Markets
CNS

New Liquidity Risk Management Reforms Devised by SEC

The Securities and Exchange Commission ("SEC") unanimously voted to recommend new rules to enhance effective liquidity risk management for mutual funds and exchange-traded funds ("ETFs"). The move comes as part of five initiatives framed and undertaken by the SEC to minimize potential risks imbedded in such funds and adequately shield them from any kind of financial shock.

The risks involved are solvency and liquidity. The challenge is to meet shareholder redemptions during periods of stress and ensure smooth functioning of the funds despite large withdrawals. The main reasons for these additional safeguards for the over $60 trillion asset-management industry by the SEC are to lower overall systematic risks and protect investors' interests.

"Promoting stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and exchange-traded funds," said SEC Chair Mary Jo White. "These significant reforms would require funds to better manage their liquidity risks, give them new tools to meet that requirement, and enhance the Commission's oversight."

The Proposed Reforms

Under the proposal, mutual funds and ETFs would need to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. The funds would require to maintain a minimum cushion of cash or cash-like investments, which can be sold within three days (down from seven days currently required by statute).

Moreover, under the new reforms, the funds will be able to charge investors, if they redeem their money on days of elevated withdrawals. The purpose is to make certain the timely redemption of shares and collection of assets by investors without hampering day-to-day running of the funds.

Further, according to the new rules, the open-end funds would have to allow the use of "swing pricing" in certain cases. Swing pricing is a liquidity management tool designed to reduce the dilution impact of subscriptions and redemptions on non-trading fund investors. This step would enable mutual funds to reveal the fund's net asset value (NAV) costs related to shareholders' trading activity.

In addition, the proposed reforms would put a 15% cap on investments that can be made in hard-to-trade assets. As reported by the Wall Street Journal, some of the largest U.S. bond mutual funds have 15% or more of their money invested in such illiquid securities.

Our Take

Increased investments in mutual funds as well as ETFs by investors in recent years have compelled the SEC to toughen its stance. The concern is the anticipated scramble for exit by the investors in case of panic or extreme market movements. The implementation of the assured rate hike could also trigger huge immediate redemptions. Simultaneous fat withdrawals will result in large losses to fund managers in case they are not prepared for such measures and hold too much illiquid assets in the funds.

While BlackRock, Inc. BLK has been extending its support to the SEC's proposed reforms to enhance liquidity risk management practices across the industry, other asset managers like Fidelity Investments and The Blackstone Group L.P. BX , Cohen & Steers Inc. CNS , AllianceBernstein Holding L.P. AB and Pimco are also expected to follow suit.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

BLACKSTONE GRP (BX): Free Stock Analysis Report

BLACKROCK INC (BLK): Free Stock Analysis Report

ALLIANCEBERNSTN (AB): Free Stock Analysis Report

COHEN&STRS INC (CNS): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

CNS BX AB BLK

Other Topics

Stocks

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More