Mutual Funds to Face More SEC Scrutiny After Third Avenue Bust

U.S. market regulators are intensifying their scrutiny of assets that can be hard to sell in stressed markets after the failure of a high-yield bond fund overseen by Third Avenue Management LLC.

The Securities and Exchange Commission said in an annual statement on its exam priorities released Monday that it plans to scrutinize how mutual funds, exchange-traded funds and hedge funds value these less-liquid holdings and manage the risk that they can’t be sold when managers need the cash. The SEC said its examiners also plan to review the role of brokers that match buyers and sellers for less liquid investments.

This year’s focus on liquidity as a “market-wide risk” is a change from last year, when the SEC just looked to ensure retail investors were adequately informed about the risks of investing in more exotic mutual funds. The regulator recently had to contend with the failure of the $788.5 million Third Avenue Focused Credit Fund, which blocked clients from pulling their money because the fund couldn’t meet redemptions without selling holdings at steep discounts.

“These new areas of focus are extremely important to investors and financial institutions across the spectrum,” SEC Chair Mary Jo White said in the statement.

The agency’s new exam priorities also include plans to examine how ETFs operate, including the role big securities dealers play in greasing the trading of shares. Regulators also will focus on how ETFs are sold to retail investors, including whether brokers have disclosed the risks of buying niche products and funds that generate outsized gains and losses using leverage. – Mutual Funds to Face More SEC Scrutiny After Third Avenue Bust