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SEC Allows Third Avenue to Temporarily Halt Redemptions

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Third Avenue Management LLC received approval from the U.S. Securities and Exchange Commission to temporarily suspend shareholder withdrawals from its $788.5 million high-yield bond fund after the firm canceled a controversial plan to freeze shareholder assets for a year or more.

The New York-based management firm said last week that it would place the bulk of the fund’s assets in a so-called liquidating trust to sell its holdings, which are primarily distressed bonds and bank loans. Third Avenue reversed course after the SEC “expressed concern” about the fund’s original Dec. 9 plan, according to an application the firm filed Wednesday seeking authorization by the regulator to carry out the suspension.

An SEC spokeswoman said the agency had approved the request, but the firm would be required to put in place investor and market protections, and be subject to ongoing oversight.

Third Avenue originally said that it would move assets from its Focused Credit fund into a liquidating trust after losses and redemptions left it unable to pay back redeeming clients without resorting to fire sales. Clients would have gotten interests in the trust, but would have only been able to gradually pull out their cash as the assets were sold, a process that was expected to take more than a year.

That clashes with one of the most basic precepts in mutual fund law — the right of investors to get their money back within a week of requesting it. The Investment Company Act of 1940 requires mutual funds to stand ready to redeem their shares at net asset value on a daily basis. Suspending such redemptions normally requires an explicit authorization from the SEC, such as the one issued today, securities attorneys have said.

Weekend Deliberations

Third Avenue said the SEC had expressed concern when the plan to set up a liquidating trust was disclosed last week. The agency wasn’t told that Third Avenue was going to create the trust until the last minute, according to a person familiar with the situation who asked not to be identified because the talks were confidential.

In addition to the SEC’s concerns, Third Avenue received numerous inquiries from shareholders and intermediaries through which investors hold their shares in the fund, according to Wednesday’s filing. Investors held almost 78% of the Focused Credit fund’s institutional shares and 81% of its retail shares through the brokerage units of companies such as Charles Schwab Corp., UBS AG and Fidelity Investments as of February, the latest data available in regulatory filings. The firm reviewed the pros and cons of the alternatives with its board of trustees over the weekend, the application said. After deciding to change course on Sunday, the board voted the following day to dissolve the liquidating trust and return the assets to the Focused Credit fund.

“We believe that this result benefits shareholders by providing greater reporting transparency — and we believe that amounts returnable to FCF shareholders will not be affected by the new structure,” Jim Hall, Third Avenue’s general counsel, said in a statement.

Institutional shareholders currently own about 65% of the value of the fund’s shares, according to the filing, with the remainder held by retail investors. The firm said these small investors would suffer if the SEC didn’t approve its request to suspend withdrawals.

“Institutional investors would likely be best positioned to take advantage of any redemption opportunity, to the detriment of those investors” who remain in the fund, Third Avenue said. The remaining investors would most likely be its retail shareholders, who would “suffer a rapidly declining net asset value and even further diminished liquidity” of the fund’s holdings, the firm said.

— Check out Meltdown in the High-Yield Market: Turning Point or Opportunity? on ThinkAdvisor.


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