SEC Money-Fund Compromise Faces Opposition in Final FightChristopher Condon
The mutual-fund industry’s main trade group, in what may be the last round of lobbying against tighter rules for money-market funds, rejected a scaled-back proposal to force only the riskiest funds to give up their stable $1 share price.
The compromise, unanimously approved by SEC commissioners June 5, would harm investors and the economy, and would increase systemic risk, the Investment Company Institute said today. The group supported an alternative option offered by the SEC to limit withdrawals when funds come under stress.
“Our opposition to floating NAV remains as firm as ever,” Paul Schott Stevens, president of the Washington-based ICI, said in the text of a speech delivered today in Baltimore. “Forcing funds to float their NAVs doesn’t address the problem.”
The plan would exempt funds that buy only U.S. government-backed securities and retail funds, a concession regulators made to address concerns of fund providers. The proposal marked the beginning of what may be the last round in a five-year battle over how to regulate the investment vehicle used by U.S. companies and households to park $2.6 trillion in assets.
Judith Burns, an SEC spokeswoman, declined to comment.
The debate over the vehicles was sparked by the collapse of the $62.5 billion Reserve Primary Fund, whose closure in September 2008 triggered a wider run on money funds, helping to freeze global credit markets. Some regulators, including former SEC Chairman Mary Schapiro, have argued that the funds’ $1 share price makes them susceptible to runs. Her plan to make all money funds adopt a floating value or create capital reserves was blocked by fellow commissioners in August.
Her failure followed a months-long lobbying effort from the ICI and the fund industry to halt the plan, backed by the U.S. Chamber of Commerce, the biggest business lobbying group.
The commission this month proposed a less sweeping application of the floating NAV plan that would apply only to institutional prime funds and institutional municipal funds, which hold a combined $1 trillion, according to figures from research firm iMoneyNet based on how providers categorize their funds. Prime funds can invest in corporate debt. Municipal funds invest in debt issued or backed by states and municipalities.
The narrowed proposal, backed by new SEC Chairman Mary Jo White, marked a victory for companies including Boston-based Fidelity Investments, San Francisco-based Charles Schwab Corp. and Vanguard Group Inc. in Valley Forge, Pennsylvania, which had retreated in the months leading up to the SEC’s June meeting from an all-out opposition to a floating NAV in favor of a compromise.
Those companies had differing reactions to the SEC’s bid for compromise.
Fidelity, the largest U.S. money-fund provider, said the proposal “missed the mark” because it failed to exempt institutional municipal money-market funds from either the floating NAV or withdrawal restriction options, Stephen Austin, a spokesman said in an e-mailed statement.
Institutional municipal funds hold about $78 billion, according to iMoneyNet.
Marie Chandoha, president and chief executive officer of Charles Schwab Investment Management, called the proposal “a well-reasoned approach.”
“We continue to support floating NAV for prime institutional funds,” Chandoha said in an e-mailed statement. “We are reviewing their proposal carefully and anticipate providing comments where we think improvements can be made.”
John Woerth, a Vanguard spokesman, declined to comment.
The commission’s proposal includes the option of allowing a fund’s board to temporarily halt withdrawals and require it to impose a fee of 2 percent on all redemptions if the fund’s weekly liquid assets fell below 15 percent of total assets. The commission left open the option of adopting either floating NAV or withdrawal restrictions, or both together.
“Liquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressure in periods of market turmoil,” Stevens said in his speech at a conference organized by Crane Data.
The SEC’s proposals were published today in the Federal Register, beginning a 90-day public comment period.