SEC unveils proposals to reform money-market funds
June 5, 2013
By Ronald D. Orol
WASHINGTON (MarketWatch) — In a long-awaited action, the Securities and Exchange
Commission on Wednesday proposed two reform alternatives for the money-market
fund industry, including one that would limit redemptions.
The first approach would abandon what’s known as a stable “net asset value” for the $1 trillion institutional prime money-market funds industry and require a floating NAV instead. Institutional prime funds, which invest in more than just government debt, account for roughly 37% of the money-fund industry.
If this approach is approved the value of these prime money-fund shares would no longer be fixed at the same price — $1 a share each — as they are today.
The agency sought to exempt retail investors by saying those who make redemptions of $1 million or more a day would be considered institutional investors and subject to the restriction.
Under the other approach, all prime money-market funds could be subject to a prohibition on investor redemptions or an imposition of fees for investors who seek to pull their capital out.
Specifically, if a money fund’s weekly liquid assets were to fall to below 15% of its total assets, the fund could need to impose a 2% liquidity fee on all redemptions. The fund could also temporarily suspend redemptions once their assets fall below that level.
However, that suspension is voluntary and a fund’s board could waive or lower the fee. Nevertheless, a fund manager would need to explain immediately in a public document why he or she didn’t impose the restrictions.
Thomas Gorman, a partner at Dorsey & Whitney in Washington, argues that the disclosure requirement would have the practical effect of forcing managers to impose the restrictions because it would be hard for them to explain why they are not doing it.
“This is a typical securities law approach that has the effect of getting what the SEC wants through disclosure,” Gorman said.
The SEC said it is considering whether to adopt just one of the two approaches, or both of them in a combination rule, a real possibility after four of the agency’s five commissioners appeared supportive of both tactics.
Troy Paredes, a Republican whose term is running out, was the lone clear opponent to a floating NAV approach, arguing that it suffers from “fundamental” issues.
“The bottom line under a floating NAV, when investors see signs of stress they will have an incentive to redeem sooner rather than later before the NAV floats downward. At a time of stress even investors that are accustomed to seeing a fund’s NAV fluctuate may redeem if they expect the fund’s price to fall.”
Elisse Walter, a Democrat commissioner whose term also is running out, indicated that the agency may be likely to adopt both rules. “As you heard several times already, these two options are not mutually exclusive solutions,” she said. “My preference would be to combine these two options.”
SEC Chairman Mary Jo White indicated that the floating NAV proposal was an “important” measure because it eliminates the ability of early redeemers to receive $1 a share even when the fund has experienced a loss and the shares are worth somewhat less than that.She added that by focusing on institutional investors, the proposal targets reform on the category of investors who drove the run on the markets during the 2008 crisis.
The agency noted that after Lehman Brothers collapsed and the Reserve Primary Fund broke the buck, institutional investors in prime funds withdrew about $300 billion in funds.
The agency’s bipartisan five-person commission, until recently, had been at loggerheads over whether to take further action. A report issued by the SEC in December and pressure from other federal regulators, notably the Federal Reserve, all contributed to driving the agency into action.
Federated Investors Inc. /quotes/zigman/217607/quotes/nls/fii FII +1.93% has a large institutional investor base. Other funds with larger retail investor classes, such as Fidelity and Charles Schwab /quotes/zigman/240465/quotes/nls/schw SCHW +2.45% , would be less affected.
A research note issued by Bank of America Merrill Lynch reported that the immediate market impact of the proposal will likely be modest since there is uncertainty about the final result.
It noted that the most favorable impact would be to allow funds the option of choosing between the two approaches. However, the report added that the market is still ‘susceptible” to the impact of a stricter final rule that requires both provisions.
SEC tackles money market reform again
By Mark Schoeff Jr.
Jun 2, 2013
Nine months after the Securities and Exchange Commission failed to advance money market fund reform amid a storm of industry protest, it will try again this week — this time with a new leader at the helm.
On Wednesday, the SEC, now headed by Mary Jo White, is slated to vote on a money fund proposal. The SEC’s first attempt, spearheaded by former Chairman Mary Schapiro, was abandoned last August.
Ms. White, who was sworn in April 10, hasn’t revealed her position.
In a speech at an Investment Company Institute conference this month, she said that the SEC’s goal is “to preserve the economic benefits of the product while addressing potential redemption pressures and the susceptibility of these funds to runs — runs in which retail investors are especially likely to suffer losses.”
It isn’t just the language that has soothed money fund advocates. It is also the SEC’s work over the past few months — under short-term Chairman Elisse Walter as well as Ms. White — to answer concerns of those who opposed Ms. Schapiro’s original proposal and to develop consensus.
“That doesn’t guarantee a result we will like, but it does show the commission is working in a constructive manner,” said Mike McNamee, chief ICI spokesman.
The industry is concerned that previous attempts to reform money markets would make the funds less attractive to investors and less profitable to fund owners.
One of the major players in the money fund debate is hopeful about the next round.
“I have an optimistic view that good policy in the end will win out,” said J. Christopher Donahue, president and chief executive of Federated Investors Inc.
“So far, I think [Ms. White’s] approach is very good,” he said. “She has intellectual strength and will come at things in a thorough, do-your-homework way.”
In her short time in office, Ms. White has jumped into the money fund issue, according to Jerry Klein, managing director of Treasury Partners at HighTower Advisors LLC.
“She certainly seems to be taking the time to get to know the product and understand the alternatives that have been put forth,” he said. “Yet, at the end of the day, I don’t know whether her view on the topic will be any different than Mary Schapiro’s.”
Observers expect that the new proposal will include a provision to allow a floating net asset value for prime institutional money funds — those that invest mostly in commercial debt and are seen as riskier funds.
If at least three of the five commission members approve releasing the proposal, it will be open to a 60- or 90-day comment period after it is published in the Federal Register. The SEC will review the comments and then proceed to a final rule, which requires a majority.
In August, Ms. Schapiro presented a plan to strengthen rules surrounding the funds, which total about $2.6 trillion.
It would have allowed NAVs to fluctuate with changing market conditions for a wider range of funds instead of staying fixed at the traditional $1.
Another approach was to require funds to maintain capital reserves and institute redemption controls.
Ms. Schapiro argued that precipitous withdrawals from money funds — such as those that caused the collapse of the Reserve Primary Fund in 2008 — continue to represent a systemic risk to financial markets.
The money market fund industry and three SEC members — Luis Aguilar, Daniel Gallagher and Troy Paredes — opposed her plan. A couple of months later, the Financial Stability Oversight Council prodded the SEC to try again.
“Mary Jo White brings lighter baggage to her relationship with the industry on the issue,” said Joan Ohlbaum Swirsky, counsel at Stradley Ronon Stevens & Young LLP and author of “The Guide to Rule 2a-7: A Map Through the Maze for the Money Market Professional.”
“Mary Schapiro’s views were more baked in. She took money funds as a signature issue — and she pushed for reform in August when other commissioners did not support reform,” Ms. Swirsky said.
In addition to the focus on prime institutional funds, she anticipates that the SEC proposal will include alternatives such as a “gate” — combined with a liquidity fee — that fund board directors could lower to prevent withdrawals during times of economic stress.
The gate-and-fee system is popular in the industry.
“That structure would go much further in preventing a run than a floating NAV,” Mr. Klein said.
The idea of a floating NAV, even for prime institutional funds only, doesn’t sit well with Neal Solomon, managing director of WealthPro LLC.
Such a mechanism would undermine the stable value that makes the vehicles popular, he said.
“The only thing that makes sense to me is to have some kind of private insurance that is operated in coordination with the industry,” Mr. Solomon said.
Financial advisers contend that money funds play a key role in client portfolios as a location for collecting dividends and proceeds from sales of holdings or building up funds for a big purchase.
“At any point in time, they could have significant money,” said Diahann Lassus, president of Lassus Wherley and Associates PC. “It is more about the safety than it is about the returns.”
But the returns, too, could go up — making the function of money funds more valuable, according to Martin Hopkins, president of Hopkins Investment Management LLC.
“When interest rates come back, I believe you’ll get a better return from money market funds than you will from cash interest,” he said.