Last week the SEC proposed a new set of guidelines for mutual funds and ETFs about disclosure of the liquidity of their holdings. This is as banks.part of its continuing effort, being resisted by the fund industry, to establish tighter risk controls over mutual fund and ETF products.
There are several parts to the guidelines”
-funds should set aside a specific percentage of assets to be held either in cash or cash-like securities that could be turned into cash within three trading days,
–funds should rank and disclose holdings in groups by how long it would take the liquidate the entire position without market impact: 1 trading day, 2-3 days, 4-7 days, 8-15 days…
–funds would be allowed to establish and disclose a “swing factor” that would be added to NAV on days of high sales and subtracted from NAV on days of high redemptions, in order to compensate existing shareholders for the additional liquidity risk taken on by the fund in committing to buy or sell large portions of its portfolio
Why do this?
- The fund industry is much larger than it used to be. The SEC is worried that giant fund complexes are actually “too big to fail” financial institutions, but not subject to the same close supervision.
- The “load” industry, where clients had to call a financial advisor to buy and sell, has yielded the field to “no-load” funds, where panicky shareholders can transact without a calming influence and at any hour, day or night.
- The fund industry has recently developed many less liquid products.
- Fund buyers have recently allocated away from stock funds toward bonds, which are generally less liquid.
- Some individual funds have become extremely large, raising questions about the possibility of unusual problems coming with size.
More tomorrow. (I’m on the road and Windows 10 is acting up. Sorry)