SEC Exams Showed Uniqueness of Third Avenue Collapse

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By Rob Tricchinelli

April 19 — In the weeks following the December collapse of the Third Avenue Focused Credit Fund, the Securities and Exchange Commission examined roughly 70 funds and concluded that the threat of similar meltdown was minimal, a top agency official said today.

“There really weren’t any other funds with the specific holdings that that fund had,” Jane Jarcho, deputy director of the SEC’s Office of Compliance Inspections and Examinations, said at the agency's compliance outreach conference. “They were very, very unique.”

Similar funds had good liquidity buffers, Jarcho said, and OCIE told the commissioners that the Focused Credit Fund's risk profile wasn't widespread in the industry, which wouldn't have caused a crisis unless market conditions significantly worsened.

Liquidity Got ‘Difficult.'

The $788 million Focused Credit Fund invested in distressed and high-yield debt but was still designed to allow smaller investors to redeem quickly.

As the fund halted redemptions, “there was a brief period of time where liquidity got a little difficult” among similar funds, Jarcho said.

The Third Avenue fund faced more than $700 million in redemptions in previous months, which, combined with losses, made it unable to honor new sell-offs (241 SLD, 12/16/15).

In March, SEC Chairman Mary Jo White urged caution for all funds (61 SLD, 3/30/16).

“Directors of funds should also be thinking about and asking fund managers whether these events could happen at your fund, how to prevent them from happening, and how to respond promptly and effectively if they do occur,” White said then.

Risk Management Rule

The agency in September proposed to require mutual funds and exchange-traded funds to create liquidity risk management programs (184 SLD, 9/23/15). Under the proposal, funds would have to classify and regularly review their fund products' liquidity risks, based on their activity, trading volume, bid/ask spreads, volatility, structure and relationship to other funds.

The Third Avenue collapse was a “petri dish type situation,” allowing the agency to collect useful real-world information and guide the rule, Diane Blizzard, associate director of the SEC's Division of Investment Management, said April 19.

“My staff that’s working on the rulemaking have been involved in the calls, they’ve gone on some of the exams,” she said. “It’s been a really good thing for the staff to have had that opportunity to really get in there.”

Industry commenters have criticized the proposal and asked for more flexibility for funds to comply with the final rule.

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Susan Jenkins at

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