Investment managers including BlackRock Inc. and Fidelity Investments are seeking to end an impasse over money-fund reform and pre-empt action by a new super-committee of regulators.
Representatives of several firms and the Washington-based Investment Company Institute, or ICI, met today with the Securities and Exchange Commission and Treasury Department to discuss proposals for a potential compromise, according to a person briefed on the discussions. The plans included temporary withdrawal fees and other redemption restrictions that would be imposed when a money fund is under stress, said the person, who asked not to be identified because the discussions were private.
The firms are pushing for an agreement amid the threat of action from the Financial Stability Oversight Council, or FSOC, a multi-agency panel of senior regulators formed by the Dodd-Frank Act. FSOC’s most powerful figures, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke, have said money funds are a systemic threat to global financial markets. The body could intervene and submit money funds to direct regulation by the Fed.
“Representatives of the ICI and the fund industry today made a presentation to the Chairman and the staff of the SEC,” SEC spokesman John Nester said today in a statement. “While there were many questions asked, neither the chairman nor the staff gave any indication of their views on the presentation.”
The industry helped block a plan in August that was backed by SEC Chairman Mary Schapiro, who has been working to make the $2.6 trillion industry safer since the 2008 collapse of the $62.5 billion Reserve Primary Fund. The failure triggered a run by money-fund investors, which abated only after the Treasury guaranteed shareholders against default for a year and the Fed began financing the purchase of fund holdings. The Treasury and Fed have since been restricted from repeating those bailouts.
The concept offered today is similar to a plan published Sept. 27 by BlackRock, proposing that money funds under some circumstances impose “stand-by liquidity fees” on investors who withdraw money. Such fees would be triggered only when a fund’s liquidity failed to meet existing minimums, or when a fund’s mark-to-market share value dipped below a certain level.
“ICI and the fund industry are engaged directly with the Securities and Exchange Commission in a united effort to constructively build on the success of the 2010 reforms,” the ICI said today in a statement.
BlackRock’s plan also calls on regulators outside the U.S to adopt requirements for asset quality, duration and liquidity similar to those adopted by the SEC in 2010. Duration refers to the price sensitivity of an asset to changes in interest rates.
“BlackRock has tried before” to find a resolution that regulators and fund providers can agree on, Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc., said in an interview. “Maybe now with FSOC breathing down everyone’s neck it will work.”
Company executives met first today with Mary Miller, Treasury’s undersecretary for domestic finance. Some fund representatives also confered with Schapiro, SEC Commissioner Elisse B. Walter, Commissioner Luis A. Aguilar and staff members from the offices of Commissioner Daniel M. Gallagher and Troy A. Paredes.
“I think it’s important that we continue to push ahead on this,” Schapiro told reporters at a Washington event, saying she hopes the SEC can do the work instead of other regulators. Schapiro said any subsequent effort should include “concrete and meaningful reforms that can go out for public comment.”
Schapiro’s earlier plan would have forced money funds to choose between replacing their traditional $1 share price with a floating value, or building capital buffers to absorb potential losses and holding back a percentage of all fund withdrawals for as much as 30 days to discourage flight.
Fund executives fought the proposal, arguing that capital buffers would be either too small to be effective or too large to afford, and that investors would reject a floating share price and withdrawal holdbacks.
BlackRock Chief Executive Officer Laurence D. Fink has consistently tried to position his firm as a conciliator on the issue, even chiding his peers when debate with regulators turned confrontational.
Industry opposition to money-fund overhaul “does not instill the sort of trust we need,” Fink wrote Oct. 9 in an opinion piece in The Wall Street Journal about restoring investor confidence in financial markets.
“We have been, remarkably, one of the only firms to aggressively believe that we need money-market reform, working with the SEC to a sensible industry and client-oriented solution,” Fink said during a conference call with analysts in April.
BlackRock, which managed $140 billion in U.S. money-market mutual funds as of Sept. 30, has made previous proposals to the SEC on money funds, including a plan in August 2011 that mentioned redemption fees, and one in February 2010 suggesting funds be run as “capitalized special purpose entities.”
BlackRock’s newest plan was unveiled the day Geithner, acting as FSOC’s chairman, increased pressure on the industry and the SEC by instructing the new panel to take up the money fund issue. Geithner, outlining potential recommendations for the SEC, listed three options, with the first two based on Schapiro’s proposal.
His third option referred to “capital and enhanced liquidity standards” with no mention of a capital buffer. He also mentioned “liquidity fees or temporary ‘gates’ on redemptions,” as a potential alternative to the always-on withdrawal holdbacks envisioned by Schapiro.
Suzanne Elio, a spokeswoman for the Treasury Department, declined to comment.
Geithner’s letter began the process by which FSOC can urge, but not force, the SEC to adopt new rules on money funds. Geithner said he is hopeful FSOC would vote on a draft of that recommendation in November.
FSOC would then ask for public comment on the draft for at least 30 days, and possibly longer, before voting on a final recommendation. The SEC would then have 90 days to adopt the recommendation or explain its refusal in writing.
Geithner’s letter also urged FSOC members to prepare for the more severe action of declaring funds or fund companies systemically important entities, and thus subject to Fed oversight.
Treasury’s Miller, a former industry executive, has since been calling company leaders, hoping to spur discussion on what options might be acceptable to all sides, according to three people familiar with the calls. Miller was director of Baltimore-based T. Rowe Price Group Inc.’s fixed-income division before joining the Treasury at the start of 2010.
FSOC was charged by Congress with monitoring the country’s financial stability. Should it supersede the SEC, the primary regulator of mutual funds, that could damage both the industry and the agency.
It could leave funds subject to regulation that company executives are convinced would destroy the product. It could also undermine the regulatory authority of the SEC on a subject Schapiro has called “the most important for us to tackle.”
“I’d have to believe the commission doesn’t want to give up its principal jurisdiction over a financial product that has developed under its watchful eye,” Barry Barbash, head of the asset-management group at law firm Willkie Farr & Gallagher LLP in Washington and a former director of the SEC’s investment-management division, said in an interview.
Geithner and Federal Reserve Governor Daniel Tarullo have said the SEC is best positioned to implement money-fund changes. In addition, FSOC’s pathway to trumping the SEC’s oversight of money funds would be long, complicated and subject to legal challenge.
The renewed push for a compromise comes just over four years since the financial crisis transformed the way regulators viewed money-market funds. The largest collective buyer of short-term debt in the U.S., money funds were previously seen as a stable place for companies and individuals to park cash.
The SEC enacted new rules, some of them first proposed by the industry, in 2010, creating liquidity minimums, imposing shorter ceilings on the average maturity of holdings, tightening credit standards and forcing the funds to disclose more information on holdings.
Schapiro called the changes a good start. Her staff worked for two additional years on a plan that was ready in August.
The industry enlisted the U.S. Chamber of Commerce in a months-long lobbying campaign aimed at swaying SEC commissioners, members of Congress and money fund investors and borrowers against the plan. Its key victory came over Aguilar, a Democrat, who told Schapiro in August he wouldn’t support the plan, joining two Republicans who opposed it.
Aguilar, along with Gallagher and Paredes, has said he wants to see more study on the impact of the SEC’s 2010 reforms and the potential consequences of Schapiro’s plan. Schapiro responded by appealing to FSOC to act.
The issue is complicated by the Nov. 6 elections because a Republican victory may end the push for new rules. Two recent departures from the SEC’s division of investment management mean that companies are already dealing with different officials when discussing money funds. Eileen Rominger, the division’s director, left in July, and Robert Plaze, the deputy director, retired at the end of August.