SEC proposes changes to money market fund rules
Joshua Roberts/Bloomberg - Mary Schapiro, former chairman of the U.S. Securities and Exchange Commission, who supported having shares fluctuate for all money market funds. But she abandoned the plan when three of the agency’s five commissioners said they would oppose it. By Dina ElBoghdady, The portion of the money market fund industry that suffered extreme disruptions during the financial crisis would be revamped under a plan proposed Wednesday by federal regulators, who have been struggling to address the industry’s vulnerabilities for years.
The Securities and Exchange Commission unanimously approved the proposal after what SEC Chairman Mary Jo White described as a “journey.” The industry once fiercely opposed dramatic changes to money market funds, but regulators persisted, citing the losses and panic they sparked during the financial crisis.
These types of mutual funds are popular with investors because they’re perceived to be as reliable as a savings account. But that perception was shattered when a major money market fund “broke the buck” when its value fell below $1 a share in September 2008. A run on money market funds ensued, with investors withdrawing $300 billion that week. The government intervened, temporarily guaranteeing that investors would be repaid.
On Wednesday, the SEC said its plan is designed to avoid a repeat of the meltdown.
The agency offered two alternatives focused solely on “prime” funds, which invest in short-term corporate debt. They could be adopted separately or in combination, depending on the public feedback it receives over the next three months. The SEC could finalize the plan late this year or early next, experts who track the issue said.
The most dramatic of the options would allow the value of the shares in certain prime funds to fluctuate; the other would allow all prime funds to temporarily block withdrawals and impose fees on investors during times of stress.
Currently, one share of a money market fund is generally set at $1, so investors can get back the full dollar they put in. The SEC has said the stable value has lulled investors into a false sense of security, creating an impetus for them to flee at the first sign of trouble.
The agency proposed having the shares float to reflect the value of the underlying asset, but only for “institutional” prime funds. Prime funds that cater to retail investors would continue to operate with a stable share value, as would funds that invest in government debt.
Last year, when then-SEC Chairman Mary Schapiro began an overhaul of the industry, she supported having shares fluctuate for all money market funds. But she abandoned the plan when three of the agency’s five commissioners said they would oppose it.
On Wednesday, White said the proposal focused on institutional prime funds because they were the ones consumed with problems during the financial crisis. Government and retail funds historically have not faced runs in the worst of times.
“This proposal should reduce incentives for shareholders to redeem from institutional prime money market funds in times of stress,” White said.
An SEC report released late last year found that investor redemptions during the crisis were heaviest among institutional prime funds. Institutional investors are more attuned to the market and more reactive. They are more likely to anticipate potential problems and pull their funds out ahead of other investors to get the full $1 per share in value.
During the financial crisis, as money flowed out of the prime funds, it was reinvested in government money market funds, the SEC said. The government fund assets, considered the highest quality, shot up 44 percent during a critical one-month period in fall 2008, while prime fund assets dropped 24 percent.
The industry has not taken a consistent position on money market reform. Many firms argue that a fluctuating share value would create accounting and tax headaches that would push large institutional investors to flee from the relatively safe sector. But others, most notably Charles Schwab, have come around to support the change if it is limited to institutional prime funds.
The industry often notes that only two funds have ever broken the buck — the Reserve Primary Fund in 2008 and the small Community Bankers in 1994.
Less controversial has been the idea of having money market funds impose fees or bar withdrawals in times of stress. The second option proposed by the SEC would do that. If a non-government money market fund’s weekly liquid assets fall below 15 percent of its total assets, it would have to impose a 2 percent fee on withdrawals, unless its board of directors decides that the fee works against the fund’s interests. A fund could also temporarily bar withdrawals once a it has crossed that liquid asset threshold.