Jan 13 U.S. securities regulators launched a review of potential liquidity risks posed by high-yield bond fund managers in the aftermath of the collapse of Third Avenue's junk bond fund in December, according to a document seen by Reuters and people familiar with the matter.
The Dec. 9 collapse of Third Avenue's Focused Credit Fund marked the biggest mutual fund failure since the 2007-2009 financial crisis. It was sparked after heavy losses in the junk bond sector left the fund unable to meet a wave of demands by investors to withdraw their money.
The event has heightened regulators' concerns about how mutual funds manage their liquidity risks and the impact that such disruptions can have, both on fund shareholders and the broader marketplace.
Within weeks of the Third Avenue event, examiners at the Securities and Exchange Commission sent detailed requests to mutual funds and exchange-traded funds seeking information about how they price less liquid securities, and whether certain parties have ever challenged those prices, according to a copy of a letter sent by the SEC and viewed by Reuters.
The SEC specifically requested daily internal illiquidity calculations from Aug. 31 through Dec. 15.
It also asked for a list of large fund shareholders, daily inflow and outflow data and any disclosures concerning "liquidity, quality of portfolio composition and/or redemption activity for each fund."
In an unusual move, the SEC gave fund managers just 24 hours to turn over a little more than half of the requested materials from its December letters, according to people familiar with the agency's request. The funds were then given one additional week to submit the remaining documents.
"I think that SEC examiners are better now at reacting quickly to these problem situations," said Norm Champ, who previously oversaw the division at the SEC that regulates funds.
An SEC spokeswoman declined to comment on the exam into high-yield bond funds. The sources familiar with the review spoke to Reuters anonymously because SEC exams are not public.
According to a Reuters analysis, at least one-fifth of the roughly $789 million of Third Avenue's Focused Credit Fund was composed of illiquid assets, or securities that don't have a market price because they trade infrequently.
When Third Avenue was unable to find buyers, it was forced to suspend a flood of redemptions and liquidate the fund.
The collapse has raised fresh questions over whether there are enough protections in place to buffer the marketplace in the event a fund is forced to unwind, and whether tougher rules are needed to protect investors from liquidity market risks.
The SEC has been trying to reduce such risks by proposing new rules in September, which call for mutual funds and exchange-traded funds to classify the liquidity of their portfolios and periodically review liquidity risks, among other things.
The agency also said earlier this week that its examiners plan to more closely scrutinize mutual funds, ETFs and private funds that are exposed to illiquid securities. (Reporting by Sarah N. Lynch in Washington, Editing by Soyoung Kim and Alistair Bell)