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SEC Throws Up On Third Avenue's Gating Plan (Then Folds)

Update: The SEC Folds:

  • SEC PERMITS TEMPORARY SUSPENSION OF THIRD AVENUE REDEMPTIONS
  • THIRD AVENUE WILL BE SUBJECT TO ONGOING SEC OVERSIGHT
  • SEC SAYS IT REQUIRED FUND TO PUT IN PLACE INVESTOR PROTECTIONS

As Bloomberg reports, Third Avenue Management LLC received approval from U.S. regulators to temporarily suspend redemptions from its $788.5 million high-yield bond fund.

“The commission required the fund to put in place investor and market protections, including ongoing commission oversight and provisions involving an orderly and fair process as a condition of its approval of the order,” an SEC spokeswoman said in an emailed statement Wednesday.

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As we detailed previously, HYG, the now infamous high-yield bond ETF, had an "ok" day, rallying along with everything else post-Fed. However, shortly after the close, it started to fade quickly as SEC "expressed concerns" about Third Avenue's plan for liquidation.

Third Avenue last week said it plans to move assets from the fund, the Third Avenue Focused Credit Fund, into a liquidating trust after losses and redemptions left it unable to pay back redeeming clients without resorting to fire sales. Clients would have gotten interests in the trust, but would not have been able to pull out cash until the assets were liquidated over time. But as Bloomberg reports, new regulatory filings show:

  • *THIRD AVENUE CANCELS PLAN TO PLACE ASSETS IN LIQUIDATING TRUST

Third Avenue Management LLC canceled plans to place assets from its $788.5 million high-yield bond fund in a liquidating trust after the staff of the Securities and Exchange Commission “expressed concern” about the idea, according to a regulatory filing.

 

The New York based management firm, headed by Martin Whitman, is now asking the SEC to issue an order that would permit the fund to suspend redemptions, the filing said.

The fund claimed:

  • *THIRD AVENUE: FUND WAS UNABLE TO SELL ASSETS AT RATIONAL PRICES

And noted that

  • *THIRD AVENUE: FAIR VALUED PART OF FUND EXCEEDED 15% BY NOV. 30

Which translated means:

  1. The SEC threw up on Third Avenue's plan to stash the "guess the market value" bonds in a trust;
  2. Which means Third Avenue will be forced to sell at market; unless
  3. The SEC grants them permission to suspend redemptions.

As a reminder, The Investment Company Act of 1940 requires mutual funds to stand ready to redeem their shares at net asset value on a daily basis. Suspending such redemptions normally requires an explicit authorization from the SEC, securities attorneys have said.

Why would The SEC allow this? Would it not seem like encouraging moral hazard? Or pandering?

The reaction so far:

 

You didn't really think it was all over, right?

 

Charts: Bloomberg

Source
U.S. Securities and Exchange Commission