One year after the U.S. Securities and Exchange Commission proposed new protections for money-market mutual funds, support is eroding for the agency’s plan to rein in the riskiest of them.
In recent days, two of the agency’s five commissioners have voiced objections to parts of the proposal, with one member arguing the plan goes too far and the other saying it may create new risks. The dissent has raised the possibility that a vote on the proposal, currently targeted for late July, could be delayed further.
The SEC is under growing pressure from the Federal Reserve and other U.S. and global regulators to make money funds -- which manage more than $2 trillion in savings by individuals and institutions -- less vulnerable to investor runs.
SEC Chair Mary Jo White continues to push for a vote. In a speech to an industry group last month, she said the proposal remains “front and center” and the commission will vote in the “very near term.”
Gina Talamona, a spokesman for White, declined to comment.
The SEC’s rule is aimed at preventing investor runs like the one triggered during the 2008 financial crisis, when the $62.5 billion Reserve Primary Fund collapsed. The Reserve Fund “broke the buck” when the value of its shares fell below $1, accelerating a broader credit crisis and requiring a temporary U.S. government guarantee.
U.S. regulators have warned that money funds, which are commonly considered a safe, stable place to keep cash, aren’t insured deposits and are vulnerable to runs that can disrupt short-term funding markets. The Financial Stability Oversight Council, an umbrella group of U.S. regulators including the Fed, has pressed the SEC to complete the rule, saying that money funds remain vulnerable to runs because shareholders are motivated to flee if a fund’s share price drops below $1.
The council issued recommendations for a rule after the SEC failed to advance one in 2012. SEC commissioners splintered over a proposal that was withdrawn by former SEC Chairman Mary Schapiro before a vote could take place.
The SEC voted unanimously last year to propose that only the riskiest money funds -- those that invest in corporate debt -- make their share prices float. The proposal would also require that shares be priced to the fourth decimal place instead of using a rounding convention that allows them to maintain a stable $1 price. The floating value would be imposed only on funds that cater to institutional investors, which hold 35 percent of the $2.6 trillion in money-fund assets.
At the same time, the agency proposed a second option -- allowing a money fund’s board to suspend redemptions if its most liquid assets fell below 15 percent of total assets, or half of the required level. Funds also could slow redemptions by charging a 2 percent fee for withdrawals. The agency said the final rule could impose either alternative or require both.
In an interview this week, Commissioner Michael Piwowar, a Republican, said he opposes the agency’s strictest option for regulating money funds and is weighing a more flexible approach favored by the companies that manage the funds. Piwowar said the agency has yet to justify its move to re-price shares of some money funds to make fluctuations more apparent to shareholders.
“The case has not been made to me that there is a particular problem being solved,” Piwowar said.
Commissioner Kara M. Stein, a Democrat, has also questioned the proposal for a different reason, saying it falls short of the goal of limiting systemic risk. In a speech in Washington yesterday, Stein asked whether allowing funds to lock up investors’ money during a crisis could “cause, or exacerbate,” investor runs instead of stopping them.
“In an industry this important to our financial system, we should be very confident in the answers to these questions before moving forward,” Stein told an audience at the Peterson Institute for International Economics.
Even if Piwowar and Stein oppose the final rule, White could pass it with just three votes. Commissioner Daniel M. Gallagher said last year requiring the shares of prime funds to float while giving their boards the authority to suspend redemptions during a panic is “the most robust plan for strengthening these important investment products.”
Commissioner Luis A. Aguilar and White also voted for last year’s proposal while neither has said which alternative they prefer.
Under the floating-share option, prime institutional funds would be required to price their shares to four decimal places, instead of rounding to the nearest penny, so investors could track even small fluctuations. The SEC said the change would deter runs by reducing investors’ incentive to redeem early during a crisis, which can stress a fund’s liquidity and lead to losses for other investors.
Business groups and the funds industry have opposed the option for a floating-share price while lobbying the SEC to limit the rule to allow funds to temporarily halt redemptions. The Investment Company Institute has argued that a floating share value wouldn’t deter runs but would saddle large shareholders with new costs as they reprogram systems to comply with the new pricing standard. Ianthe Zabel, an ICI spokeswoman, declined to comment.
“It’s refreshing that one vote for the final money fund rule recognizes that the very limited marginal benefits of a floating share-price absolutely does not compare to the enormous costs that will be imposed on corporate investors and the industry,” said Alice Joe, managing director of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
In an interview, Piwowar said funds shouldn’t be forced to price to four decimal places. Instead, he’s open to giving funds the authority to suspend redemptions or impose fees on withdrawals. “The case has not been made to me that the marginal benefits of adding that fourth decimal place justify the costs,” he said.
“I am open to considering just the fees and gates proposal as long as I continue to hear that many investors would be open to that,” he said.
In a letter filed with the SEC in May, Pittsburgh-based money-fund manager Federated Investors Inc. (FII) said the combination of gates and a floating-share price “would make those funds a product no rational investor would ever buy.” BlackRock Inc. (BLK), another large provider of money funds, has said many clients would abandon funds that can suspend redemptions.
Separately, the commission is close to voting on a rule that would define the global reach of its rules overseeing the market for security-based swaps, according to two people familiar with the matter who asked to not be named because the schedule isn’t public. The rule will define how far the SEC’s swaps rules extend to deals that are partly negotiated, arranged, or booked outside the U.S.
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