(Corrects size of mutal fund market in second paragraph to $18
trillion, not $18 billion)
By Lisa Lambert and Trevor Hunnicutt
WASHINGTON/NEW YORK Oct 13 The top U.S.
securities regulator on Thursday approved rules designed to
protect mutual fund investors from the effects of a sudden
selloff, but it left for another day some of the dicier issues
The U.S. Securities and Exchange Commission's new rules take
aim at liquidity issues of the $18 trillion traditional mutual
fund market. But the agency deferred action on a separate plan
to regulate the use of derivatives in funds and carved out
significant exemptions for exchange-traded funds.
Thursday's action was part of a sweeping set of reforms that
SEC Chair Mary Jo White has sought in the asset management
industry, which includes the open-end fund market. On Thursday
she said the SEC will finish rules on how the funds use
derivatives "in the near term" and is also working on annual
stress testing for large investment advisers.
White said the rules have been strengthened since they were
first proposed more than a year ago. They are "better tailored
to the liquidity risks faced by different kinds of funds, with
an improved classification scheme for the liquidity of fund
investments and a more targeted approach to ETFs," she said
before the vote.
But the mutual fund and ETF industry did win some major
concessions. The three members of the SEC unanimously approved a
final version that exempts "in kind" exchange-traded funds,
those that honor redemptions in securities instead of cash, from
some of its requirements.
Several, but not all, ETF issuers asked to keep their
products exempt from the rules because they often meet
redemption requests from large sellers by handing over stocks or
other securities, rather cash. The issuers had said the proposal
better fit mutual funds that face pressure to raise cash when
investors head to the exits.
Under the final rules, funds would have to classify
investments into the categories of highly liquid, moderately
liquid, less liquid and illiquid. They also would be permitted
to classify investments by asset class. The first draft had
proposed stricter definitions of categorizing investments.
The new version also keeps in place a requirement that funds
keep on hand a certain level of assets that can be converted
into cash in three days, but leaves it to the funds' boards to
decide how to rectify any dip below that threshold. The original
proposal had blocked funds from buying any more assets until
they got back up to the minimum.
That change should reassure some ETF managers who said that
being prevented from buying some assets could contradict their
ETFs have faced fears that they cannot manage rampant
selling. On Aug. 24, 2015, heavy demand to sell U.S. ETFs pushed
many of their market prices far below the value they could have
fetched if they had been redeemed by the issuer.
But ETFs operate differently from mutual funds because most
individuals sell them in the public market and cannot redeem
them directly with the issuers.
(Reporting by Lisa Lambert; Editing by Meredith Mazzilli and