Thursday, February 7th, 2019 and is filed under AI Insight News
Some financial firms have raised questions about the need for conducting additional research on alternative mutual funds given their complex structure compared to traditional mutual funds. See below for supporting regulatory detail to help differentiate the need for additional due diligence on alternative mutual funds.
In 2013, FINRA issued an alert identifying alternative mutual funds as having unique characteristics and risks separate from their traditional counterparts (stock and bond funds). The alert, Alternative Funds Are Not Your Typical Mutual Funds, focuses on defining liquid alternatives, how they compare to hedge funds, and what all investors need to be aware of.
Liquidity Risk Management proposed on September 22, 2015. The proposal included a comprehensive package of rule reforms designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs). Under the proposed reforms, mutual funds and ETFs would be required to implement liquidity risk management programs and enhance disclosure regarding fund liquidity and redemption practices. The proposal is designed to better ensure investors can redeem their shares and receive their assets in a timely manner.
Derivatives Rule proposed on December 11, 2015. The rule is designed to enhance the regulation of the use of derivatives by registered investment companies, including mutual funds, exchange-traded funds (ETFs) and closed-end funds, as well as business development companies. The proposed rule would limit funds’ use of derivatives and require them to put risk management measures in place which would result in better investor protections.
In 2017, FINRA took further steps to identify alternative mutual funds as a unique product set by introducing an e-learning course titled Understanding Alternative Mutual Funds. The course explains the unique characteristics and associated risks of these investments, and presents scenarios designed to further the understanding of the complexities and the importance of performing a thorough suitability analysis.