‘While, the exact nature of the SEC inquiry couldn’t be determined, industry representatives said that it appeared the rapid growth of the once-obscure stable-value vehicles had caught regulators’ eye, the Wall Street Journal reported. The regulators apparently want to examine valuation questions that arise because of unusual features of stable-value funds.
Stable-value portfolios consist of high-quality bonds as well as interest-bearing contracts bought mostly from banks and insurance firms. The contracts include a guarantee, called a wrapper, which also is issued by a bank or insurer, that the principal and interest payments will remain steady, despite the goings on in the markets. That effectively keeps the net asset value steady for a given amount of time. Last year, stable-value portfolios returned an average 6% – particularly significant since the average domestic equity fund plummeted by 22.43% in the same period.
Fund Stable Value Products Comparatively New
401(k) plans and other employer retirement programs have long included stable value in their offering lineups and assets in them hit $315 billion in 2002, according to the Stable Value Industry Association. But mutual fund families only began offering stable value through individual retirement accounts for the first time only in 1998. There are now seven such mutual funds, and assets in them more than doubled last year to $4.7 billion, according to the industry group.
That kind of growth prompted financial-services providers without such mutual funds, including Fidelity Investments and Strong Investments, to file registration papers with the SEC last year to launch their own versions.
Fidelity’s move appears to have drawn the scrutiny from SEC regulators, people familiar with the matter say, according to the Journal. That’s because instead of merely filing registration papers for its fund, Fidelity asked the SEC for a “no action” letter, a fairly common way of getting regulatory clearance before implementing a plan in a particular way.
A Fidelity spokesman told the newspaper that the firm had asked the SEC for “guidance on valuation and other matters.” Instead, he said, the commission didn’t issue the “no action” letter and in fact started asking additional questions. “Consequently, we decided not to launch it until such questions are resolved,” the unnamed spokesman told the Journal said.
But people in the industry say the SEC subsequently sent letters to other firms offering stable-value mutual funds and those with prospective funds in registration, asking for copies of wrapper contracts and whether a fund has had to draw on an insurer’s wrapper, among many other questions. The February 25 letter asked for responses by this month. The SEC letter said it wanted to make sure that funds’ valuation methods were consistent with rules governing mutual funds.