SEC Money-Fund Rule Said to Make Riskiest Float ValueDave Michaels
U.S. securities regulators have narrowed the target of new rules for money-market funds, according to a person familiar with the matter, limiting changes to a smaller set of funds than many executives anticipated.
The Securities and Exchange Commission proposal would impose a floating-share value only on funds that buy corporate debt and cater to institutional clients, said the person, who asked not to be identified because the plan isn’t public.
Money-market mutual funds are at the heart of a Washington debate over how to address risks that fueled the 2008 financial crisis, when the $62.5 billion Reserve Primary Fund collapsed. A proposal limiting rule changes to so-called prime institutional funds would be a victory for companies including Vanguard Group Inc. and Charles Schwab Corp. that called for exempting funds that invest only in government securities and those that serve only retail investors.
Money funds are allowed to keep a stable value of $1 a share and are used as cash-equivalent accounts by individuals, institutional investors and corporations. They distribute investment earnings in cash or new shares.
Adopting a floating net-asset value is intended to make investors less sensitive to variations in the value of holdings, thus limiting redemptions during times of economic stress.
Institutional prime funds account for 35 percent of money-fund assets, which amount to $2.58 trillion, according to the Investment Company Institute, a Washington-based trade group for the mutual-fund industry.
SEC Chairman Mary Jo White said last week that the goal of new regulation is to mitigate the systemic risk posed by some money funds while preserving the product’s value to investors. The SEC’s proposal could include regulatory alternatives, as draft regulations sometimes do.
The SEC’s staff renewed its work on the proposal, now before commissioners, after a similar effort failed last year. Former Chairman Mary Schapiro’s proposal would have given funds the choice of switching to a floating share price or establishing a capital buffer with redemption restrictions.
Schapiro abandoned her effort in August after three commissioners said they wouldn’t back it because it wasn’t supported by data and analysis.
SEC Commissioner Luis A. Aguilar said the latest proposal is “much improved as a result of the knowledge and findings gained” from a staff study issued in November. Aguilar requested the study early last year to help the rule-making process, he said. Commissioners Daniel M. Gallagher and Troy A. Paredes also pressed for a study.
The study, which was authorized under Schapiro in September, addressed the impact of earlier money-fund reforms.
Aguilar said he expects the five-member commission to vote next month on the new proposal, which spans more than 500 pages. He declined to discuss its specific plan of regulation.
“This is a work in progress and I am still in the process of reviewing it,” Aguilar said yesterday in an interview. “My preliminary review hasn’t found anything that appears objectionable.”
The Financial Stability Oversight Council, a group of U.S. financial regulators led by the Treasury secretary, issued its own recommendations last year to overhaul money funds. Its proposal included an option to vary the share price for money funds. FSOC has since said the SEC, the historic regulator of money funds, is best positioned to write the new rules.
Executives from companies including BlackRock Inc., T. Rowe Price Group Inc. and State Street Corp. had anticipated a proposal to float share values would likely apply to all prime funds.
Drawing it more narrowly will benefit those with a larger proportion of retail clients. Some of those companies, including Fidelity Investments, Vanguard and Schwab, have said they favored limiting any new rules to prime institutional funds.
Of Fidelity’s prime fund assets, 58 percent are in retail products, according to research firm Crane Data LLC in Westborough, Massachusetts. Vanguard and Schwab have 79 percent and 95 percent of prime fund assets in retail.
BlackRock Inc., the world’s biggest asset manager, and JPMorgan Chase & Co., are among providers who have argued against splitting retail and institutional under two regulatory regimes.
“Differentiating between retail and institutional products is quite challenging,” Barbara Novick, vice chairman of New York-based BlackRock, said in an interview.
BlackRock wrote in a January 2011 report that many retail clients invest in institutional products through 401(k) retirement plans, and through broker or bank sweep accounts. Those blur the line between the categories, the company said in the report.
BlackRock and JPMorgan hold 85 percent and 91 percent, respectively, of their prime fund assets in institutional funds, according to Crane Data.
Novick declined to comment directly on the SEC’s plans until she saw the proposal. Vincent Loporchio, a Fidelity spokesman, Erin Montgomery at Schwab, John Woerth at Vangaurd and Kristen Chambers at JPMorgan all declined to comment.