BlackRock to SEC: Drop ETFs From New Fund Liquidity Safeguardsby
Asset manager says rules should be tailored to ETF features
BlackRock joins ICI and Vanguard in questioning SEC plan
BlackRock Inc., the world’s largest provider of exchange-traded funds, is urging U.S. regulators to exclude the products from potential rules that could crimp investment returns.
A proposal issued by the Securities and Exchange Commission in September would require mutual funds and ETFs to hold more assets that can be easily sold during market routs. The SEC’s plan addresses concerns that investors could be harmed if they try to flee funds that hold a lot of high-yield bonds and other riskier debt. That’s what triggered the collapse of the $788.5 million Third Avenue Focused Credit Fund last month.
But unlike mutual funds, which must buy back investors’ shares, ETFs trade on stock exchanges at market prices, meaning they don’t fork over cash to investors who sell. That means any new rules affecting them should be tailored to the unique features of ETFs, according to New York-based BlackRock. ETFs hold assets valued at $2.1 trillion, based on data from the Investment Company Institute.
“There is no liquidity risk for an ETF,” Barbara Novick, BlackRock’s vice chairman, who runs the firm’s lobbying and public policy efforts, said in an interview Tuesday. “We would recommend exempting ETFs from this rule.”
The criticism from BlackRock, the world’s largest asset manager, puts pressure on the SEC to scale back its proposal, which is the centerpiece of Chair Mary Jo White’s efforts to update rules that haven’t kept pace with the growth of the $15.9 trillion fund industry. SEC spokeswoman Judith Burns declined to comment on BlackRock’s recommendations. The plan was criticized last week by Vanguard Group Inc. and the ICI.
The SEC’s proposal would require that funds hold a minimum cushion of cash or cash-like investments that can be sold within three days. That approach could constrain returns and backfire by creating an incentive for funds to sell assets as markets tank, simply to maintain the required three-day minimum, according to Novick. That could further push down asset prices, creating a vicious cycle that is the opposite of what regulators want.
The SEC’s September plan also asked funds to classify how many days it would take to sell each security they own. The SEC should scrap that design and instead have funds assign securities to one of several “liquidity tiers,” while limiting the share of assets in the least liquid category, Novick said.
“The days-to-liquidate is a very subjective test, so you could have three different managers look at the identical security and put it in different liquidity buckets, and they could each justify their reasons,” she said. “We agree with their objective, but we came up with a better way to get to that objective.”
BlackRock is supportive of the SEC writing separate regulations for ETFs that distinguish between different types of products, according to Novick. Some ETFs that hold assets that aren’t publicly traded, such as bank loans, could run into trouble when the price of those assets becomes more uncertain in stressed markets, BlackRock wrote in a separate letter to the SEC in August.
BlackRock, which manages $4.5 trillion for clients, says monitoring the liquidity of fund holdings is already part of its approach to managing risk. The firm efficiently managed almost $1 billion in redemptions in its iShares iBoxx $ High Yield Corporate Bond ETF after Third Avenue froze withdrawals, Mark Wiedman, global head of BlackRock’s iShares ETF unit, said last month.