The riskiest money-market mutual funds will have to let their share prices fluctuate and charge investors withdrawal fees during times of stress under tougher U.S. rules set for adoption this month.
The Securities and Exchange Commission is poised to impose both requirements on some money-market mutual funds, which required a federal backstop during the 2008 financial crisis, according to a person familiar with the matter who asked to not be named because terms of the final rule haven’t been made public.
Key parts of the proposal have been strongly opposed by the funds’ trade group, the Investment Company Institute, and fund-management company Federated Investors Inc., which said that a floating share price would destroy demand for prime institutional funds, which invest in short-term corporate debt.
The final rule, which began as a proposal issued last year, is likely to be voted on by the five-member commission on July 23, the person said.
“The commission is actively engaged with the staff in proceeding to finalize rules in the near term and I am confident we will adopt very robust rules,” SEC Chair Mary Jo White said today at a meeting of the agency’s Investor Advisory Committee.
The plan would require prime institutional funds to float the value of their share price, traditionally set at a stable $1, which makes them a popular place to park cash. It also would require funds to impose a 1 percent fee on redemptions and permit them to temporarily suspend withdrawals when liquidity drops below required levels.
The plan is intended to make money funds, which manage $2.5 trillion in assets for retail investors and corporations, less vulnerable to investors fleeing funds during a crisis. The rule wouldn’t apply to retail funds or those that predominantly invest in U.S. government and municipal securities.
Gina Talamona, an SEC spokeswoman, declined to comment.
The proposal was part of the SEC’s response to vulnerabilities exposed by the 2008 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 its losses on Lehman Brothers Holdings Inc. debt caused the value of its shares to fall below $1, sparking massive investor withdrawals from other prime money funds.
To halt the panic, the Treasury Department guaranteed all money-fund shareholders against losses from default, putting the government on the hook for about $1.6 trillion in corporate and municipal debt, according to estimates by research firm Crane Data LLC.
White is pushing to hold the vote on July 23, the person said. The SEC has been under growing pressure from the Federal Reserve and other U.S. and global regulators to finish the rule. Federal Reserve Chair Janet Yellen said July 2 that progress on new rules for money funds has “been frustratingly slow.”
Details of the rule could still change before the vote, with at least two commissioners having voiced objections to parts of the plan. Commissioner Kara M. Stein, a Democrat, has questioned whether allowing funds to suspend redemptions could exacerbate, instead of reduce, the risk of runs on a fund.
Stein’s concerns are consistent with a paper published in April by Fed economists. They wrote that well-informed investors would preemptively pull out money when they believed a money fund might suspend redemptions after suffering a loss.