SEC proposes rules to shore up liquidity risk management for funds

Tue Sep 22, 2015 11:44am EDT
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By Sarah N. Lynch

WASHINGTON (Reuters) - Mutual funds and exchange-traded funds will be required to create new programs to better manage their liquidity, under a plan put forth by U.S. securities regulators on Tuesday.

The proposal by the Securities and Exchange Commission is one of several safeguards for the asset management sector that SEC Chair Mary Jo White called for in a major policy speech last year.

The plan comes as asset managers have been facing heightened scrutiny by banking regulators over fears their lending and investing activities could pose broader risks to the marketplace.

The Financial Stability Oversight Council (FSOC), a body of regulators headed by the U.S. Treasury Secretary, has been conducting a review of products and activities in the industry to determine if they may warrant further regulation.

Under Tuesday's plan, mutual funds and ETFs will need to devise plans to ensure they can meet redemption demands from investors during periods of market stress.

These plans will require funds to classify and review the assets in their portfolios based upon how quickly they could be converted into cash.

The plan would also permit, but not require, mutual funds to use "swing pricing," a process in which a fund's net asset value reflects the costs associated with trading so those costs can be passed to shareholders.

Swing pricing is meant to protect existing shareholders from dilution that can come from purchases and redemptions, and would only be triggered in certain market conditions.   Continued...

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst