Bond funds would have to report how vulnerable their holdings are to interest-rate changes under a rule proposed Wednesday by the Securities and Exchange Commission.
The five-member SEC unanimously voted to seek comment on the plan, which would require mutual funds to disclose more about their exposure to derivatives, repurchase agreements, and securities lending. For bond funds, the reports would include a metric known as duration that shows how their bond holdings would perform if rates were to rise by 1 percentage point.
The proposal is the agency’s first move to address concerns that its rules haven’t kept pace with the growth and complexity of many funds, which use derivatives and other contracts to hedge risk and boost returns. Federal banking regulators have warned that bond funds could face steep losses if the Federal Reserve’s first interest-rate hike June 2006 forces them to sell assets quickly.
“Investors will have better quality and greater access to information about their fund investments and investment advisers, and the SEC will have more and better information to monitor risks in the asset management industry,” SEC Chair Mary Jo White said Wednesday.
The new reports would be provided to the SEC on a monthly basis. The mutual-fund industry has bristled at having to disclose too much data, arguing that high-frequency traders could use the information on their holdings to trade ahead of them. In response, the SEC proposed that only the third month of each quarter’s data would be made public.
Funds would have to provide more data on the terms of repurchase agreements, securities lending, and derivatives. Risk metrics such as duration would be provided on a portfolio level, the SEC said. Funds would have to report separate risk measures for derivatives as well as gains and losses on those positions.
“Mutual funds have increasingly pushed into strategies and asset classes that the Commission’s current reporting forms were not designed for,” Commissioner Kara Stein, a Democrat, said. “This updated information should help the commission keep pace.”
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, the Financial Stability Oversight Council said in a report made public Tuesday. 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 approved a proposal that would require investment advisers to report more information about individual accounts they manage for investors, including data on assets, borrowings and derivatives. These accounts held $838 billion as of the end of 2014, according to research firm Cerulli Associates, but they aren’t required under current rules to comply with many of the SEC’s rules for mutual funds.