Mutual funds to face new rules from SEC on portfolio holdings

U.S. regulators may limit how much mutual funds can invest in hard-to-sell assets and use derivatives to boost returns, as concerns mount over firms’ ability to unwind positions in times of financial stress.
The Securities and Exchange Commission is working on regulations to ensure mutual funds are liquid enough to meet client redemptions and that money managers have plans in place should a fund fail, according to a notice published on its website Nov. 21. The SEC also plans new rules for derivatives and requirements for large asset managers to stress test their funds, the regulator’s policy agenda said.
In a report last month, the International Monetary Fund said mutual funds’ large holdings of junk bonds, leveraged loans and other assets that trade infrequently had “raised market and liquidity risks.” The issue could “compromise” financial stability if regulators don’t address it, the IMF said.
SEC Chair Mary Jo White said earlier this year that regulators were working on an “action plan” to increase oversight of asset managers. The SEC is also planning to require more disclosure of mutual funds’ investments, she said.
The SEC’s new agenda indicates regulators plan to propose rules for mutual funds in October 2015. SEC spokeswoman Judith Burns declined to comment.
Asset managers and mutual funds have come under the microscope of the Financial Stability Oversight Council, a panel of regulators who decide which companies pose the biggest risk to the financial system. Ms. White is a member of the council, whose chairman is Treasury Secretary Jacob Lew.
The Treasury Department’s Office of Financial Research reported last year that the money-management industry could threaten economic stability by herding into certain asset classes and using leverage to amplify returns.