STT State Street Corporation

By Justin Baer 

U.S. regulators are willing to spare money managers from telling shareholders more details about their holdings in hard-to-sell assets. But they still want to see that information for themselves.

Mutual-fund managers are now scrambling to meet new Securities and Exchange Commission rules requiring them to classify their investments by how easily they could be sold to meet investor redemption requests.

"I've been thinking about this in stages of grief," said Kevin Ehrlich, chief compliance officer at Western Asset Management Co. "I'm now in the acceptance stage."

The industry argued that classifying all of their funds' holdings into these buckets would be an onerous and complex task, forcing them to make imprecise judgments that might be second-guessed.

Money managers won a partial victory in March, when the SEC proposed tabling the part of the rule that would have forced managers to disclose those classifications to the public. But the underlying information will still have to be turned over to regulators starting in 2019.

Some firms, particularly small ones with little or no debt holdings, will have an easier time getting ready for the new rules, Mr. Ehrlich said. But many others have concluded they need an outside firm to help with the new calculations.

Managers cited State Street Corp., Bloomberg LP and Intercontinental Exchange Inc. as among those that have emerged as top choices in providing this service to investment firms.

One sign of how the rules are affecting the industry came during a conference in January, when Nathan Greene, a partner with the law firm Shearman & Sterling, asked the audience: "Who's ready for the liquidity rule?" After a number of hands shot up, Mr. Greene posed a follow-up question: "How many of you are vendors?" Most of those same attendants raised their hands again, he said.

The collapse of Third Avenue Management's Focused Credit Fund in December 2015 trained a spotlight on how mutual funds unload hard-to-sell bonds when the credit markets seize up.

In 2016, the SEC adopted the new rules requiring funds to review liquidity risks and hold a minimum amount of liquid securities, while formalizing a cap on the amount of illiquid holding to 15% of the fund's net assets. The provision also compelled firms to give the SEC regular snapshots of their funds' buckets.

It's a complicated task, with many factors that can affect a bond's liquidity. Newer bonds tend to trade more often than older ones, and larger issues are bought and sold more than smaller bonds, said Eric Jacobson, a senior manager research analyst at Morningstar Research Services LLC. Many higher-quality bonds are also traded by more investors than riskier credits, he added.

There are other components to calculating how hard it will be to sell those securities in a pinch, such as how much of a fund's holdings they represent -- or even how much sway the manager has with the Wall Street banks serving as intermediaries between sellers and buyers, managers say.

"The problem is that there are several dimensions to liquidity," Mr. Jacobson said.

(END) Dow Jones Newswires

March 31, 2018 08:14 ET (12:14 GMT)

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