The SEC’s Office of Investor Education & Advocacy is issuing this bulletin to help investors understand what happens when a fund closes & distributes its assets, or “liquidates.”
What is a fund liquidation?
A fund liquidation occurs when a fund closes down its operations completely, sells off its assets & generally distributes substantially all of its assets in cash to its shareholders. Fund liquidations may occur for a variety of reasons, including poor performance, a decline in assets under management, lack of investor interest, & more.
A liquidation is different than a merger where one fund acquires the assets of another fund. In a merger, shareholders in the “acquired” fund receive shares of the new, “acquiring” fund rather than the proceeds from selling off fund assets.
Who makes the decision to liquidate a fund?
The requirements for liquidating a particular fund generally depend on state corporate or trust law, on the fund’s charter documents, or both. To liquidate, most funds will require a vote by the fund’s board of directors or trustees. In some cases, a vote by the fund’s shareholders will also be necessary.
How will I be notified that my fund is liquidating?
If it is necessary to obtain a shareholder vote to approve a liquidation, the fund will have to call a shareholder meeting & seek to obtain the required number of votes. As a shareholder, you will receive a proxy statement informing you of when & where the shareholder meeting is taking place. The timing of this notice to shareholders about a vote is governed by state law & may provide funds some flexibility (for example, requiring notice not less than 10 days & not more than 90 days before a shareholder meeting).
Once a fund liquidation has been approved, the notice shareholders receive may depend on both state law & the fund’s charter documents. Some states require that a written notice of liquidation be sent to shareholders, while others do not. A fund’s charter documents may also address providing notice to shareholders.
For mutual funds, the approval of a liquidation would generally be considered a material event that would be disclosed to shareholders in a “sticker”–a supplement to a previously sent prospectus or summary prospectus.
Funds with shares that trade on an exchange, such as exchange-traded funds (ETFs), generally announce the liquidation through a press release.
The notice that shareholders receive regarding a liquidation will generally include relevant information like the date that the fund will stop accepting new purchases of fund shares, the date that the fund will suspend redemptions (if applicable), & the date on or after which all remaining assets will be distributed pro rata (the “liquidation date,” sometimes also called the closing date or cessation date).
What do I need to do?
At some point during the liquidation process, many funds stop accepting new purchases of fund shares. If you are making regular contributions to the fund, you may have to stop those contributions by a particular date in advance of the fund closing.
In certain cases, funds may also suspend redemptions as part of the liquidation process. Some funds might give you the option to exchange your fund shares into a different fund within the same fund family prior to liquidation. If you own shares of a mutual fund, you can choose to redeem your shares at net asset value at any time prior to the date that the fund suspends redemptions—although sometimes suspension may happen immediately upon the approval of a liquidation. If you own shares of an ETF, you can sell your shares any time before the fund stops trading.
After the liquidation date, any remaining fund assets will generally be sold by the fund managers, & the proceeds will be distributed to the remaining fund shareholders. If you still own shares on the liquidation date, you will receive your share of the fund’s assets in this way. The price you receive may differ from the fund’s prior net asset value or trading price. The timing of converting assets to cash or cash equivalents & paying shareholders will vary from fund to fund & may take more time—sometimes months or even years–if the fund has significant investments in less liquid assets.
Mutual Funds & ETFs — A Guide for Investors