SEC Said to Weigh Industry’s Retail Exemption in Money-Fund RuleDave Michaels and Christopher Condon
Securities regulators are considering a change in how they exempt retail investors from proposed restrictions on money-market mutual funds after fund companies complained the original plan was too onerous, according to three people familiar with the matter.
The new plan would allow retail funds that only have individuals as shareholders to keep their stable $1 share price, according to the people, who asked to not be named because the plan isn’t public. The Securities and Exchange Commission initially proposed defining retail funds as those limiting an investor’s redemptions to $1 million per day.
The change, reported yesterday by the Wall Street Journal, would respond to a request by nine large asset managers, including BlackRock Inc. and Fidelity Investments, to simplify the carve-out for retail investors. Small businesses and other companies probably wouldn’t be able to invest in retail money funds under the new approach.
“Keeping track of the $1 million-per-day withdrawals would be so complicated and so convoluted,” said Mike Krasner, managing editor of iMoneyNet Inc., a research firm that focuses on the money fund industry. “This is just a simpler way to do it.”
Under a rule proposal issued in June, money funds that invest in corporate debt and cater to institutional investors would have to move to a floating-share price, abandoning an accounting method that currently allows them to value shares at $1. The proposal also recommended allowing those funds to stabilize themselves during times of stress by suspending investors’ redemptions.
Companies such as Federated Investors Inc. and the Investment Company Institute, the industry’s trade group, have opposed the SEC’s call to move some prime funds to a floating-share price. Prime institutional funds held $996 billion in assets as of March 18, or about 37 percent of total money-fund assets, according to iMoneyNet data.
SEC Chairman Mary Jo White has said the five-member commission will vote on adopting the money-funds rule this year. A vote could come in late April after a 30-day public comment period ends for money-funds research the SEC issued on March 24.
The rule proposal was part of the SEC’s 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 its losses on Lehman Brothers Holdings Inc. debt caused the value of its shares to fall below $1, sparking massive investor withdrawals from other prime money funds.
Regulators proposed the exemption for retail funds because small investors didn’t flee money funds during the 2008 crisis. At the same time, regulators found it difficult to accurately separate retail and institutional funds, because some funds are held by both types of shareholders.
Defining retail funds as those held by individuals -- or those with U.S. Social Security numbers -- “provides a front-end qualifying test and eliminates the need for costly programming and ongoing monitoring by a fund adviser or an intermediary,” Nancy Prior, Fidelity Investments’ head of fixed-income investing said at an industry conference in Orlando on March 11.
About 10 percent to 20 percent of the $2.7 trillion industry lies in a gray area between retail and institutional users, according to Peter Crane, president of research firm Crane Data LLC in Westborough, Massachusetts.
It’s unclear how the industry’s recommended definition of retail funds would affect the number of funds subject to a floating-share price. If adopted, regulators would have to find a way to get small businesses that sometimes use retail funds to switch to other products, or provide them with an exemption to continue using them.
“I don’t think this approach would expand the retail exemption beyond what the SEC proposed,” said Robert E. Plaze, a partner at Strook & Strook & Lavan LLP who oversaw money-fund regulation at the SEC until 2012. “I think it’s being pushed by the industry principally for operational simplicity.”