discipline the extent to which a fund manager exposes the fund’s shareholders to dilution risk. Investor dilution associated with illiquidity of funds’ underlying investments may create a first-mover advantage that may lead to increased mutual fund redemptions similar to bank runs.393 Such redemptions have been observed prior to the adoption of the current liquidity rule.394 More specifically, fund investors may have an incentive to redeem their shares quickly if they believe that other investors will also redeem their shares and, by doing so, these other investors will dilute the fund’s non-transacting shareholders. This first-mover advantage effect in mutual funds has been documented 395 EP16DE22.005</GPH>
Figure 5: The Dilutive Effects of Redemptions and Subscriptions.
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Yiming Ma et. al., Bank Debt Versus Mutual Fund Equity in Liquidity Provision (working paper, May 29, 2020), available at https://ssrn.com/abstract= 3489673; Luis Molestina et. al., Burned by Leverage? Flows and Fragility in Bond Mutual Funds (European Central Bank (ECB) working paper no. 20202413, May 19, 2020) available at https:// ssrn.com/abstract=3605159 (retrieved from SSRN Elsevier database); Michael Feroli et. al., Market Tantrums and Monetary Policy (Chicago Booth Research Paper no. 14–09, Mar. 15, 2014), available at https://ssrn.com/abstract=2409092 (retrieved from SSRN Elsevier database). 396See e.g., Yao Zeng, A Dynamic Theory of Mutual Fund Runs and Liquidity (working paper no. 42, Apr. 2017), available at https://ssrn.com/ abstract=2907718 (retrieved from SSRN Elsevier database). See also Stephen Morris et. al., Redemption Risk and Cash Hoarding by Asset Managers, 89 J. Monetary Econ. 71 (2017); Yiming Ma et. al., Mutual Fund Liquidity Management, Transformation and Reverse Flight to Liquidity (working paper, Jul. 29, 2020), available at https:// ssrn.com/abstract=3640861(retrieved fromSSRNElsevierdatabase); and Philipp Ko¨nig & David Pothier, Safe but Fragile: Information Acquisition, Liquidity Support and Redemption Runs, J. Fin. Intermediation (in press, corrected proof Dec. 15, 2020). 397For example, one paper argues that fund investors’ behavior is affected by the expected behavior of other investors in the fund and finds that funds with less liquid assets (where this investor effect is stronger) exhibit stronger sensitivity of outflows to bad past performance than funds with more liquid assets. See Qi Chen et. al., Payoff Complementarities and Financial Frailty:
Evidence From Mutual Fund Outflows, 97 J. Fin. Econ. 239 (2010). Also see Meijun Qian and Bas¸ak Tanyeri, Litigation and Mutual-Fund Runs, 31 J Fin. Stability 119, (2017); and Sirio Aramonte et. al., Measuring the Liquidity Profile of Mutual Funds (FEDS working paper no. 2019–55, Oct. 22, 2019), available at https://ssrn.com/abstract=3473039 (retrieved from SSRN Elsevier database). 398See Christof W. Stahel, Strategic Complementarity Among Investors with Overlapping Portfolios (working paper, May 1, 2022), available at https://ssrn.com/ abstract=3952125 (retrieved from SSRN Elsevier database). 399See e.g., Shiyang Huang et. al., Does Liquidity Management Induce Fragility in Treasury Prices:
Evidence From Bond Mutual Funds (Dec. 30, 2021), available at https://ssrn.com/abstract=3689674 (retrieved from SSRN Elsevier database). See also Hao Jiang et. al., Does Mutual Fund Illiquidity Introduce Fragility Into Asset Prices? Evidence From the Corporate Bond Market, 143 J. Fin. Econ. 277 (2021); Joshua D. Coval & Erik Stafford, Asset Fire Sales (and Purchases) in Equity Markets, 86 J. Fin. Econ. 479, no. 2 (2007); Donald J. Berndt et. al., Using Agent-Based Modeling to Assess Liquidity Mismatch in Open-End Bond Funds, Summer Sim ’17: Proceedings of the Summer Simulation MultiConference (Society for Computer Simulation International, San Diego, CA) (Jul. 2017); Valentin Haddad et. al., When Selling Becomes Viral:
Disruptions in Debt Markets in the COVID–19 Crisis and the Fed’s Response, 34 Rev. Fin. Stud. 5309, no.11 (2021). 400See Coval & Stafford, supra. Also see Alex Edmans et. al., The Real Effects of Financial Markets: The Impact of Prices on Takeovers, 67 J. Fin. 933 (2012).The constructed measures exploit the idea that large investor redemptions place pressure on mutual funds to sell portfolio holdings, and if these sales are sufficiently large, the funds’ liquidity needs may put downward pressure on prices that is unrelated to the fundamental value of the underlying stocks. 401See e.g., Pekka Honkanen & Daniel Schmidt, Learning From Noise? Price and Liquidity Spillovers Around Mutual Fund Fire Sales, 12(2) Rev. Asset Pricing Stud. 593 (Jun. 2022); Antonio Falato et. al., Fire-Sale Spillovers in Debt Markets, 76 J Fin. 3055 no. 6 (2021). 402See Azi Ben-Rephael, Flight-to-Liquidity, Market Uncertainty, and the Actions of Mutual Fund Investors, 31 J. Fin. Intermediation 30 (2017). 403See George O. Aragon & Min S. Kim, Fire Sale Risk and Expected Stock Returns (Mar. 11, 2022), available at https://ssrn.com/abstract=3663567 (retrieved from SSRN Elsevier database). 404See e.g., Charles Cao et. al., An Empirical Analysis of the Dynamic Relationship Between Mutual Fund Flow and Market Return Volatility, 32 J. Banking & Fin. 2111, no. 10 (2008). 405See e.g., Alex Edmans, supra. The authors find that mutual fund investor flows lead to pressure on the price of underlying securities, which may in turn affect the probability of takeover of the firm issuing the security. Also see Derrien, Franc¸ois et. al., Investor Horizons and Corporate Policies, 48 J. Fin. & Quantitative Analysis 1755 no. 6 (2013). Also see Norli, ;yvind et. al., Liquidity and Shareholder Activism, 28 Rev. Fin. Stud. 486 (2015). Also see B. Espen Eckbo et. al., Are Stock-Financed Takeovers Opportunistic? 128 J. Fin. Econ. 443 (2018). 406See Han Xiao, The Economics of ETF Redemptions (Apr. 10, 2022), available at https:// ssrn.com/abstract=4096222 (retrieved from SSRN Elsevier database). 407See Johan Sulaeman & Kelsey D. Wei, SellSide Analysts and Stock Mispricing: Evidence From Mutual Fund Flow-Driven Trading Pressure, 65 Mgmt. Sci. 5427 no. 11 (2019). 408See Elizabeth Berger, Selection Bias in Mutual Fund Fire Sales (Apr. 18, 2021), available at https:// ssrn.com/abstract=3011027 (retrieved from SSRN Elsevier database). See also Malcolm Wardlaw, Measuring Mutual Fund Flow Pressure as Shock to Stock Returns, 75(6) J. Fin. 3221 (2020). See also Aleksandra and Ru¨diger Weber, Money in the Right Hands: The Price Effects of Specialized Demand (Jan. 27, 2022), available at https://ssrn.com/ abstract=4022634 (retrieved from SSRN Elsevier database). Also see Simon Schmickler, Identifying the Price Impact of Fire Sales Using High-Frequency Surprise Mutual Fund Flows (Jul. 8, 2020) available at https://ssrn.com/abstract=3488791 (retrieved from SSRN Elsevier database). and studied as a mechanism for
runs on mutual funds in the academic literature.396 In addition, it has been shown that the effect of the first-mover advantage may be larger for funds that hold less liquid investments.397 While the academic literature on mutual fund runs generally relies on an exogenous mechanism to generate initial redemptions from a fund or relies on frictions such as an inability of a fund to raise capital and exogenous shocks such as negative fund returns, the results may extend to trading costs to the degree that dilution due to trading costs may reduce subsequent fund returns, which would trigger runs in these models. At the same time, we recognize that while dilution risk arising from trading costs can create incentives for early redemptions, redemptions may also occur for reasons unconnected to the pooled vehicle nature of the fund. For example, a recent working paper 398 concludes that the behavior of mutual fund investors is similar to that of direct investors with overlapping holdings, and suggests that systemic implications of mutual fund investors’ activities are not necessarily due to the liquidity transformation feature of the mutual fund structure, but rather to the fact that mutual funds’ investors compete for finite asset market liquidity when they decide to sell assets. Mutual fund shareholders’ transactions may also affect markets for funds’ underlying portfolio holdings. Academic research suggests that redemption-induced sales of securities by mutual funds can create price pressure in underlying markets which may result in a fire-sale for these securities.399 Two studies have constructed measures of mutual fund outflow-induced price pressure on various securities that are widely-used in the academic literature.400 Subsequent studies use these price impact measures and claim that fire sales induced by investor redemptions hurt peer funds’ performance and flows, leading to further asset sales that have a negative price impact.401 Another paper suggests that redemptions from mutual fund that hold less liquid investments may contribute further to already existing poor market conditions by putting further downward pressure on prices of illiquid stocks.402 In addition, one paper suggests that the exposure of stocks to fire-sale risk is bigger when mutual funds represent a larger share of the stock’s owners.403 Moreover, academic research also documents the potential effect of mutual fund flows on market-wide return volatility,404 on a wide array of corporate decisions, 405 on the choices of ETF security baskets, 406 and on sellside analysts’ recommendations on stocks subject to mutual-fund flowdriven stock mispricings.407 However, several recent studies argue that the aforementioned price impact measures are biased and that with the removal of this bias many established in the prior literature results above no longer hold.408 Notwithstanding, while we recognize that there is an ongoing debate in the academic literature as to the size of these
effects, the literature does point to a potential link between mutual fund flows and prices in the underlying markets. We recognize that the proposed rules may not address all of the mechanisms that amplify dilution in the mutual fund sector, such as system-wide market stress, misaligned incentives of fund managers and investors, or stale information used for pricing of funds’ portfolio holdings. However, even if these dilution-amplification

409We recognize, however, that open-end funds in other jurisdictions have successfully implemented swing pricing, as discussed in section I.B and accompanying notes 59–63. 410See supra section I.B for a discussion of how market stress events in Mar. 2020 caused some funds to explore the potential of various emergency relief actions due to the combination of abnormally large redemptions and deteriorating liquidity in markets for underlying fund investments. 411We use information reported on Form N–CEN to the Commission for each fund as of Dec. 2021, incorporating filings and amendments to filings received through May 15, 2022. Net assets are monthly average net assets during the reporting period identified on part C.19.a of Form N–CEN, and validated with Bloomberg (for ETFs). Current values are based on the most recent filings and amendments, which are based on fiscal years and are therefore not synchronous. We exclude money market funds identified in Item C.3.g of the Form N–CEN from the count of the affected open-end funds. These exclusions were also applied to the estimates that follow. We note that the submission on the Form N–CEN is required on a yearly basis. Therefore, these estimates do not include newly established funds that have not completed their first fiscal year and, therefore, have not filed the Form N–CEN yet, as well as they do not account for the funds that have been terminated since the last Form N–CEN was filed. Therefore, the estimates for the number of funds and their net assets may be over- or underestimated. 412See id. ETFs are identified on Form N–CEN, Item C.3.a.i and include 781 in-kind ETFs with average total net assets of $1.2 trillion. UIT ETFs and exchange-traded managed funds are excluded from ETF totals. Mutual funds are identified as those funds that are not identified as ETFs or money market funds. 413Funds of funds are identified in Item C.3.e. A fund of funds means a fund that acquires securities issued by any other investment company in excess of the amounts permitted under paragraph (A) of
section 12(d)(1) of the Act (15 U.S.C. 80a–
12(d)(1)(A)), but does not include a fund that acquires securities issued by another investment company solely in reliance on rule 12d1–1 under the Act (CFR 270.12d1–1). We note that at most 29 closed-end funds of funds with net assets of $10 billion may be affected by the proposal indirectly, to the extent that they hold shares of open-end funds. 414See note 411. Master-feeder fund means a twotiered arrangement in which one or more funds (each a feeder fund) holds shares of a single fund (the master fund) in accordance with section 12(d)(1)(E) of the Act (15 U.S.C. 80a–12(d)(1)(E)) or pursuant to exemptive relief granted by the Commission. See Instruction 4 to Item C.3 of Form N–CEN. Feeder funds are identified on Form N– CEN, Item C.3.f.ii. 415See infra note 540 and accompanying text. 416See infra note 547 and accompanying text. 417Closed-end investment companies are identified on Form N–CEN, Item B.6.b. Unit investment trust (UIT) ETFs are funds of Form N– 8B–2 registrants identified in Item B.6.g. which are also reported in Item E. 418We note that these statistics are estimated with the Morningstar data; therefore, there is a discrepancy in the number of funds estimated based on the Form N–CEN and the number of funds estimated based on the Morningstar data. This discrepancy exists for two reasons. First, Morningstar data may not include all open-end funds due to its voluntary submission nature; as such, the number of funds based on the Morningstar data may be under-estimated. Second, funds may submit their data to Morningstar on a monthly data, while the submission on the Form N–CEN is required on a yearly basis. Therefore, the number of funds estimated based on the Form N–CEN may be under-estimated because it may not include new funds that haven’t filed the Form yet. 419Morningstar data, excluding funds of funds, feeder funds, and money market funds. 5 UIT ETFs, with assets of approximately $0.7 trillion are included in the Morningstar ETF totals. mechanisms were not present, several factors may inhibit mutual fund managers’ ability to allocate trading costs to transacting investors by using currently available swing pricing. First, as discussed above, funds generally do not have complete information regarding their order flows at the time the NAV is struck, which may restrict the ability to operationalize swing pricing. These U.S.-market specific operational impediments cannot be mitigated by any single fund, which presents a collective action problem. Second, even if funds were currently able to obtain complete flow data prior to striking their NAVs, funds may be hesitant to implement swing pricing to the extent that some investors are averse to bearing the full costs of their transactions via swing pricing, even if it is in the best interest of fund shareholders overall, or because investors in U.S. funds are unfamiliar with swing pricing.409 In addition, there may be a stigma attached to being the first fund to implement swing pricing.
To the extent that such a stigma effect is present in relation to swing pricing, it may deter investors from choosing funds that could implement swing pricing under the optional approach, and that could be a reason why no fund currently chooses to implement swing pricing. Finally, even where fund managers are willing and able to employ liquidity risk management tools, they may not be able to forecast accurately the extent to which episodes of market stress can create challenges for mitigating dilution and meeting shareholder redemptions.410
4. Affected Entities
a. Registered Investment Companies The proposed amendments would mainly affect open-end funds registered with the Commission that are ETFs and mutual funds, excluding money-market funds (hereafter ‘‘mutual funds’’). Based on Form N–CEN filing data as of December 2021, we estimate that there are 11,488 of such funds that hold approximately $26 trillion in net assets.411 Among these, there are 9,043 mutual funds that hold approximately $21 trillion in net assets and 2,445 ETFs that hold approximately $5.1 trillion in net assets.412 In addition, there are 1,650 mutual funds of funds that hold approximately $3.1 trillion in net assets, 413 as well as 150 feeder funds structured as ETFs that hold $0.6 trillion in net assets.414 Different parts of the proposal would affect these two subsets of open-end funds differently. In particular, the proposed amendments to the liquidity management program and certain reporting requirements would affect both mutual funds and ETFs and the proposed hard close and swing pricing requirements and related reporting requirements would affect only mutual funds that are not feeder funds. We estimate that there are 12,153 funds currently required to file reports on Form N–PORT 415 and there are 2,754 registrants required to file reports on Form N–CEN that would be affected by the proposed reporting requirements.416 Among these, we estimate that the proposed changes to the reporting requirements on Form N– PORT would also affect 660 closed-end funds and 5 ETFs registered as unit investment trusts with assets of $0.4 trillion and $0.7 trillion, respectively.417
i. Open-End Fund Characteristics
Table 2 below shows the number and
total assets of open-end funds by fund type.418 The largest share (by assets) of funds (approximately 63.5% of assets held by all open-end funds) that would be affected by the proposal are equity funds, including U.S. and international equity funds. The second largest type of funds affected by the proposal is taxable bond funds, which on aggregate holds approximately 19.6% of all open-end fund assets.
TABLE 2—NUMBER OF AFFECTED FUNDS BY FUND TYPE, AS OF DECEMBER 2021 419
Category
ETFs 1 Other open-end (not including MMFs) Total

of funds Assets,

$ trln
% of Total assets # of funds Assets, $ trln % of Total Assets # of funds Assets, $ trln % of Total assets Allocation ................................... 90 $0.03 0.37 377 $1.58 7.59 467 $1.61 5.72 Alternative ................................. 193 0.01 0.21 167 0.13 0.64 360 0.15 0.53

420 In addition to these, a smaller number of other categories are classified as less liquid investments. 421Source: Form N–PORT. Loan investments are identified via Form N–PORT, Item C.4.a and liquidity classifications are from Form N–PORT, Item C.7. 422See Leveraged Loan Primer, supra note 99 (stating that the S&P/LSTA Loan Index, which is used as a proxy for market size in the U.S., totaled approximately $1.375 trillion as of Feb. 2022). 423See supra note 111. 424Source: Form N–PORT. The fair value hierarchy for an investment are identified on Form N–PORT, Item C.8., and liquidity classifications are identified on Form N–PORT, Item C.7. We observed that the investments classified as highly liquid that were Level 3 investments primarily were mortgagebacked securities. 425 Id. 426 Data source: Morningstar Fund Flow Data. We restrict our analysis to funds that have a ‘‘Global Broad Category Group’’ of Equity or Fixed Income because we believe the data for other types of funds (e.g., Alternative and Commodity funds) contain more extreme values that may be spurious. We restrict our analysis to include fund flow data starting 2009. While some Morningstar data is available for 2008, we have not included that data in our historical flow analyses because of gaps in the 2008 data (e.g., the 2008 dataset covers a more limited set of funds). We trim outliers from the dataset by restricting outflows from a fund to be no more than 100% of AUM and inflows to be no more than 300% of AUM on a given day or 1000% of AUM for a given week when analyzing weekly flows. For daily flows, we determine the flow percentage by dividing dollar flows on date T by total net assets on date T. This assume that total net assets on a given day do not account for that day’s flows. Similarly, for weekly flows, we aggregate by business week, summing dollar flows over the course of the week and dividing by the first available day’s net assets in that week. Making the opposite assumption, that total net assets on a given day do incorporate that day’s flows, does not significantly alter our results. 427See supra note 426 for a description of how the data set was constructed. 428See id. Daily flows for equity funds have notable seasonal spikes that tend to occur during the month of Dec., independent of market stress events. These flow spikes may be attributable to any year-end rebalancing of investors from, e.g., underperforming funds into outperforming funds;
TABLE 2—NUMBER OF AFFECTED FUNDS BY FUND TYPE, AS OF DECEMBER 2021 419—Continued
Category
ETFs 1 Other open-end (not including MMFs) Total

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

of funds Assets,

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