BlackRock Inc. (BLK), the world’s biggest money manager, is encouraging regulators to scrutinize the risk of an investor flight from mutual funds and consider potential restrictions that would help prevent asset sales.
“There is no historical evidence that this type of run has ever occurred, however, it’s worth doing deeper analysis to understand the questions better,” Barbara Novick, BlackRock’s vice chairman, said in a telephone interview yesterday.
Regulators, seeking to avoid a replay of the 2008 financial crisis, are contemplating ways to reduce the likelihood that an exodus from funds could freeze financial markets during a selloff. Much of the focus is on bond mutual funds and whether they might lose assets rapidly if interest rates rise. Investors poured $1 trillion into U.S. bond funds from 2008 to 2012, and pulled $80.5 billion last year, according to data from the Investment Company Institute.
The Financial Stability Oversight Council, a group of regulators led by Treasury Secretary Jacob J. Lew that also includes the chairs of the Fed and the U.S. Securities and Exchange Commission, has been examining whether asset management firms or their activities may pose systemic threats to the financial system.
Large withdrawals can cause a fund manager to sell assets quickly to meet redemptions. If withdrawals are spread among many funds it can cause asset prices to plummet, especially for securities that are illiquid and hard-to-value.
The Financial Times reported last week that the Federal Reserve was examining redemption fees for bond mutual funds as a possible tool for preventing runs. Fed Chair Janet Yellen today contradicted the report, saying oversight of the funds industry lies with the SEC.
“I am not aware of any discussion of that topic inside the Federal Reserve,” she said in a press conference following a meeting of the Federal Open Market Committee.
BlackRock published a paper last month calling on policy makers to consider revising tax, accounting and fund regulations in ways that could influence investor behavior. The firm also said regulators might consider redemption restrictions for some bond mutual funds, such as extra fees for large redeemers and standardized provisions for in-kind redemptions. In an in-kind redemption, the fund hands securities over to the withdrawing shareholder instead of selling them and returning cash.
In 2012, BlackRock proposed the idea of redemption restrictions as one possible solution in the debate over money-market mutual funds, which traditionally price their shares at a constant $1. The firm suggested that funds use “circuit breakers,” triggered when the market value of a money fund’s shares drops slightly below $1. In such a case, a fund would charge redeeming investors an extra fee, helping to restore it to $1 or otherwise discouraging their departure.
More recently, BlackRock has lobbied regulators against designating large money managers as systemically important, a label that would bring direct oversight by the Fed to a firm and could bring significant costs. Its efforts are leading regulators to shift their focus from investment companies to investment products, BlackRock’s chief executive officer, Laurence D. Fink, said at the firm’s investor conference on June 17.
“We’d been a huge advocate and we had many conversations with many regulators about the need to focus more on product regulation,” Fink said.
During the financial crisis that followed the collapse of the U.S. housing market in 2008, stock and bond mutual funds didn’t contribute much to market turmoil. Investors in U.S.- registered stock mutual funds redeemed less than 2 percent of assets in October of that year, when the Standard and Poor’s 500 Index fell 17 percent, according to New York-based consulting firm Strategic Insight.
To contact the editors responsible for this story: Christian Baumgaertel at email@example.com Sree Vidya Bhaktavatsalam, Josh Friedman