ICI calls on SEC to ‘raise the bar’ on liquidity risk regulation

US trade association says the FSOC has no basis for financial stability concerns over liquidity management.

The Investment Company Institute (ICI) has called out the Securities Exchange Commission (SEC) in the US, urging it to ‘raise the bar’ on liquidity risk rule making.

In a letter to the Financial Stability Oversight Council (FSOC) - responding to a review of activities in asset management – ICI said the SEC must understand liquidity management “is not a ‘one size fits all’ proposition.

“Investors expect, and the law requires, that mutual funds have sufficient liquidity to meet redemptions,” the US-based association added.

A ‘waterfall theory’ of liquidity management – the selling of more liquid assets first to meet redemptions – does not accurately represent how funds manage liquidity, the association explained.

FSOC’s report on liquidity management stated it: “has identified certain areas of potential financial stability risk and is providing its views on key areas of focus and next steps to respond to these potential risks.”

ICI’s letter slammed the FSOC’s concerns that financial instability could arise from liquidity risks in less liquid asset classes, explaining it has no basis for its conclusion.

“A careful reading of the statement, however, reveals that the Council has not substantiated its concerns,” ICI wrote.

The association and other trade bodies offered further data and analysis, but FSOC acknowledged this with “an occasional nod.”

ICI concluded: “It is disheartening to see the extent to which the Council appears to prefer what is a conjectural narrative about mutual funds over the consistent experience of an investment product used by tens of millions of Americans to help achieve their most important financial goals.”