Federal securities regulators on Wednesday approved a temporary halt on investors withdrawing money from a failed New York junk bond fund, Third Avenue Focused Credit Fund, while the firm that runs it liquidates its assets.
According to an order by the Securities and Exchange Commission, Third Avenue Management can suspend redemptions from the mutual fund in order to allow for an orderly sale of the fund's assets that is fair to all investors.
While large institutional investors account for 65 percent of the fund's assets, the SEC said individuals hold the other 35 percent.
If the temporary suspension were not granted, the SEC said in its order, "the institutional investors would likely be best positioned to take advantage of any redemption opportunity, to the detriment of those investors – most likely, retail investors – who remain in the Fund."
Smaller investors would likely suffer losses as a result, the SEC said.
Third Avenue's general counsel, Jim Hall, said in a statement that when the fund's board decided on Dec. 9 to liquidate the portfolio, it used "a legal structure that we believed would protect all of our shareholders."
But the SEC stepped in as investors grew alarmed by the shut-down of the fund, which invested in risky bonds. Investors withdrew $1.1 billion from the fund this year through Dec. 9, the agency said, leaving about $789 million in assets. The value of the fund's shares, for both large and small investors, also has dropped.
Third Avenue Management is majority owned by Affiliated Managers Group Inc. of Beverly. The parent company declined to comment, referring questions to Third Avenue.
In the statement, Third Avenue said all shareholders in the fund would receive an initial cash distribution Wednesday. The company said it would not charge investors fees while it liquidates the portfolio.
SEC spokeswoman Gina Talamona said the Commission "required the fund to put in place investor and market protections," including ongoing SEC oversight and provisions to ensure an orderly and fair process.
The SEC in its order also said Third Avenue must keep accurate records of the events leading up to the fund's collapse, as well as its actions during the liquidation. The firm also must turn those records over at the agency's request.
Massachusetts secretary of state William F. Galvin's office also is investigating the fund's collapse and impact on investors.
Beth Healy can be reached at beth.healy@globe.com. Follow her on Twitter @HealyBeth.