Compliance February 22, 2018

SEC Extends Deadline for Open-End Fund Liquidity Classification

However, the deadlines for creating a liquidity risk management program and to limit illiquid investments to 15% of a fund’s portfolio remain unchanged: December 1, 2018, for larger fund groups and June 1, 2019, for smaller fund groups.

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The Securities and Exchange Commission has voted to extend by six months the deadline by which open-end funds must comply with certain elements of the Commission’s liquidity risk management program rule.

According to the SEC, the new compliance date will provide funds additional time to complete implementation of the final rule’s classification requirement, along with specified other elements that are tied to the classification requirement. Other provisions of the rule that provide important investor protection benefits, including the requirements to adopt a liquidity risk management program and to limit illiquid investments to 15% of the fund’s portfolio, will go into effect as originally scheduled.

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The SEC adopted the open-end fund liquidity rule in October 2016 to help funds meet their statutory obligation, and investors’ expectations, regarding redemption of shares. Since that time, SEC staff have reached out to investment management firms to identify any issues with compliance.

As a result of this review, the new deadline for the classification requirement for larger fund groups is now June 1, 2019, and for smaller fund groups, December 1, 2019. The deadline for the formation of liquidity risk programs and the 15% cap on illiquid securities remains unchanged as December 1, 2018, for larger fund groups and June 1, 2019, for smaller fund groups.

“Today’s Commission action is a measured step designed to help preserve key market oversight and investor protection benefits of the Commission’s liquidity rule while addressing certain concerns that have been raised since adoption,” said SEC Chairman Jay Clayton in a statement. “I expect our action will promote a smoother and more effective implementation process for the rule. I appreciate the valuable engagement with stakeholders we have received thus far, and welcome further engagement, particularly from fund investors, as the implementation process continues.”

The Markets February 22, 2018

Institutional ESG Investing Can Bring Tough Reporting Questions

Highlights from a new Natixis survey suggest reporting challenges continue to rank as top hurdle for institutions implementing ESG programs; this includes the concern that public companies may be “greenwashing” reported data to enhance their public image.

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A new cut of data shared by Natixis Investment Managers is based on a broad survey of 500 institutional investors, including managers of corporate and public pension funds, foundations, endowments, insurance funds and sovereign wealth funds.

Among other findings, the survey results show these large-scale investors are embracing greater use of environmental, social and governance (ESG) investing programs—wherein the decision whether to invest in a given company or security directly weighs factors such as upstream or downstream environmental waste, resource scarcity, the present and future impact of global warming, the embrace of corporate best practices, and many other potential elements which advocates say directly impact the long-term performance of companies.

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The Natixis research shows 45% of institutional investors feel it is difficult to measure and understand financial versus non-financial performance considerations when establishing ESG programs. Some of their concern may be based on the criticism received by CalPERS and the New York City pension funds following fairly enthusiastic ESG implementation and fossil fuel divestment efforts. However, the Department of Labor (DOL) and other regulators and resources have offered extensive guidance on the topic as it pertains to retirement plans, it should be noted.

Shared by fewer investors but perhaps even more concerning is the fear that publicly owned companies may be “greenwashing” reported data to enhance their image from the ESG investing perspective, cited by 37% in the survey pool. This is the same number that cited concern about a general lack of transparency and standardization by companies when it comes to reporting ESG-related information for the purposes of securities disclosures.

The research further shows slightly more than a quarter feel concerned about a lack of third-party-reported data—almost exactly the same as the number who are concerned about how ESG trends “may not play out in the long-term.” Important to note, the firm says, in a 2016 edition of a similar survey, 42% of institutions cited difficulty measuring performance as the biggest challenge of ESG investing. So it seems those who favor greater use of ESG are making some slow progress in winning over the world’s largest public and private investors.

Among those already embracing ESG themes, Natixis finds institutions describe their approach to ESG investing as follows: Negative/exclusionary screening (36%); full ESG integration (26%); impact/activist investing (21%); thematic investing (14%); we do not incorporate ESG factors (40%).

The full survey results are here.

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