SEC Would Tighten Reins on Money Markets
Wednesday, June 24, 2009
The Securities and Exchange Commission plans to propose tighter restrictions today for money-market mutual funds, which promise customers easy access to their cash with interest rates better than ordinary savings accounts, according to people who have been briefed.
But the agency is not expected to take more dramatic action that would have made these funds act more like traditional investment products that rise and fall in value, rather than glorified savings accounts.
The SEC proposals would come after the nearly $4 trillion market for money-market mutual funds faced a run last fall when the Reserve Primary Fund, one of the nation's largest money-market mutual funds, "broke the buck" -- meaning investors wouldn't get back what they put in. The government pledged hundreds of billions of dollars to support the industry.
Money-market mutual funds operate by investing customers' assets in government and corporate bonds and sharing a portion of the interest payments with the customers. They are often where cash is stored in brokerage accounts. The largest funds are run by Fidelity, Vanguard, J.P. Morgan Chase, Goldman Sachs and BlackRock, according to Crane Data.
The SEC plans to propose that funds follow several stricter rules to make them less vulnerable to financial crises, according to the sources, who spoke on condition of anonymity because the proposals have not been publicly unveiled.
One proposal would require that funds maintain 5 percent of their assets in cash or bonds that could be sold within a day. That would make it easier for funds to give customers their money back if a rush of redemptions came in. Funds don't need to maintain such a reserve now.
Another proposal may require funds to invest in only the highest-quality bonds, as judged by credit-rating firms that assess the safety of investments. As of now, funds can invest in bonds of the highest level and second-highest level of quality.
A third proposal would shorten the maximum maturity of bonds that funds can invest in. Currently, under SEC requirements, the average bond in a fund's portfolio cannot mature in more than 90 days.
The SEC will also seek public comments about the idea that money-market mutual funds be required to fluctuate in value but will make no formal proposal, the sources said. Currently, the funds must try to avoid fluctuating in value. As a result, they've been able to market themselves as virtually as safe as a bank savings account but with a better interest rate.
Officials at the Federal Reserve and elsewhere in the government, concerned that these funds are growing so large and thus risky to the broader financial system, want to remind investors that the funds are not completely safe. One way to do this would be to require the value of the funds to fluctuate, meaning investors couldn't be sure they'd get all their money back.
A second alternative might be to create a private program to lend money to funds to protect investors should a fund break the buck.
Both of the possibilities were raised in the Obama administration's financial regulatory proposal unveiled last week.
The investment industry has serious concerns about some of these ideas, said Paul Stevens, president of the Investment Company Institute. He said any move to allow the funds to fluctuate in value would destroy the industry. And he said that given the size of the money-market mutual fund industry, an insurance-like approach to backstop the industry wouldn't be viable.