January 7, 2016
The SEC's liquidity proposal should not be adopted:
Other than the Third Avenue Focused Credit Fund and the Reserve Fund, there have not been any fund liquidity crises in recent history. In both cases, the Commission gave these registrants the ability to blow off liquidity requirements with little consequence (other than reputational risk).
The current proposal is folly. It will only serve to reduce fund returns in response to a very rare phenomenon. Your cost benefit analysis should be looking at the cost to investors, not the industry.
The Commission also undercut a staff position that says that funds should have no more than 15% in illiquid investments at any time (not just the time of investment). Limiting this position to the time of investment makes little sense and undercuts the purpose of liquidity restrictions. Open-end funds should always be redeemable and so should always be subject to the 15% limit.
The proposal and your derivatives proposal will place an exceptional burden on Fund Boards. Either they will need to rubberstamp certain findings or take a huge amount of time to learn about and evaluate liquidity. This is too much. Stick to the hard 15% limit and hold people to it.
Also, when a fund blows through liquidity limits and cannot honor redemptions in a timely fashion, ban the adviser and portfolio managers from the industry. Give them consequences and skin in the game.