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"I
am concerned that we are starting to see some cracks in the
foundation," Securities and Exchange Commission Democratic
member Kara Stein said at a Brookings Institution event.
At issue, she said, are mutual funds and exchange-traded
products that utilize large amounts of leverage, invest in
illiquid securities or execute strategies similar to those used
by hedge funds.
Although there are rules on the books to limit these activities,
Stein said she is concerned too many funds have been able to
avoid some of these restrictions, in some cases by relying on
exemptions granted by SEC staff.
Stein's comments come at a time when the SEC and other federal
regulators have been more closely scrutinizing the asset
management sector amid questions about whether certain products
or activities could pose risks.
SEC Chair Mary Jo White late last year outlined a series of
reforms she plans to enact, including requiring mutual funds and
advisers to report additional data, imposing new risk controls
on mutual fund and ETFs, and requiring funds to draft plans for
how they would unwind and transfer client assets.
Just last week, the SEC sought public comment on exchange-traded
products, such as ETFs, with an eye toward determining how they
are marketed to and traded by retail investors.
Stein said Monday that while the rules on the books require
funds to disclose a lot of information for investors, over the
years there has been a shift that "places the onus on the retail
investor to figure out whether a fund is right for him or her."
She raised concerns, for instance, that some funds are able to
bypass a rule which is supposed to limit their investments in
illiquid assets to 15 percent.
Such funds, she said, are investing in illiquid bank loans, but
they are calculating the 15 percent threshold by basing it on
when a contract price is struck to sell the underlying bank loan
- and not when the loan actually settles.
She also said SEC staff have granted nearly 30 exemptions to new
funds that permit them to use derivatives, saying this has
"chipped away" at true leverage restrictions.
(Reporting by Sarah N. Lynch; Editing by Andrew Hay)
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