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.