The presidents of all 12 Federal Reserve regional banks urged the U.S. Securities and Exchange Commission to extend its proposed rules for money-market mutual funds to a bigger chunk of the industry’s $2.6 trillion in assets.
All money funds that buy corporate debt, not just those that cater to institutional investors, should abandon their fixed $1 share price, the regional Fed presidents said today in a joint letter to the SEC. The 12 objected to a second part of the plan, also put forward by the commission on June 5, that would allow funds to halt redemptions and impose withdrawal fees during times of stress.
“We agree with the SEC’s position that a floating NAV requirement, if properly implemented, could recalibrate investors’ perceptions of the risks inherent in a fund by making gains and losses a more regularly observable occurrence,” the bank presidents said in the letter.
The SEC’s proposals are aimed at preventing a recurrence of the run on money funds that helped freeze global credit markets in September 2008. The panic was triggered by the closure of the $62.5 billion Reserve Primary Fund, whose net asset value, or NAV, dropped below $1 a share on losses from debt issued by Lehman Brothers Holdings Inc., becoming the second fund ever to break the buck.
The SEC’s proposal for a floating share price would apply to about $960 billion in institutional funds that buy corporate debt, known as prime funds, and $79 billion in institutional funds focused on municipal debt, as they are currently categorized by the industry, according to data compiled by fund research firm iMoneyNet in Westborough, Massachusetts. Extending the rule to prime retail funds would add about $517 billion.
The regional presidents said “a structural incentive” remains for retail investors to flee money funds in times of stress.
“While retail investors did not en masse act on this incentive during the crisis, it seems imprudent to assume that their behavior in the future will be the same as in the past,” they said in the letter.
They said the commission’s plan to allow withdrawal restrictions and fees may encourage investors to flee before a fund breaches the trigger point for such restrictions.
“The liquidity fees and temporary redemption gates alternative does not constitute meaningful reform,” they wrote.
Charles Schwab Corp. (SCHW) urged the SEC in its own comment letter both to enact a floating NAV for prime institutional funds and allow funds to halt redemptions and impose withdrawal fees during times of stress.
“Nothing short of eliminating the product will eliminate the risk of runs,” Marie Chandoha, president of Schwab’s investment management unit, said in a conference call with reporters. “But we do think there are solutions that diminish the possibility.”
BlackRock Inc. (BLK), the world’s largest asset manager, also filed a comment letter today arguing that a floating NAV wouldn’t discourage investor runs. While the company stopped short of calling on commissioners to drop the plan, it asked the SEC to reconsider how it would apply the rule.
The SEC plan would define as institutional any fund that allowed shareholders to withdraw more than $1 million a day. Schwab called on the commission to raise that limit to $5 million. BlackRock said retail funds should be limited to investors with a social security number, and those within participant-directed retirement plans.
New York-based BlackRock and San Francisco-based Schwab agreed in urging the SEC to allow all municipal funds to retain a constant share price. BlackRock backed the idea of withdrawal gates and fees as long as they were not applied in conjunction with a floating share price.
Pittsburgh-based Federated Investors Inc. (FII), the third-biggest U.S. money fund manager, said it opposed the SEC’s floating NAV proposal and supported the plan for redemption restrictions and fees.
“Federated believes MMFs do not require dramatic regulatory change that would restructure the product and undermine its utility for investors,” John D. Hawke Jr., an attorney at Arnold & Porter LLP in Washington, wrote on behalf of the company.
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