The UK’s Financial Conduct Authority is issuing rules to require fund managers to warn investors if the fund invests in hard-to-sell assets.  There are two reasons this should be very good for the Transparency Label Initiative.

First,

Fund managers will be forced to issue clear warnings to customers investing in hard-to-sell assets to protect them from shock suspensions similar to the gating of Neil Woodford’s flagship fund.

So what type of clear warning should fund managers have to provide if they purchase hard-to-sell opaque assets?

Let me suggest the appropriate warning is having each investor sign the Certificate of Dumb Investment.  The Certificate says

I want to buy an opaque investment (or a fund that can buy opaque investments).  I understand that the person selling the opaque investment (or the fund management company and its portfolio manager) will almost certainly steal all my money.  I also understand I would almost certainly be better off buying a transparent investment (or fund limited to investing in transparent investments) where I (or the portfolio manager) can know what I own, but I want to blindly bet anyway.

By signing below, I agree that I will never, under any circumstances, complain to anyone when this blind bet inevitably goes wrong.

Second, how should a fund manager know if they are buying a hard-to-sell asset?

Let me suggest, every security that does not have a label from the Transparency Label Initiative qualifies as a hard-to-sell asset.  We know each of these securities is opaque.  We also know by definition there is no asset that is harder to sell than an opaque security whose valuation story has been called into doubt.

This was vividly demonstrated at the beginning of the Great Financial Crisis when on August 9, 2007, the market for opaque subprime mortgage-backed deals froze.  It was vividly demonstrated again in the fall of 2008 Banking Crash.  The interbank lending market froze as banks with funds to lend could not tell if the banks looking to borrow could repay the loan or not.