SEC’s Money-Funds Rule Too Costly for Firms, U.S. Chamber SaysDave Michaels
Companies that park cash in money-market mutual funds will abandon them if regulators force the riskiest ones to abandon a stable $1 share price, according to a report released today by the U.S. Chamber of Commerce.
Corporations and institutions using money funds would face up-front compliance costs of $1.8 billion to $2 billion under regulations proposed last month by the Securities and Exchange Commission, according to the report written by consultant Treasury Strategies at the request of the Chamber’s Center for Capital Market Competitiveness. The rules would impose $2 billion to $2.5 billion annually in new operating costs for all investors, according to the report.
The report is meant to raise new questions about an SEC proposal released for comment on June 5. The plan would impose a floating-share price on funds that cater to institutional investors and invest in corporate debt.
“If they are willing to sacrifice some of the key benefits of money-market funds, only the largest money-market fund investors will be able to absorb the high cost of compliance,” the report’s authors wrote.
The SEC proposal is its 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 proposed rule, which is open for public comment, would force prime funds to adopt a floating-share value, apply withdrawal restrictions during times of stress or do both.
The Chamber, which has sued the SEC over rules it considers too costly, opposed an effort by the SEC in 2012 to impose new rules on money funds. The Washington-based business group plans to tout the report today at an event featuring money-fund users such as the state of Maryland and Boeing Co.
The report says 8,000 to 10,000 corporations invest cash in money funds, and many won’t have the resources to comply with the SEC’s rule. Instead, companies will shift funds into bank deposits, the report says.
“We don’t think the operational changes are fully understood,” David Hirschmann, president and chief executive officer of the Center for Capital Markets Competitiveness, said on a media call last week. “What our our members tell us is, if the costs of using the new product are greater than the benefits, they won’t use it.”
The SEC wrote in its proposal that users of prime funds would have to adapt accounting systems for a floating share price, track gains and losses, provide cost-basis reporting, and monitor potential wash sales. The SEC estimated implementation costs at $1.2 million to $2.3 million, and annual operating costs at 5 percent to 15 percent of the up-front costs.