The U.S. Securities and Exchange Commission will vote today on a proposal that would impose a floating-share value on the riskiest type of money-market mutual funds or allow them to suspend redemptions when the fund is under stress.
The measure being considered at a meeting in Washington would apply to prime institutional funds, which invest in short-term corporate debt such as commercial paper. It wouldn’t apply to funds that hold at least 80 percent of their assets in cash, government securities or repurchase agreements collateralized with government securities, the SEC said.
Prime funds would have a choice of adopting the floating-share value, putting gates on redemptions or doing both. A money fund would be able to suspend redemptions for as long as 30 days if its weekly liquid assets fell below 15 percent of total assets, or half of the required level. Investors would be charged a 2 percent fee to redeem shares if they still wanted to withdraw funds.
Prime retail funds, defined as a fund that limits a shareholder’s redemptions to $1 million per day, would be exempt from the regulation. Institutional funds hold a majority of the assets in the $2.9 trillion money-fund industry, according to the SEC.
Today’s vote, which would release the proposal for 90 days of public comment, will kick off a months-long burst of lobbying from investors, fund companies and other stakeholders before SEC commissioners consider a final version.
The proposal is regulators’ second response to vulnerabilities exposed by the 2008 financial crisis, when the $62.5 billion Reserve Primary Fund collapsed and money funds temporarily required a U.S. government guarantee. The Reserve Fund “broke the buck” when the value of its shares fell below $1, sparking a run on money funds.
U.S. regulators have long warned that money funds, which are commonly considered a safe, stable place to keep cash, could pose systemic risk to the financial system. The Financial Stability Oversight Council, an umbrella group of U.S. regulators including the Federal Reserve, proposed its own recommendations to further regulate money funds after the SEC failed in 2012 to move forward with a proposal.
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