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1 [1] (February 17, 2016)

handle is hein.crs/govcdvw0001 and id is 1 raw text is: F.% iE SE ,$r'h.&!: , February 17, 2016 The Collapse of the Third Avenue Junk Bond Fund Mutual funds pool money from various investors and act as financial intermediaries to invest those proceeds in securities, such as corporate equity or various types of bonds. Led by fund managers, the funds attempt to generate capital gains and income for their investors who are typically given the right to redeem their fund holdings on a daily basis. In 2014, according to the Investment Company Institute, a fund trade group, the roughly 9,000 domestic funds held about $16 trillion in assets. In early December 2015, Third Avenue Management, a company that manages several mutual funds, announced that it was freezing shareholder redemptions and involuntarily liquidating the assets of a financially troubled member of its mutual fund family, Third Avenue Focused Credit Fund (the Third Avenue fund). Launched in 2009, the Third Avenue fund was principally invested in high- yield or junk bonds, debt issued by companies with a relatively high risk of default (when a debt issuer is unable to make required payments on its debt obligations). This collapse was the first by a domestic mutual fund since the failure of the Reserve Primary money market fund (such funds primarily invest in short-term debt) during the 2008 financial crisis. The potential broader systemic implications of the mutual fund's failure led the Treasury Department to adopt a temporary money market fund shareholder guarantee and the Securities and Exchange Commission (SEC) to adopt a series of new money market fund regulations. The Third Avenue fund, which had $790 million in assets on December 8, 2015, is being investigated by the Massachusetts Securities Division and the SEC, the primary fund regulator. The fund paid out all shareholder redemption requests through December 8, right before fund officials closed the fund and prohibited further redemptions. It then transferred all of its invested assets into a liquidating trust, which issued fund trust interests to be distributed to the terminated fund's shareholders. Fund officials said that the redemption freeze was necessary to avoid liquidating its assets in a fire sale. The move was characterized by various industry observers as rather unorthodox: SEC permission is generally required before fund redemptions can be frozen. Later, on December 16, Third Avenue fund officials requested from the SEC exemptive relief for its earlier suspension of fund redemptions, and relief was obtained on that day. As part of the exemptive relief granted by the SEC, the fund was allowed to shift assets from the trust back into the fund while continuing to bar shareholder redemptions. The fund's investors will receive updated, daily net asset value (i.e., a fund's per share value as reflected in the valuation of its assets) reports on their fund holdings. Investors were also paid an initial distribution of about 9% of the total value of their holdings. Meanwhile, fund managers are liquidating the fund's remaining assets, which is likely to be a protracted process widely predicted to last many months. Some question whether the fund's shareholders, who include individual investors, nonprofit concerns, and pension funds, will ultimately be made whole with respect to the value of their remaining holdings on December 10, 2015, the advent of the redemption freeze. The Regulation of Mutual Funds The SEC primarily regulates mutual funds such as the Third Avenue fund through the Investment Company Act of 1940 (P.L. 76-768). As described by the agency, the act [I]s designed to minimize conflicts of interest that arise in these complex operations. It requires these companies to disclose their financial condition and investment policies to investors ... [It also requires] disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. Figure I. Total Net Assets of Mutual Bond Funds by Investment Obiective. Year End 2014 (in S billions) Source: Data from the Investment Company Institute. High-Yield Bonds Investment grade debt is debt that a bond rating agency, such as Standard & Poor's or Moody's, determines has a relatively low risk of being defaulted on by an issuer, such as a corporation or a municipality. As reflected in the axiom that potential return rises with an increase in risk, investment grade debt is associated with relatively low yields or interest payments. By contrast, the Third Avenue fund was largely invested in long-term debt (i.e., maturities longer than 12 months) with high-yield or junk ratings from bond rating agencies. As described by the SEC, A high-yield corporate bond is a type of corporate bond that offers a higher rate of interest because of its higher risk of default. When companies with a greater estimated default risk issue bonds, they may be unable to obtain than investment-grade bond credit rating. As a result, they typically issue bonds .O 'T gognpo 'popmm- , goo g , q 'S a X 11LULANJILiN,