The brewing scandal at Freddie Mac may come to haunt some mutual funds. Representative Chris Shays
(R-Connecticut) is planning to introduce a bill this week that would effectively prevent some mutual funds from holding securities issued by Freddie Mac and Fannie Mae, reports Dow Jones Newswires
Shays is expected to offer his bill as an amendment to the Baker bill when the House Financial Services Committee takes up that bill later this week.
The Shays amendment would give the SEC nine months to adopt rules barring funds that market themselves as investing in either "federal government" or "U.S. securities" from investing more than 20 percent of their assets in securities issued by the two organizations. Specifically, these funds would have to invest at least 80 percent of their portfolio in debt issued directly by the U.S. Treasury. Currently, these funds often hold government agency issues such as Freddie Mac and Fannie Mae bonds since they are perceived to be backed by the U.S. Treasury.
Funds that market themselves as other types of fixed income funds would not be affected by the bill.
The bill comes as Treasury officials are also reportedly expressing concern about the use of debt issued by the two agencies in these mutual funds. On June 4, Treasury Assistant Secretary Sheila Bair expressed the department's concern over the issue in a letter sent to Securities and Exchange Commission officials. In that letter she cited one fund that invested 90 percent of its portfolio in agencies as an example of the potential problem.
"Investors may find this naming convention confusing and in some case, the disclosures provided by the fund may not clearly describe the risk associated with the security," Bair wrote, according to Dow Jones
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