Oct 12 Mutual funds will have to show they have
enough liquidity to cover a rush of redemptions from investors
under rules that the top U.S. securities regulator is set to
approve on Thursday.
The rules have stirred up the $18 trillion U.S. open-end
fund market since they were first proposed a year ago. This week
the Securities and Exchange Commission indicated it is
responding to some concerns and altering the proposal ahead of
Thursday's final vote.
The sole Republican commissioner, Michael Piwowar, told
reporters on Wednesday it is considering changing a requirement
for the funds to hold a minimum amount of assets that can be
converted to cash in three days. Funds that fall below the
threshold would have to stop acquiring other types of assets
until they re-attain the minimum.
"There are active discussions as to how that is actually
going to be structured," he said at the sidelines of a
conference. "My concern is that we don't have a regulatory
requirement that actually creates the problem we're trying to
The changes should give funds some flexibility, he added.
The commission wants to ensure a fund can muster enough cash
to pay out investors during a panic run. It is worried a major
fund caught short would threaten market stability.
But Piwowar said having all funds hold the same amount of
liquidity at the same time could worsen a deterioration in the
market by forcing further selling.
"It'll be a robust, strong rule that is also more practical,
but to be clear there's going to be a lot of wailing and
gnashing of teeth on implementation," said one person familiar
with the matter.
The rule is the latest in a series of efforts by the SEC to
enhance its regulation of asset managers. Piwowar said another
proposal that would restrict fund managers' use of derivatives
is unlikely to be approved this year before a change in the
presidential administration after Nov. 8 elections.
Managers of exchange-traded funds, which trade like stocks,
have said the three-day minimums in the liquidity rule could
directly contradict their investment strategies.
Dalia Blass, counsel at Ropes & Gray who worked in the SEC's
investment management division, said the proposal would put ETFs
in a no-win situation of choosing between complying with federal
rules or with customers' orders.
Unlike mutual funds, ETFs often meet redemptions by handing
over the stocks or other securities they hold instead of cash.
"Many in the industry don't think this rule is needed at
all, but I think it's here to stay and we would rather have the
SEC regulate it than the federal banking regulators," said Jay
Baris, chair of Morrison & Foerster LLP's investment management
practice in New York.
Meanwhile, the commission has changed its meeting agenda to
separately consider another component of the proposal that would
allow funds to use "swing pricing" in certain conditions. In
swing pricing, trading costs are passed to shareholders through
recalculating the fund's net asset value in order to protect
existing shareholders from dilution.
"Changes to operational infrastructure are needed before
swing pricing can be adopted effectively," wrote BlackRock Inc
vice chairman Barbara Novick and a managing director,
Benjamin Archibald, in a comment letter.
The main challenge is obtaining some data on investor flows
with enough to time to determine if a swing is needed before
publishing funds' net asset values, they wrote.
(Editing by James Dalgleish)