Faced with one bond-fund meltdown and worried about others, the Securities and Exchange Commission is pushing new rules to ensure investors can get their money back when they want it.
But based on the comments on the SEC's website, the mutual fund industry really hates some of those new rules.
David Grim, head of the SEC's division of investment management, outlined the watchdog's concerns in a speech to the Investment Company Institute's mutual fund and investment management conference in Orlando, Florida on Monday. “Mutual funds witnessed sharp spikes in outflows during periods of intense market volatility in August and December of last year, and last December also saw global bond funds incur their largest outflows since June 2013,” Mr. Grim said. “And, as you all know, last December also witnessed the total suspension of redemptions by one open-end fund.”
The fund in question was
Third Avenue Focused Credit, whose shocking failure marked one of the few times that a fund denied investors the ability to cash out. The fund's liquidation prompted the SEC to survey junk bond funds about their ability to provide enough liquidity to meet redemptions during times of stress.
The SEC's proposal would mandate more disclosure of a fund's ability to meet redemptions and to price thinly traded securities, such as high-yield bonds. It would also set minimum liquidity levels, based on the liquidity of the funds' holdings.
Reaction from the fund industry has been largely negative, particularly on the minimum liquidity levels. “We are concerned that the proposed rules go further than necessary in attempting to rectify a problem which is lesser in magnitude than the proposal would suggest, and in so doing impose disproportionate costs on fund investors,” wrote Marie Knowles, chair of the independent trustees for Fidelity's fixed-income funds.
The ICI, for its part, supports the requirement for funds to establish formal liquidity risk management proposals, but generally opposes strict SEC rules on liquidity levels. “These proposed requirements depart dramatically from the current regulatory approach, which has served investors well,” wrote Brian Reid, the ICI's chief economist. “Neither in the Rule Proposal itself nor in the DERA study does the SEC establish a reasonable basis for the level and type of regulatory intervention these proposed requirements represent.”
At a recent fund industry conference, two former heads of the Investment Management Division, Barry Barbash and Paul Roye, also voiced opposition to the new rules. Mr. Barbash works for the law firm of Wilkie Farr & Gallagher, and Mr. Roye works for Capital Research & Management, which oversees the American funds.
The SEC has no deadline for moving vote on the new rules, and any major re-tooling of the rules would mean another 90-day comment period, because the commission can't adopt something substantially different from what was proposed. Nevertheless, action is likely by mid-summer.
