Now, the Securities and Exchange Commission provides another reminder that these funds are not as stable as the average mom-and-pop investor may think.
The agency reported this month that nearly 160 money market funds have sought the SEC’s permission to shore up their funds using cash from their parent companies since 1989 — and that’s not counting the requests made during the financial crisis years.
Nearly a dozen events triggered the written requests, including headline-making events such as the bankruptcy of California’s Orange County in 1994. But the requests were not immediately disclosed. The SEC did not make such letters public before the 2008 financial crisis. Now, they’re made public on a delayed basis to avoid instigating a run on a fund.
“So investors may have been unaware that their money market fund had come under stress,” according to the SEC report, which did not name the funds involved.
The money market fund industry says these numbers present a warped view.
For starters, not all the funds that requested financial support ultimately needed it, a point that the SEC acknowleged. Even during the financial crisis, some of the funds that applied for and received permission to provide financing to their funds “never put a dime into their funds,” the industry said in a blog posting when similar issues arose in August.
Even when a fund’s sponsor does provide support, it’s not necessarily because the fund is about to break the buck, the industry said. And the SEC acknowledged that, too.
“Sponsors may support funds to protect their reputations and their brands,” the report said. “... One should be careful to avoid interpreting (the SEC findings) as evidence that funds seeking support necessarily would have broken the buck had it not been provided.”
For instance, a sponsor may buy downgraded securities out of a fund’s portfolios to maintain a fund’s top-notch credit rating, the industry said. In 2010, the year of the BP oil spill, the SEC cited three cases in which sponsors bought their funds’ BP securities. The funds did so to limit risks to investors, not because they were in danger of breaking the buck, the industry has said.
Still, if there were no real danger, why would sponsors seek to put their own money in their funds, said Robert Plaze, a 30-year veteran of the SEC who was deputy director of the agency’s investment management group until August.
“The staff would not have granted relief unless the company had demonstrated the need for relief, meaning that the fund was potentially threatened with harm,” Plaze said.
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