September 22, 2015 / 2:11 PM / 2 years ago

SEC proposes rules to shore up liquidity risk management for funds

3 Min Read

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

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.

Finally, Tuesday's plan calls for additional disclosures related to swing pricing use and how the liquidity of a fund's assets is classified.

SEC Democratic Commissioner Kara Stein said that requiring these risk management plans is "sensible and long overdue."

At the same time, however, she questioned whether the plan goes far enough toward addressing some of the more complex ETFs and mutual funds that have risen in popularity.

Currently, there is not an extensive regulatory regime governing fund liquidity.

By law mutual funds are expected to honor redemption requests within seven days. And while mutual funds are urged by SEC guidance to cap their investments in illiquid securities at 15 percent, this is not a legal requirement.

The last time the SEC issued guidance concerning fund liquidity was more than two decades ago.

Republicans on the commission supported the plan, but raised some concerns about whether swing pricing is the right solution for allocating the costs of purchases and redemptions.

Reporting by Sarah N. Lynch; Editing by Meredith Mazzilli

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