(Adds reaction, background)
By Lisa Lambert and Trevor Hunnicutt
WASHINGTON/NEW YORK Oct 13 The top U.S.
securities regulator on Thursday approved major new rules
designed to protect mutual fund investors from the effects of a
sudden sell-off, but it left for another day some of the dicier
The U.S. Securities and Exchange Commission's new rules take
aim at liquidity issues of the $18 trillion traditional mutual
fund market. But the agency deferred action on a separate plan
to regulate the use of derivatives in funds and carved out
significant exemptions for exchange-traded funds. It also put
off a vote on electronically delivering funds' written materials
The rules are part of a sweeping set of reforms that SEC
Chair Mary Jo White has sought in the asset management industry,
which includes the open-end fund market. On Thursday, the
commission also approved increased information reporting from
the funds and allowing them to use swing pricing during unstable
White said the SEC will finish rules on how the funds use
derivatives "in the near term" and is working on annual stress
testing for large investment advisers, as well.
The new rules have been strengthened since they were first
proposed more than a year ago, White said. They are "better
tailored to the liquidity risks faced by different kinds of
funds, with an improved classification scheme for the liquidity
of fund investments and a more targeted approach to ETFs," she
But the mutual fund and ETF industry did win some major
Under the final rules approved unanimously by the SEC's
three commissioners, funds will have to classify investments
into the categories of highly liquid, moderately liquid, less
liquid and illiquid.
The first draft had proposed a stricter system of
categorizing investments, with six levels, or "buckets,"
defining their liquidity.
"There was a lot of positive - the classification system
seems much more practical and realistic," said David Blass,
general counsel for the Investment Company Institute, the funds'
The final rules also exempt "in kind" exchange-traded funds,
those that honor redemptions in securities instead of cash, from
requirements on how many highly liquid and illiquid assets they
The final version still requires funds to keep on hand a
certain level of assets that can be converted into cash in three
days, those considered "highly liquid." But it left the funds'
boards to decide how to rectify dips below that threshold. The
original proposal had blocked funds from buying any more assets
until they got back up to the minimum. ETFs had said that could
run counter to their investment strategy.
In the same vein, the rules kept a requirement that no more
than 15 percent of assets could be classified as illiquid, but
did not prescribe a fix for passing that bar.
Several ETF issuers had asked to keep their products exempt
from the rules because they often meet redemption requests from
large sellers by handing over stocks or other securities, rather
than cash. The issuers had said the proposal better fits mutual
funds that face pressure to raise cash when investors head to
ETFs have faced fears that they cannot manage rampant
selling. On Aug. 24, 2015, heavy demand to sell U.S. ETFs pushed
many of their market prices far below the value they could have
fetched if they had been redeemed by the issuer.
But ETFs operate differently from mutual funds because most
individuals sell them in the public market and cannot redeem
them directly with the issuers.
The rules go into effect on Dec. 1, 2018 for larger funds,
and June 1, 2019 for smaller ones.
(Reporting by Lisa Lambert; Editing by Bill Trott and Lisa