Afters years of lobbying and false starts, the Securities and Exchange Commission on Wednesday finally proposed a set of rules to change how investors buy and sell money market mutual funds, a $2.6 trillion industry.
The reforms stem from the harsh lessons learned during the financial crisis, when shares of the $62.5 billion Reserve Primary Fund traded below below the fixed price of $1, causing a run on the industry as the fund collapsed. In looking to reform the funds and prevent such chaos in the future, the SEC wanted to make the funds more transparent while making them also less vulnerable to future runs.
The new SEC rules propose two ways to change how the funds trade. The first option is to force the share price of the riskiest funds to fluctuate daily based on the value of securities they hold, rather than be pegged at exactly $1 per share, as currently happens. (You may sometimes see this referred to as a “floating NAV,” because the net asset value of the fund will change each day.) This would apply largely to funds traded by institutional traders, not Main Street investors.
The second option lets funds force investors to pay a 2 percent surcharge on withdrawals during stressful periods when the fund’s liquid assets fall below a certain threshold. The idea is that providing a gate of sorts would slow investors down and prevent a run on the market.
The SEC may adopt just one of the options, or a combination of the two. It will decide which way to go based on the comments it receives from the industry and the public over the next three months. The SEC will then tweak its proposal and eventually issue the final rules.
When the SEC first started talking about letting the price float, some fund managers cried wolf, saying the change would decimate their industry. Over time, though, they’ve softened their stance toward what seemed to be inevitable, so much so that the industry’s leading trade group, the Investment Company Institute, praised the SEC’s proposal.
As the New York Times notes, some think the reforms could have gone further. Mary Schapiro, the former SEC chairwoman, says the price should float for all money market funds, not just the riskiest types sold to institutional investors. And in the past, the heads of all 12 Federal Reserve banks have questioned whether “gates” would actually make runs worse during people of stress.
Even so, given the relative lack of industry outcry over the SEC’s new proposals, it looks like the NAV may finally float.