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The SEC’s Liquidity Rule: What ETF Sponsors Need to Know, Ignites

January 19, 2017

 The Securities and Exchange Commission adopted a new rule in October that requires all open­end mutual funds to adopt comprehensive liquidity­risk management programs that satisfy certain minimum requirements. The rule is designed to reduce the risk that funds become unable to meet their redemption obligations without diluting the interests of remaining fund shareholders.

Although the SEC acknowledged that ETFs can raise liquidity risks that are different from those of mutual funds, it did not exempt ETFs organized as open­end funds entirely because those products still have liquidity related  risks that could affect their shareholders or the broader markets. To address the unique issues raised by ETFs, the SEC tailored components of the rule specifically for them.

ETFs and their sponsors have a number of choices to consider before the rule goes into effect next year, which could impact broader product management and product development issues.

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