SEC Takes Aim at Funds Fighting Too-Big-to-Fail Label

(Bloomberg) — The U.S. Securities and Exchange Commission is preparing a sweeping set of rules to police mutual funds that have increasingly moved into complex and harder-to- sell investments, the agencys chairman said.

Managers of mutual funds will face new requirements that limit how much they can invest in less-liquid assets and use derivatives to boost returns, SEC Chair Mary Jo White said today at a conference in New York. Regulators also will require funds to provide investors with more information about their use of derivatives and their practice of lending out securities to earn a profit.

We are now embarking on a new period of regulatory change, driven by long-term trends in the industry and the lessons of the financial crisis, White said at the event, which was sponsored by the New York Times DealBook.

The SEC first disclosed in November that its working on regulations to ensure mutual funds are prepared to meet client redemptions and money managers have plans in place should a fund fail. The SEC also plans new rules for large asset managers to stress test their funds, according to the regulators policy agenda.

In remarks to reporters after her speech, White declined to say when the agency will propose the rules, saying 2015 will be a very active year for those rules.

White disclosed the plans as federal banking regulators and groups such as the International Monetary Fund question whether some money managers have gotten too big or herded into illiquid investments. The IMF in October said mutual funds large holdings of junk bonds, leveraged loans and other assets that trade infrequently could compromise financial stability if regulators dont address it.

The Financial Stability Oversight Council, a panel of regulators who decide which companies pose the biggest risk to the financial system, considered this year whether BlackRock Inc. and Fidelity Investments should be classified as systemically important. White is a member of the council, whose chairman is Treasury Secretary Jacob Lew.