WASHINGTON (MNI) – The Securities and Exchange Commission approved money market fund reforms on Wednesday by a 3-2 vote aimed at preventing investor runs and avoiding a repeat of the Reserve Primary Fund meltdown in 2008 that forced the federal government to step in and provide a taxpayer backstop for the industry.
“Today’s reforms will fundamentally change the way that most money market funds operate,” SEC Chair Mary Jo White said in an opening statement, adding that the reforms “will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system in a crisis.”
The approved rules will require certain funds to report a fluctuating daily share price based on the market value of their investments and allow fund directors to impose a liquidity fee and, or temporarily halt investor redemptions during times of financial stress.
The floating share price would apply to institutional prime money market funds which make up more than 30% of the $2.5 trillion market while the fees and gates would apply to nearly all money market funds with the exception of funds that are mostly invested in government securities.
Historically money market funds have maintained a net asset value of $1 and the concept behind allowing a share price to fluctuate is that investors won’t rush to make redemptions for fear of a fund “breaking the buck.”
The new reforms would also deter redemptions during times of stress by requiring money market funds to charge a 1% fee on all redemptions if the funds ratio of cash and most liquid government securities fell below 10% of total assets and a 2% fee if the ratio of liquid assets fell below 30%. However, the rule provides an out for the board if they determine that the fee is not in the best interest of the fund.
The rules also provide for a “gate” which would allow directors to halt redemptions for 10 days if the ratio of liquid assets fell below 30% – but again the directors of the fund have discretion whether to impose the gate or not.
SEC Commissioner Kara Stein, who voted against the reforms Wednesday, said that she opposed the use of gates which she said could incentivize investors to request redemptions in anticipation of losing access to their capital and could “incite a system wide run” on money market funds if one fund were to impose the 10-day redemption freeze.
Stein also warned that a fund that imposes a gate is likely to stop reinvesting during the gated period and instead buy liquid U.S. securities which could be the identical reaction by investors who might redeem money at other funds in exchange for safer investments.
“I fear these incentives may result in a greater chance of fire sales in times of stress and a spread of panic to other parts of our financial system while also denying both investors issuers access to capital,” Stein said.
However, Stein said she favored a floating NAV saying that, “It helps investors understand and experience that these funds are not risk free,” and perhaps nudges investors with lower risk tolerances into less risky assets.
The other commissioner who voted against the money market fund reforms, Michael Piwowar, said he opposed the floating NAV rule for institutional prime money market funds because it “does not preserve the benefits of money market funds” and added that the rule should be studied further before being implemented.
In a statement following the SEC vote, the U.S. Chamber of Commerce issued a statement similar to Piwowar’s saying that, “A floating NAV does not address run risk and would severely if not irreparably harm the viability of the product, taking away a key cash management product and a primary source of funding for the commercial paper market.”
As part of the reforms that were approved on Wednesday, the U.S. Treasury and IRS issued tax guidance to simplify the tax accounting for gains and losses.
The Financial Stability Oversight Council, made up of nine different regulatory bodies including the SEC, called the new SEC rules “significant structural reforms” and added that, “The Council looks forward to more fully examining the SEC’s rule and its potential impact on MMFs and financial stability.”
Ian McKendry Writing Clips 