Erlend Bo, managing director and distribution head at Angel Oak Capital
The SEC has come out with three new proposals and guidelines for mutual fund companies. They are about liquidity, derivatives, and cybersecurity.
When thinking about liquidity, the SEC wants fund companies to do more to ensure that investors can get their money out. In addition, mutual fund companies could be forced to implement swing pricing.
The mutual fund industry is generally supportive of the SEC's goal of improving liquidity and risk management but has expressed some reservations. It would require funds to make highly subjective, unknowable projections about asset liquidity.
Mutual funds would be required to classify securities into six different liquidity buckets. Because these classifications are subjective, it would be difficult to compare funds. It would also be costly to implement.
One solution that has been proposed is to allow for a board approved portfolio based risk liquidity risk management framework. Another possible solution is for a bank line of credit.
As far as derivatives are concerned, the SEC plans to propose restrictions over concerns about the risk derivatives pose to retail investors.
The proposal primarily affects leveraged ETFs - that can be highly volatile, and expose investors to sudden outsized losses. It will also require these managers to hold more cash.
Cybersecurity is increasingly becoming one of the key risks facing the financial industry today.
The SEC has shown swelling interest in cybersecurity in recent years, urging companies to discuss cyber risks and disclose data breaches.
Some of the ways Angel Oak is trying to approach this includes; developing an information security and risk management regime, securing a system and configuration management strategy, establishing an anti-malware strategy, developing a network security strategy as well as building a security monitoring strategy.
