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Portfolio > Mutual Funds

SEC Said to Propose That Mutual Funds Disclose Risk of Rate Rise

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The U.S. Securities and Exchange Commission is set to propose a requirement that mutual-fund companies report how vulnerable their bond portfolios are to interest-rate changes, two people familiar with the matter said.

The proposal, which the five-member commission is scheduled to vote on Wednesday, is among the agency’s first moves to address regulators’ concerns that many bond funds could face steep losses if the Federal Reserve’s first interest-rate hike in almost seven years forces them to sell assets quickly.

Under the proposal, mutual funds would have to submit monthly reports to the SEC including new information about their derivatives holdings, said the people, who asked not to be named because the proposal isn’t yet public. The reports would also include a metric known as duration that shows how bonds would perform if rates were to rise by 1 percentage point.

“Duration would be extraordinarily useful both to the commission and investors to help them understand the interest- rate sensitivity of a bond portfolio,” said Robert Plaze, a partner at Stroock & Stroock & Lavan who previously led mutual- fund regulation at the SEC. “It’s what they use inside the asset managers to evaluate their own portfolios.”

The mutual-fund industry has bristled at having to provide the data, arguing that high-frequency traders could use the information on their holdings to trade ahead of them. In response, the SEC will propose to delay the release of the reports and will withhold some of the data from public view altogether, the people said.

Advocates of tighter rules, including the International Monetary Fund, say investors searching for higher returns have piled into funds holding riskier and less liquid debt. Funds may find it harder to sell such investments during periods of stress, exacerbating losses. Funds are required to return cash within seven days to investors who redeem shares.

Mutual fund companies including BlackRock Inc. and Fidelity Investments have lobbied against claims they should come under stricter regulation reserved for big banks and insurance companies. The Investment Company Institute, the industry’s lobbying group, says there has never been a run on mutual funds, even during the 2008 financial crisis.

The SEC also will also vote Wednesday to propose that investment advisers provide more data on accounts they manage that aren’t subject to the SEC’s leverage and liquidity rules.


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