On December 15, we blogged about the struggles that some high yield funds were having trouble with honoring redemption requests. One of them, the Third Avenue Focused Credit Fund, in lieu of cash, had taken steps to provide its shareholders with interests in a trust that would be used to liquidate the fund’s assets once it had been closed down. Since that time, the Fund has come to an agreement with the SEC, permitting it to postpone honoring redemption requests until it can liquidate the fund’s assets in orderly fashion.
In addition, mutual fund industry news site Ignites.com has reported that around the same time, the Commission sent out a “sweep” letter to high yield asset managers requesting certain key data around junk funds’ holdings, investors, and credit lines, amongst other areas, ostensibly to identify whether there are funds beyond the Third Avenue fund that are at risk. The Ignites article also reported that the turn-around time for responding to the request was very quick, particularly for holdings information.
The Third Avenue story, and subsequent SEC sweep, illustrate that in difficult markets in particular, it is important to have your position, shareholder, and valuation data well organized, and easily accessible. Furthermore, asset managers should review their risk and compliance controls, procedures, and investment guidelines closely such that their portfolios are well prepared for market shocks. By taking the steps that it has, the Commission has shown that it will be proactive in working to prevent disorderly fund closures and other actions that ultimately harm mutual fund shareholders.