The FSOC recently released an update on its review of the products and activities of the asset management industry. The Council recommended the following with respect to mutual fund liquidity:
- Robust liquidity risk management practices for mutual funds, particularly with regard to preparations for stressed conditions by funds that invest in less-liquid assets.
- Establishment of clear regulatory guidelines addressing limits on the ability of mutual funds to hold assets with very limited liquidity, such that holdings of potentially illiquid assets do not interfere with a fund’s ability to make orderly redemptions.
- Enhanced reporting and disclosures by mutual funds of their liquidity profiles and liquidity risk management practices.
- Steps to allow and facilitate mutual funds’ use of tools to allocate redemption costs more directly to investors who redeem shares.
- Additional public disclosure and analysis of external sources of financing, such as lines of credit and interfund lending, as well as events that trigger the use of external financing.
The FSOC’s report also addressed leverage issues. While primarily focused on hedge funds, the Council did applaud the SEC’s rule proposal regarding fund use of derivatives. However, the Council did say that it “intends to monitor the effects of any regulatory changes and their implications for financial stability.” The report also raised concerns about the use of service providers in the asset management industry, and indicated that the Council would continue to analyze those risks and work with the industry to promote information sharing.
SEC Chair Mary Jo White issued a statement emphasizing that the SEC is independent of the FSOC and that while both may be interested in similar topics, “the analysis of foundational asset management issues, including liquidity management and use of leverage, is set forth in the Commission’s proposals and accompanying white papers of the SEC’s Division of Economic and Risk Analysis. In developing the SEC’s final regulations, we will consider and rely on our analysis of the input we receive from the public through the notice and comment process. Today’s FSOC update thus should not be read as an indication of the direction that the SEC’s final asset management rules may take.”