SEC to propose liquidity rules on fund managers

September 22, 2015 09:42 AM

Mutual funds and exchange-traded funds will be required to create new programs to better manage their liquidity, under a plan unveiled 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, 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.

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, who earlier this year gave a speech lamenting the lack of adequate rules for the liquidity of mutual funds and ETFs, said in prepared remarks on Tuesday 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.

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