SEC Agrees to Dismiss First Liquidity Rule Enforcement Action
On July 11, 2025, the SEC announced the filing of a joint stipulation in the U.S. District Court for the Northern District of New York, agreeing to dismiss, with prejudice, its first-ever enforcement action under Rule 22e-4 under the Investment Company Act of 1940, the SEC’s liquidity rule. The SEC filed the complaint on May 5, 2023 against a registered mutual fund’s investment adviser, the fund’s two independent trustees and the two fund officers responsible for implementing the fund’s liquidity risk management program pursuant to the liquidity rule, alleging that the defendants aided and abetted the fund’s violations of the liquidity rule. In its litigation release announcing the joint stipulation, the SEC stated that it had determined that the dismissal of this action was appropriate “in the exercise of its discretion and as a policy matter.”
The foundation of the SEC’s enforcement action was the fund’s alleged investment in shares of a private company that constituted approximately 21% to 26% of the fund’s net assets during the relevant period and the alleged misclassification of such shares as “less liquid investments,” rather than “illiquid investments,” under the liquidity rule. The liquidity rule limits the amount of illiquid investments a mutual fund can hold to 15% of its net assets, and exceedances of this limit trigger certain board reporting and SEC filing requirements. The SEC alleged that the fund’s investment adviser, as the administrator of the fund’s liquidity risk management program, and the two fund officers responsible for implementing the program classified the investments as “less liquid investments” without a reasonable basis to support such classification and against the advice of fund counsel and the view of the fund’s external auditors. The SEC also alleged that the fund’s trustees allowed the fund to make such classification and failed to exercise reasonable oversight.
The defendants moved to dismiss the case on July 11, 2023, arguing that the liquidity rule exceeds the scope of the SEC’s rulemaking authority under the Investment Company Act and is unenforceable. On March 27, 2025, the court denied the defendants’ motions to dismiss with leave to refile their motions to provide additional briefing to address the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimundo (June 28, 2024), in which the Court overruled the broad deference courts previously afforded to an agency interpretation of a statute administered by that agency, as established in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. The defendants refiled their motions to dismiss on April 28, 2025 in light of Loper, and following the additional briefing, the SEC agreed to dismiss the action with prejudice, which means the SEC cannot refile the charges.
The SEC’s litigation release is available here.
Vedder Thinking | Articles SEC Agrees to Dismiss First Liquidity Rule Enforcement Action
Article
August 7, 2025
On July 11, 2025, the SEC announced the filing of a joint stipulation in the U.S. District Court for the Northern District of New York, agreeing to dismiss, with prejudice, its first-ever enforcement action under Rule 22e-4 under the Investment Company Act of 1940, the SEC’s liquidity rule. The SEC filed the complaint on May 5, 2023 against a registered mutual fund’s investment adviser, the fund’s two independent trustees and the two fund officers responsible for implementing the fund’s liquidity risk management program pursuant to the liquidity rule, alleging that the defendants aided and abetted the fund’s violations of the liquidity rule. In its litigation release announcing the joint stipulation, the SEC stated that it had determined that the dismissal of this action was appropriate “in the exercise of its discretion and as a policy matter.”
The foundation of the SEC’s enforcement action was the fund’s alleged investment in shares of a private company that constituted approximately 21% to 26% of the fund’s net assets during the relevant period and the alleged misclassification of such shares as “less liquid investments,” rather than “illiquid investments,” under the liquidity rule. The liquidity rule limits the amount of illiquid investments a mutual fund can hold to 15% of its net assets, and exceedances of this limit trigger certain board reporting and SEC filing requirements. The SEC alleged that the fund’s investment adviser, as the administrator of the fund’s liquidity risk management program, and the two fund officers responsible for implementing the program classified the investments as “less liquid investments” without a reasonable basis to support such classification and against the advice of fund counsel and the view of the fund’s external auditors. The SEC also alleged that the fund’s trustees allowed the fund to make such classification and failed to exercise reasonable oversight.
The defendants moved to dismiss the case on July 11, 2023, arguing that the liquidity rule exceeds the scope of the SEC’s rulemaking authority under the Investment Company Act and is unenforceable. On March 27, 2025, the court denied the defendants’ motions to dismiss with leave to refile their motions to provide additional briefing to address the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimundo (June 28, 2024), in which the Court overruled the broad deference courts previously afforded to an agency interpretation of a statute administered by that agency, as established in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. The defendants refiled their motions to dismiss on April 28, 2025 in light of Loper, and following the additional briefing, the SEC agreed to dismiss the action with prejudice, which means the SEC cannot refile the charges.
The SEC’s litigation release is available here.
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