(Bloomberg) -- The U.S. Securities and Exchange Commission is preparing a sweeping set of rules to target mutual funds whose rapid growth and migration into more complex strategies could pose risks to the financial system, the agency’s chairman said.

The measures outlined today by SEC Chair Mary Jo White in New York are the fullest description yet of how the agency plans to address concerns that regulations haven’t kept pace with the evolution of the $30-trillion industry. Among the rules being developed is a plan to limit funds’ investments in harder-to- sell assets and derivatives, she said.

Federal banking regulators and the International Monetary Fund have questioned whether the SEC’s regulation of mutual funds and asset managers is sufficient. They say funds with holdings in less liquid assets, such as bank loans or junk bonds, might have to sell investments at a loss to raise cash to meet redemption requests.

Speaking at an event sponsored by The New York Times’ DealBook, White said the agency needs a broader set of “proactive initiatives” to ensure that regulators are on top of the “increasingly complex portfolio composition and operations” of the industry.

“We are now embarking on a new period of regulatory change, driven by long-term trends in the industry and the lessons of the financial crisis,” White said.


Mutual funds have come under particular scrutiny because they are open to retail investors and required to return funds within seven days to those who redeem shares. Funds forced to sell assets quickly could push down prices, creating spillover effects that hurt other investors, White said.

To guard against that outcome, the SEC is looking at requiring funds to ensure they have plans in place to meet investor demands without stressing markets. The agency also is working on a rule to require mutual funds to make broader and more frequent reports of holdings to investors, as well as additional disclosures about their use of derivatives and practice of lending out securities to earn a profit.

The SEC also will require money managers to have plans in place to transfer fund assets to a new manager in the event that they fail, White said. That would come on top of a proposal outlined by the agency last month to have large asset managers stress test their funds.

In remarks to reporters after her speech, White declined to say when the agency will propose the rules, saying “2015 will be a very active year for those rules.”


The Financial Stability Oversight Council, a panel of regulators who decide which companies pose the biggest risk to the financial system, considered whether BlackRock and Fidelity Investments should be classified as systemically important. White, who is a member of the council, said it has improved the government’s view of systemic risk.

“FSOC’s current review of the potential risks to the stability of U.S. financial system of asset managers is a complement to the work we are now undertaking,” White said today.

The Investment Company Institute, which has opposed much of FSOC’s work on money managers, struck a more conciliatory tone when discussing the SEC’s involvement.

“As the primary regulator for funds and asset managers, the SEC has the expertise and the authority to strike the right balance between protecting investors and the financial system and preserving the important role of the capital markets,” ICI President Paul Schott Stevens said in a statement.

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