The Securities and Exchange Commission voted unanimously on Thursday to propose making mutual funds and exchange-traded funds (ETFs) more open about practices amid fears the investment firms pose an increasingly large risk that regulators are currently unable to cope with.
The rules, if finalized, would seek to ensure that investors can liquidate their mutual fund assets “in a timely manner” by forcing firms to be open about and prepare for the possibility of withdrawal panics.
“Under the proposed reforms, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices,” the SEC noted in a press release.
Chair Mary Jo White called the proposals “significant reforms” and said that “stronger liquidity risk management is essential to protecting the interests of the millions of Americans who invest in mutual funds and [ETFs].”
Last year, an annual Treasury Department report described mutual funds and ETFs as having grown since the last global financial collapse into something of a shadow banking sector. The report noted that since 2008, the two types of outfits have increased five-fold in aggregate size to $622 billion. It also noted that there has been a “recent growth in credit risk-taking…concentrated in nonbank entites that are not directly regulated by banking supervisors.
“Nonfinancial corporate balance-sheet leverage is still rising, underwriting standards continue to weaken and an increasing share of corporate credit risk is being distributed through market-based financing vehicles that are exposed to redemption and refinancing risk,” the Treasury Office of Financial Research report stated.
After the SEC voted on Tuesday, The Wall Street Journal noted that Federal Reserve officials and other prominent financial regulators have “repeatedly called for ongoing vigilance on potential risks outside the traditional banking system, including asset managers.” The paper described mutual funds and ETFs as constituting a “multitrillion asset-management history.”
On Tuesday, liberal Senators also called on the administration to move forward with other kinds of regulatory maneuvers targeting financial asset managers of a different type.
Sens. Elizabeth Warren (D-Mass.), Tammy Baldwin (D-Wis.), Al Franken (D-Minn.) and Sheldon Whitehouse (D-R.I.) asked Treasury Secretary Jack Lew to move forward with a proposed crackdown on private equity fund managers who, in bad faith, classify certain types of revenue as income taxed at a lower rate.
“Fund managers should not be allowed to alter the character of their salary income simply by inserting into their fee arrangements a few magic words without meaningful economic effect,” the four said in a letter to Lew.
