A top mutual fund industry regulator publicly wonders whether or not illiquid investment strategies really belong inside open-end mutual funds.

David Grim The Securities and Exchange Commission Investment Management Division Director

David Grim, director of the SEC's division of investment management, tells fundsters that so far he's drawn three lessons from the dramatic demise in December of the Third Avenue Focused Credit Fund. Grim gave the keynote address this morning at the 2016 ICI Mutual Funds and Investment Management conference at the J.W. Marriott Grande Lakes in Orlando.

The fall of Third Avenue Focused Credit, Grim says, "highlighted a number of longstanding issues" and the SEC's staff's analysis of the situation is still "ongoing." Here are his three "initial thoughts".

Number one, if you might do what Third Avenue did and close the gates, don't wait to talk to the SEC staff.

"Any fund contemplating the extraordinary step of suspending redemptions should approach the division as soon as possible," Grim says.

Number two, maybe illiquid investments, like distressed debt in Third Avenue Focused Credit's case don't belong in funds. Given "the contours of the open-fund structure," Grim says, "certain investment strategies may be more suitable as closed-end or private funds." Grim didn't say what the SEC will do about that perceived mismatch, but perhaps this was a hint that something is coming.

And number three, fundsters and boards should prepare themselves for the worst to happen to their fund, too.

"Implement robust policies and procedures," Grim says. "I encourage fund management and boards to review the events of December to revisit their own protocols."

Grim also used his opening remarks to talk about his division's productive 2015, the liquidity risk management proposal (which he tied back to the Third Avenue fallout), the data reporting proposal, the electronic delivery proposal (trumpeted this morning by the speaker before Grim, ICI general counsel David Blass), and more. 

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