Alert January 21, 2014

SEC Staff Suggests Steps for Fixed Income Fund Advisers to Consider in Addressing Changing Market Conditions

The Staff of the SEC’s Division of Investment Management issued IM Guidance Update 2014-1 which suggests risk management measures and related communications with fund boards that fund advisers may want to consider in view of changing conditions in the fixed income markets.   Among the risk management measures discussed are the following: (1) assessing fund liquidity and conducting stress tests over varying time periods; (2) assessing other potential stress scenarios, such as interest rate hikes, widening spreads, price shocks to fixed income products, increased volatility and reduced liquidity; and (3) analyzing the foregoing assessments to develop appropriate risk management strategies at a fund or complex level, potentially involving portfolio composition, concentrations, diversification and liquidity. The Update also suggests that fixed income funds should assess the adequacy of their disclosures to shareholders in light of any additional risks due to recent events in the fixed income markets and the potential impact of tapering quantitative easing and/or rising interest rates, including the potential for periods of volatility and increased redemptions.