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.

*  *  *

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

Comments

[Budd aka Sidewinder]

Somebody at Third Avenue forgot to pay the shylocks this month

[ForWhomTheTollBuilds]

Having just read the correction posted to the article, you may reconsider :)

Another humiliating day at the office for some lifelong bureaucrat today:

"Hey, this is against black letter law, its time to do some regulating...".

"Uhh, Terry, some guy from the whitehouse is on the phone, you might want to take this...."

Of course these poor bastards suffer the same dilemma everyone in America does:  Drink self numb while cashing paycheck to pay mortgage vs sacrifice self for principles no one cares about anyway.  And its not like they can burn this bridge and get anything better than a job waiting tables.

[wmbz]

1. Which means Third Avenue will be forced to sell at market; unless
2. The SEC grants them permission to suspend redemptions.

Hmmm, wonder which way the SEC will go, decisions, decisions.

I'd guess door #2 Monty

[cougar_w]

According to Tyler's update on the post, they get a supervised time-out.

But all holders will be chomping at the bit to get their money out. If 3Ave ever do open the doors beware the stampede.

[Neil Patrick Harris]

The financial system is being held together by paperclips and rubber bands at this point.

[rapetrain]

Everybody who holds after the close gets what they deserve.

[Soul Glow]

The Fed front ran Third Avenue, sold their junk bonds before the bond fund could, and unleashed the SEC on them.  Bully behavior by the Fed.  There is no oversight when the Fed works in their best interest for their member banks ie JPM and Goldman Sachs.

[buzzsaw99]

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

unable my ass. unwilling is the word.

[squid]

Both likely based on whether they equate rational with real.

Squid

[cougar_w]

So do we get to see some olde fashioned price discovery?