Money-Fund Rule Fight Goes to House as Providers Lobby Anew

Money-market mutual fund providers and the municipalities and corporations relying on them to manage cash are telling U.S. House lawmakers to be wary of new regulation for the $2.6 trillion industry.

The groups are using a House Financial Services panel’s hearing in Washington today to kick off a lobbying campaign against a Securities and Exchange Commission proposal that would force funds that buy corporate and municipal debt and cater to institutional investors to adopt a floating share price. The agency is weighing arguments as it decides whether to amend its plan, which was issued in June after a previous effort splintered the five-member commission last year.

Some parts of the SEC’s proposal “would devastate the industry, rendering money-market funds entirely unattractive to investors,” Investment Company Institute President Paul Schott Stevens said told lawmakers at the hearing.

The proposal is aimed at improving the stability of an industry that experienced an investor run in 2008, when the $62.5 billion Reserve Primary Fund was brought down by losses on Lehman Brothers Holdings Inc. debt after the investment bank filed for bankruptcy. Thousands of households and businesses invest in money funds, which aren’t federally insured.

Investor Panic

The move to a floating net-asset value, or NAV, is intended to reduce the willingness of investors to run during a panic. An investor exiting a fund whose share price dropped below $1 would share in the fund’s losses.

The SEC’s proposal also includes a recommendation favored by the ICI: allowing funds to impose withdrawal fees during times of stress. The regulator said a final regulation could feature the so-called liquidity fees in combination with a floating-share requirement.

Representative Scott Garrett, the New Jersey Republican who leads the Financial Services panel’s Capital Markets Subcommittee, while praising changes to a capital buffer in the SEC proposal, said he doesn’t agree with every aspect of it.

“When rulemaking is done correctly, it is a deliberative and thoughtful process based off of hard economic data,” Garrett said. “Fortunately, the second iteration of the SEC’s money fund rule proposal -- the rule proposal we will examine today -- seems to be more in line with this standard.”

Representatives of the Investment Company Institute, San Francisco-based Charles Schwab Corp., the National Association of State Treasurers and the U.S. Chamber of Commerce testified at today’s hearing. The witness list also included Sheila C. Bair, former chairman of the Federal Deposit Insurance Corp.

Industry Positions

Schwab, Valley Forge, Pennsylvania-based Vanguard Group Inc., and Boston-based Fidelity Investments all say the SEC should allow municipal funds to retain a constant share price. ICI and the state treasurers group also will tell lawmakers today that these funds, which account for about $266.8 billion in assets, should be allowed to keep a $1 share price.

“Since municipal money-market funds have been very stable through many market cycles and did not experience large redemptions in the 2008 financial crisis, imposing a floating NAV on such funds seems entirely unnecessary,” Georgia State Treasurer Steve McCoy said in testimony.

Republican Randy Hultgren, an Illinois Republican, said he is also concerned how the proposal would affect municipal funds.

“Money market funds provide a unique and widely used municipal cash-management product that may no longer be available if the DNA of money market funds is changed,” Hultgren said at the hearing. “I’m also concerned that the SEC’s inclusion of tax exempt municipal money market funds will drive away money market investors, dampening these funds’ interest in municipal securities.”

Picking Winners

Bair, who now leads the nonpartisan Systemic Risk Council, has urged the SEC to apply the floating-share price to all types of money funds, including those that cater to retail investors. The current proposal “picks winners and losers” by imposing a floating-share price on some funds while allowing others to maintain the stable $1 price, she said.

“A floating NAV for all money market funds would not only address the core structural weakness and systemic risks posed by money funds, it would improve market functioning and fair competition by applying equally to all issuers and all investors,” Bair said.

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