The SEC has finalized a contentious proposal imposing standards on open-end funds (including ETFs) that are designed to ensure that those with large holdings of illiquid assets can nonetheless handle unexpected investor redemptions.  MMFs are not covered by these rules due to the broader liquidity framework mandated for them that has now led to a sharp realignment of prime MMFs into government funds.  Covered funds would also come under an array of new reporting and disclosure requirements including a duty to notify the Commission confidentially when illiquid assets exceed fifteen percent of net assets or highly-liquid assets fall below minimums.  These requirements are likely to change the structure of any open-end fund or ETF focused on illiquid assets (e.g., certain corporate loans, emerging-market instruments) as well as those using borrowings and/or derivatives to boost return.  As a result, the SEC’s approach may not only enhance covered-fund redemption capacity, but also mitigate the yield-chasing incentives stoked by fund purchases that have created significant systemic-risk concern.  A reduced fund role might also provide new credit opportunities for banks.

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