Mutual funds get SEC’s help to weather virus-fueled redemptions

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Mutual funds that face an increased risk of investors pulling their cash as the coronavirus roils markets are getting a green-light from U.S. regulators to borrow money from affiliated companies.

The relief allows funds to obtain cash infusions through collateralized loans until the end of June 30 in order to satisfy shareholder redemptions, the SEC said. For the transactions to go through, funds’ boards of directors must determine that they are in the best interest of the investment vehicle and its investors.

The SEC move comes as some mutual funds brace for a possible surge in redemptions amid steep declines for stocks, mortgage-backed securities and other assets. Some funds that invest in mortgage bonds have already been selling holdings to raise cash so they can fulfill investor requests to pull money.

SEC Chairman Jay Clayton said the agency’s order would give funds “additional tools” as investors re-balance their portfolios.

Worst active fund returns of 2019
Although roughly 40% of the actively managed industry beat their indexes, the worst-performers eked out an average gain of just 1.07%.

“This action provides funds with additional flexibility to navigate volatile markets while meeting their obligations to investors,” he said in a statement late Monday.

Specifically, the temporary relief allows funds to:

  • Borrow money from some affiliates
  • Get additional flexibility in interfund lending agreements
  • Enter into lending arrangements that might deviate from preexisting policies if the board approves them
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