SEC Proposes Floating-Share Price for Riskiest Money Funds

The U.S. Securities and Exchange Commission will seek comment on a proposal that would impose a floating-share value on the riskiest money-market mutual funds or allow them to suspend redemptions in times of stress.

The SEC’s five commissioners voted unanimously at a meeting in Washington today to apply the changes only to funds that invest in corporate debt or municipal securities and cater to institutional investors, which were abandoned during the 2008 financial crisis. Funds that serve retail clients or focus their holdings on U.S. government securities would be exempt.

“Today’s proposal contains two alternative reforms that could be adopted separately or combined into a single reform package to address run risk in money market funds,” SEC Chairman Mary Jo White said at the meeting.

The commissioners’ vote, which releases the proposal for 90 days of public comment, will kick off a months-long burst of lobbying from investors, fund companies and other stakeholders before SEC commissioners consider a final version.

Under the SEC’s proposal, prime funds would have a choice of adopting the floating-share value, putting gates on redemptions or doing both. A money fund would be able to suspend redemptions for as long as 30 days if its weekly liquid assets fell below 15 percent of total assets, or half of the required level. Investors would be charged a 2 percent fee if they still wanted to withdraw funds.

Limiting Redemptions

Retail funds, which the proposal defines as those limiting redemptions to $1 million per day, would be exempt from the rule to float their share value. Institutional funds that invest in corporate debt hold 37 percent of the assets in the $2.9 trillion money-fund industry, according to the SEC.

The proposal makes clear that investors in a floating-share fund probably would owe taxes once a year on any capital gains, according to SEC officials. Corporations and institutional investors have been worried about the new tax burden created when the share price is forced to float.

The plan is the SEC’s second response to vulnerabilities exposed by the 2008 financial 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 the value of its shares fell below $1, sparking a run on prime money funds.

The SEC is addressing “the stable-value pricing of institutional prime funds at the heart of the 2008 run and proposes methods to stop a money market fund run before such a run becomes a systemically destabilizing event,” White said.

FSOC Recommendations

U.S. regulators have long warned that money funds, which have been regarded as a safe place to keep cash, could pose risk to the financial system. The Financial Stability Oversight Council, a panel of regulators led by the Treasury secretary, made recommendations for further regulating money funds after the SEC failed in 2012 to move forward with a proposal.

SEC Commissioner Daniel M. Gallagher said the agency would have moved forward sooner with new rules if a proposal pushed by former Chairman Mary Schapiro had been more inclusive.

“Last year’s proposal –- through no fault of the staff’s –- was drafted without the input of the commissioners and presented to the commission as an inviolate fait accompli,” Gallagher said. “Indeed, we were given the proposal only after it had been fully baked and blessed by other agencies.”

Gallagher and Troy A. Paredes, the commission’s Republican members, questioned whether a floating-share price would stop investors from fleeing during a crisis. Gates on redemptions would better serve that purpose, they said.

Commissioner Elisse B. Walter, who replaced Schapiro as chairman after she stepped down last year, was credited by Gallagher for being “the guiding hand behind today’s proposal.”

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