Smaller funds of less than $1 billion had to have the program and 15% limit in place by June 2019. They won’t have to have their liquidity buckets in place until December 1.

The “buckets” for different holdings are as follows:

  • Highly liquid: This means cash and any investment that can easily convert to cash in current market conditions within three business days without moving the price of that holding.
  • Moderately liquid: Funds can expect this holding to be converted to cash somewhere between three and seven calendar days without significantly moving the price of that holding.
  • Less liquid: These names can be sold or disposed of in seven days or less without their value being changed by the transaction, but the settlement date might come later.
  • Illiquid: These are names a fund can’t sell within seven days without moving the price of the security.

This has been several years in the works, said Thomas R. Hiller, co-head of the registered funds practice group at law firm Ropes & Gray. After comments and some struggling by fund companies to classify fixed-income securities, he said, the original deadlines were pushed back. There was originally some hope the rigid buckets would go away, he said, but that didn’t happen.

“On at least a monthly basis, fund companies need to revisit all their liquidity classifications,” he said. “So it’s not just thinly traded securities that they need to track.”

The rule came about, the SEC said, because investors expect that when they are selling out of a position in a mutual fund they have a reasonable expectation that those shares can be redeemed for cash. The 2007-2008 financial crisis, of course, exposed the vulnerability of banks to illiquidity catastrophe. Gauging liquidity has also become more difficult because we’re in an age of rapid technological innovation in trading and shorter settlement periods. The SEC used as an example the famously failed Third Avenue Focused Credit fund, a junk bond portfolio of difficult-to-price distressed names. The fund had to block redemptions in 2015.

“What we’re mostly hearing from our members are that they pretty much on top of what’s required” as far as the new rule, said Bernstein. But funds are facing challenges, she said. Obviously large-cap stocks with a high daily trading volume are going to be easier to qualify as liquid. But other securities are more difficult to analyze and you can no longer set them and forget them. “You have to keep looking at the markets within current market conditions.” And liquidity is relative. “You would have to look at how much of it you are trying to sell versus how much is out there,” Bernstein said.

“It would be wrong to say that all fixed income and small cap is less liquid,” she added. “Some bonds are pretty liquid. Some bonds are less liquid, and depending on any given market day, the liquidity could shift. That’s one of the challenges for our members. That categorizing something as totally illiquid or highly liquid is easier than those middle categories, which are a little bit more nuanced. And it really depends on what their portfolio looks like.”

Another problem is subadvisors—how are their holdings going to affect your fund’s liquidity? “A fund may have different slices of the fund parceled out to subadvisors,” Bernstein said. “So you’ll have a main advisor of the fund and then you’ll have one or more subadvisors that have specific kinds of expertise in a particular sliver of that fund’s investments. And sometimes different layers of that fund … will hold the same security, but in different amounts.”

The subadvisor’s analysis for the liquidity of a security might be different than the main advisor’s, she said. Coordinating that is another big challenge she said she’s been hearing about from members.

The rule and the need for bespoke analysis for some securities, say Bernstein and Hiller, will likely mean a bonanza for third-party vendors offering liquidity analytics.