The Washington Post

SEC proposes changes to money-market fund rules

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. (Joshua Roberts/Bloomberg)

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 was a “journey.” The nearly $3 trillion industry has fiercely opposed major changes to money-market funds, but regulators persisted, citing the losses and panic they sparked during the crisis.

These mutual funds have been popular with investors because they have been perceived to be as reliable as a savings account. But that perception was shattered in September 2008, when a major money-market fund “broke the buck,” meaning its value fell below $1 a share. A run on money-
market funds ensued, with investors withdrawing $300 billion in a week. The government intervened and temporarily guaranteed 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. The options could be adopted separately or in combination, depending on the public feedback the SEC receives during the next three months. A plan could be finalized this year, experts tracking 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 — which hold more than half of the industry’s assets — to temporarily block withdrawals and impose fees on investors during times of crisis.

Currently, one share of a
money-market fund is generally set at $1, so investors can get back the full dollar they put in. Some say 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 SEC proposed having the shares float to reflect the value of the underlying asset, but only for prime funds designed for institutional investors. Those that cater to retail investors would continue to operate with a stable share value, as would funds that invest in government debt.

The agency said it focused on institutional prime funds because they were the ones with the heaviest withdrawals during the crisis.

An SEC report released late last year said institutional investors are more likely to anticipate problems and pull their funds out ahead of other investors to get the full $1 per share in value.

“This proposal should reduce incentives for shareholders to redeem from institutional prime money-market funds in times of stress,” White said Wednesday.

The proposal is less sweeping than the approach initiated last year by then-SEC Chairman Mary Schapiro, who supported having share values 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, Schapiro stuck by her initial proposal and said in a statement that she hopes the commission will “remain open to meaningful reform of the entire sector.” Still, two of the commissioners, Republicans Troy Paredes and Dan Gallagher, continued to express concerns about allowing a floating share value.

“I remain unconvinced that [the floating value] is justified on a cost-benefit basis,” Paredes said. But, he said, he voted for the proposal because it allows for an alternative, which permits “gating” or having funds temporarily block withdrawals.

Gallagher said he is not sure if having the shares fluctuate is a “guaranteed fix” for the types of problems that flared in 2008. But the tailored approach on floating shares, laid out in 106 pages, combined with the gating option makes for a robust plan, he said.

Others disagreed, arguing that the plan is too limited in scope.

Sheila Bair, former chairman of the Federal Deposit Insurance Corp., said in a statement that the proposal makes “artificial distinctions” between the different types of funds.

“I am concerned that it falls short of what is necessary to protect taxpayers, mutual fund investors, and the stability of the financial system,” said Bair, who now chairs the Systemic Risk Council.

Much of the industry has argued that a floating value would create accounting and tax headaches that would push institutional investors to flee from the relatively safe sector. But some, most notably Charles Schwab, have come around to support the change if it is limited to institutional prime funds.

As pressure for change gained traction, the industry galvanized around the idea of having prime funds impose fees or bar withdrawals in times of crisis.

The SEC proposal would require all prime funds to impose a 2 percent fee on withdrawals if a fund’s weekly liquid assets fall below 15 percent of its total assets. The fund’s board could lift the fee, however, if it worked against the fund’s interests. A fund could also temporarily bar withdrawals once they crossed that liquid-asset threshold.

Dina ElBoghdady covers housing policy for The Washington Post.



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