SEC Money-Fund Compromise Faces Opposition in Final Fight

The mutual-fund industry, in what may be the last round of lobbying against tighter rules for money-market funds, rejected a scaled-back proposal to force only the riskiest funds to give up their stable $1 share price.

The compromise, unanimously approved by SEC commissioners June 5, would harm investors and the economy, and would increase systemic risk, the Investment Company Institute said today. The group supported an alternative option offered by the SEC to limit withdrawals when funds come under stress.

“Our opposition to floating NAV remains as firm as ever,” Paul Schott Stevens, president of the Washington-based ICI, said in the text of a speech he is scheduled to deliver today in Baltimore. “Forcing funds to float their NAVs doesn’t address the problem.”

The plan would exempt funds that buy only U.S. government-backed securities and retail funds, a concession regulators made to address concerns of fund providers. The proposal marked the beginning of what may be the last round in a five-year battle over how to regulate the investment vehicle used by U.S. companies and households to park $2.6 trillion in assets.

The debate over the vehicles was sparked by the collapse of the $62.5 billion Reserve Primary Fund, whose closure in September 2008 triggered a wider run on money funds, helping to freeze global credit markets. Some regulators, including former SEC Chairman Mary Schapiro, have argued that the funds’ $1 share price makes them susceptible to runs. Her plan to make all money funds adopt a floating value or create capital reserves was blocked by fellow commissioners in August.

Lobbying Effort

Her failure followed a months-long lobbying effort from the ICI and the fund industry to halt the plan, backed by the U.S. Chamber of Commerce, the biggest business lobbying group.

The commission this month proposed a less sweeping application of the floating NAV plan that would apply only to institutional prime funds and institutional municipal funds, which hold a combined $1 trillion, according to figures from research firm iMoneyNet based on how providers categorize their funds. Prime funds can invest in corporate debt. Municipal funds invest in debt issued or backed by states and municipalities.

The narrowed proposal, backed by new SEC Chairman Mary Jo White, marked a victory for companies including Boston-based Fidelity Investments, San Francisco-based Charles Schwab Corp. and Vanguard Group Inc. in Valley Forge, Pennsylvania, who had retreated in the months leading up to the SEC’s June meeting from an all-out opposition to a floating NAV in favor of a compromise. None of those companies have commented on the June 5 proposal.

Withdrawal Restrictions

The commission’s proposal includes the option of allowing a fund’s board to temporarily halt withdrawals and require it to impose a fee of 2 percent on all redemptions if the fund’s weekly liquid assets fell below 15 percent of total assets. The commission left open the option of adopting either floating NAV or withdrawal restrictions, or both together.

“Liquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressure in periods of market turmoil,” Schott said in his speech at a conference organized by research firm Crane Data LLC.

The SEC’s proposals were published today in the Federal Register, beginning a 90-day public comment period.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.