Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Fearing a Bond Fund Run, Fed Is Considering Exit Fee

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Fearing a Bond Fund Run, Fed Is Considering Exit Fee

Article excerpt

Could investors be charged an additional fee for selling shares in their bond mutual fund?

That is what financial adviser James Sanford fears may be in store for the investing public.

In recent weeks, Mr. Sanford has become an outspoken critic of what he has described as the Federal Reserve "changing the rules at half-time." He said the Fed is pushing for an exit fee on bond mutual funds because it is growing more concerned about a "run" on bond funds that could occur as soon as interest rates - which are now around zero percent - begin to move up.

As interest rates rise, the value of bond mutual funds will fall. That may provoke an episode of selling that could wreak havoc on the bond market and have ripple effects on the broader economy, he said.

"Imposing more fees on individual investors, in a world where it's very hard to earn any interest at all, takes more money out of their pockets," said Mr. Sanford, founder of Sag Harbor Advisors in Sag Harbor, N.Y. "It's unfair. Investors bought these funds unaware that there could be exit fees, so I find this to be a huge contractual violation."

The issue of imposing an exit fee on bond mutual funds has been up for discussion in recent weeks, according to the Financial Times.

In June, the newspaper reported, "Fed discussions have taken place at a senior level but have not yet developed into formal policy, according to people familiar with the matter. . exit fees would seek to discourage retail investors from withdrawing funds, thereby making their claims less liquid and making a fire sale of the assets more unlikely."

The origins of the current dilemma go back to 2008 when stocks were crashing and an avalanche of investment dollars poured into the bond market looking for a safe haven. From early 2009 to now, U.S. retail investors have pumped more than $1 trillion into bond mutual funds.

Instituting exit fees would require a rule change by the Securities and Exchange Commission. The SEC has not yet announced that it is seeking public comment on this issue. But many in the financial services industry are concerned about rumors on the grapevine. …

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