Mutual funds facing stress from the market turmoil caused by coronavirus will be able to tap their parent asset management companies and other affiliates for funding under relief announced this week by the Securities and Exchange Commission.
The move gives the $19tn mutual-fund industry another tool to deal with large swings in redemptions, including borrowing money from the firm that manages the portfolio, according to an SEC order made public late Monday.
The SEC’s order, which it said would provide the flexibility until at least June 30, shows how Wall Street’s regulator is rushing to aid firms threatened by the coronavirus shock. While the SEC’s role in a crisis is narrower than the Federal Reserve’s, it plays a key role in gauging market conditions and adjusting rules for brokers, investment advisers, and exchanges. As investors step up the pace of withdrawals, mutual funds could be forced to unload assets at a loss to meet redemptions.
“This order is extremely helpful,” said Marc Ponchione, a partner at Debevoise & Plimpton’s investment-management group. “It provides a source of liquidity for funds and should free things up quite a bit.”
Managers and their attorneys had highlighted their concerns with rules limiting loans between funds in a series of weekend conversations with SEC officials, Ponchione said.
Investors pulled $40bn from taxable bond funds last week alone, and net outflows have totaled $55bn in the past month, according to Morningstar Direct.
By law, investors in open-end mutual funds have a right to receive the closing share price on the day they ask to sell their shares. But a wave of selling can make it difficult for fund managers to raise cash quickly enough to meet those demands.
“This is pretty extraordinary that the whole mutual-fund industry is able to do this,” said Rajib Chanda, a partner and funds attorney at Simpson Thacher & Bartlett.
The SEC has in recent weeks stepped up its outreach to fund managers on a range of issues related to the pandemic, from the virus’s impact on market volatility and liquidity to the business-continuity plans they have in place as employees are ordered to work remotely.
In a March 19 letter reviewed by The Wall Street Journal, the SEC asked managers if they were prepared in case their essential staff were unable to work, or could only work on a part-time basis, for weeks or months.
In addition to the letter, the SEC last week began requesting phone calls with investment advisers to ask questions about “any liquidity issues, counterparty issues, changes to investment strategies, investor flows, as well as general market color and concerns,” according to a copy of the request seen by the Journal. The request said the conversations weren’t part of a compliance exam and that SEC staff was happy to conduct the call “after the markets close (post 4:00 pm).”
The mutual fund rules that prevent asset managers from lending to their funds, or facilitating loans between funds, typically protect against insider dealing. But in times of stress, the rules may cut off a source of emergency funding that benefits fund shareholders.
The SEC’s move mirrors an action it took during the 2008 financial crisis that allowed asset managers to inject cash into their money-market mutual funds, which investors were fleeing amid a credit crisis. Several fund managers, including BlackRock and Pimco, have in the past obtained such permission for a group of funds they oversee.
“The money-market fund relief was really meant to prevent a run on the bank because people knew the sponsor could backstop it,” Chanda said. “In the same way, there won’t be a run on open-end mutual funds because investors know they have expanded the sources of liquidity.”
Funds that take advantage of the relief to borrow from affiliates must disclose on their websites when they use the tool for the first time, the SEC said. The disclosure may also appear in regulatory filings that funds make to update shareholders about how their funds work.
The SEC also has delayed the registration filing deadlines for managers and registered advisers, and told them they won’t necessarily be subject to staff examinations should they take longer than usual to file.
The SEC’s examiners have moved to conducting their oversight remotely, the agency said in a statement Friday.
This article was published by The Wall Street Journal