On June 28, the US Securities and Exchange Commission amended its open-end fund liquidity rule so that funds would not disclose the operation and effectiveness of their liquidity-risk management programs to their clients via the fund’s annual and semi-annual shareholder reports.

This new annual and semi-annual disclosure will replace the previous requirement in which open-end funds would include a quantitative end-of-period snapshot of historical aggregate liquidity classification data that would have been included in their monthly N-PORT filings for each portfolio.

At the same time, open-end funds may split their portfolio holdings into more than one classification category under three specific circumstances if the divided reporting equally or more accurately reflects the liquidity of the investment or eases cost burdens, according to SEC officials. Open-end funds also will need to disclose their cash and cash equivalent holdings not reported elsewhere on their N-PORT filings.

SEC Chairman Jay Clayton noted just before adopting the new amendments that the regulator is far from finished with the subject.

“The adopting release commits the staff to undertake an evaluation of the operation of the rule, and the classification process in particular, after the Commission has gained a year’s worth of experience with the actual data being produced,” he said. “This evaluation will include, among other things, assessing the utility, reliability, and comparability of classification information reported to the Commission. With this assessment in hand, the staff will determine whether there are common quantitative metrics that allow for comparisons across similarly situated funds that can and should be disclosed to investors and the markets.”

Migrating from a monthly calculation of liquidity risk to an annual or semi-annual discussion likely will not impact those open-end funds that have been working to meet the original monthly calculation requirement, Erik DiGiacomo, managing director and global head of Broadridge Professional Services, told Markets Media.

“For the most part, I think they have dealt with the hard stuff about getting the calculations together,” he said. “It would be hard-pressed for fund companies to say that the regulator is making them do something new here,” he said.

However, DiGiacomo warned that funds should not be complacent after meeting their initial regulatory requirements regarding liquidity disclosure since a higher rate environment is on the horizon that will make liquidity-risk reporting exponentially more critical.

“The difference between 1% and 3% does not sound like much when talking about those numbers, but it has three times the impact of getting the liquidity reporting wrong,” he said. “You are funding your cash balances. You’ll need to be able to raise capital and other things. Now it costs you three times more than it did a year ago.”

DiGiacomo also noted that funds would need to think about the human element in liquidity risk management since those who have entered the markets in the past five or six years have never dealt with anything but ungodly low rates.

“The folks in the market right now from a personal perspective and the technology supporting them have not operated in a high-interest rate environment in a long time,” he said. “And none of them have operated in a sustained interest rate environment for entire careers.”