Money-Fund Rules to Preserve Product’s Value, White Says

The U.S. Securities and Exchange Commission is trying to preserve the value of money-market mutual funds to investors as it writes a rule intended to limit risk, the agency’s chairman said today.

Mary Jo White said in a speech at an Investment Company Institute conference in Washington that the SEC is “actively engaged” in writing the proposal, which has been anticipated by the fund industry since a similar plan failed to advance last year. White said the proposal, which she declined to detail, will balance the views of commissioners and fund investors.

“Our goal is to preserve the economic benefits of the product while addressing potential redemption pressures and the susceptibility of these funds to runs -- runs in which retail investors are especially likely to suffer losses,” she said in the speech, her first as SEC chairman.

Regulators have worked to impose tighter restrictions on the $2.56 trillion money-fund industry since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by bankrupt investment bank Lehman Brothers Holdings Inc., triggered a wider run on money funds that helped freeze global credit markets.

The SEC is considering reforms such as requiring adoption of a floating share price, a move industry group’s have said would destroy the funds’ appeal. Money funds now have a fixed $1 share price that makes them an appealing cash-management tool for companies, institutional investors and retail customers.

Tax Implications

Regulators have been discussing ways to mitigate the tax implications of allowing the share price of money funds to vary. A floating share price would create small gains and losses that could create tax liabilities for investors.

ICI, which lobbies on mutual funds’ behalf, says the SEC’s proposal should be limited to allowing certain funds to halt investor redemptions during times of financial stress.

Fidelity, JPMorgan Chase & Co. and BlackRock Inc. are among companies urging regulators to exclude money-market mutual funds that invest solely in government-backed or municipal securities if they introduce new rules. BlackRock Chairman and Chief Executive Officer Laurence D. Fink, head of the world’s largest asset manager, said April 16 that the SEC would probably restrict the floating-share rule to funds that buy corporate debt.

“We are very focused on additional appropriate further reform,” White said in comments to reporters after the speech. “I do expect the staff recommendations to come before the commission in the near future.”

Substituted Compliance

In her speech, White made the case for coordinating the SEC’s rules and enforcement programs with global financial regulators. The SEC’s proposal this week to allow so-called substituted compliance with overseas swaps rules is an example, she said.

The cross-border swaps rule would recognize comparable overseas laws and allow the SEC to enforce its own rules when foreign standards aren’t sufficient. The proposal seeks to avoid a “line-by-line comparison” of U.S. and foreign laws.

“With the approval of this proposal, we can now move towards adopting the many substantive derivative rules the agency has proposed over the past two-plus years,” White said.

White said coordination of global rules would help guard against regulatory arbitrage, in which countries scale back regulations to attract more investment or economic activity.

“Effective regulation of the U.S. financial system requires us to be a part of the fabric of a global financial and regulatory system that transcends political boundaries,” White said in her speech.

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