Money funds take the lead in reforms

Jan 13, 2013 @ 12:01 am

By Jason Kephart

Six big mutual fund companies last week agreed to disclose the daily NAV of their money funds, an unusual show of unity among rivals aimed at heading off the threat of stricter regulation.

On Friday, Fidelity Investments, Federated Investors Inc. and The Charles Schwab Corp. became the latest companies to announce they soon will begin disclosing their money market funds' net asset values each day. BlackRock Inc., The Goldman Sachs Group Inc. and JPMorgan Chase & Co. made similar announcements earlier in the week.

Together, the six companies oversee $1.38 trillion in money fund assets, or about 54% of the industry.

Some of the companies contend that the heightened transparency will make clear to investors the true value of their funds. Even though share values may fluctuate, the companies will continue to redeem shares at $1.

“We believe this more frequent reporting can serve as an indicator of the stability of our money market products for investors looking for near-real-time information,” said Charles Schwab Investment Management president Marie Chandoha.

The moves come as regulators consider tougher regulation of the money fund industry, which nearly collapsed in 2008 when the Reserve Primary Fund “broke the buck” and a run on the funds ensued.

The Securities and Exchange Commission's efforts to impose tighter regulations fell apart late last year when then-Chairman Mary Schapiro couldn't muster enough votes to put the proposals out for public comment. The Financial Stability Oversight Council has taken up the issue and is mulling new money fund regulations, including one that would require funds to move floating NAVs.

"ADDITIONAL TWEAKS'

“I don't think this alone is enough to sway the FSOC, but it may get people thinking about additional tweaks and disclosures rather than a radical change,” said Pete Crane, president of money market research firm Crane Data LLC.

Diane Pearson, a wealth manager at Legend Financial Advisors Inc., is encouraged by the new disclosures, as well.

“It's good information from a consumer standpoint,” she said. “Ninety percent of the people that have a money market fund have no idea it's invested and not a reserve account.”

But the flip side of the added disclosure is that it may actually do more harm than good, some argue.

“They're trying to increase transparency, but it seems like they're just adding new elements that can add confusion,” said Mike Krasner, managing editor of iMoneyNet, a money market research firm. “Now companies are going to have to explain to clients why there are two NAVs.”

Last Wednesday, Goldman Sachs, which has $142 billion in money market assets, started disclosing daily prices of its money funds, becoming the first firm to do so.

CALLS FOR TRANSPARENCY

The firm made the change because of greater calls for transparency from its shareholders, which are largely institutional clients, Goldman spokesman Andrew Williams said.

JPMorgan, the second-largest money market fund provider, with $242.9 billion in money fund assets, quickly followed suit, as did BlackRock, which has $158 billion.

The largest provider, Fidelity Investments, which has $425 billion in money fund assets, on Friday joined the mini revolution, as did Federated, which has $242.8 billion, and Schwab with $164.9 billion.

“Clearly, there's a lot of momentum,” Mr. Crane said. “We've never seen the fund industry voluntarily get together without an SEC mandate before.”

The industry, led by the Investment Company Institute, its lobbying arm, maintains that a floating NAV would “undermine money market funds' convenience and simplicity, and confront investors with new accounting, tax and legal complications,” according to a statement from the ICI over the summer.

In addition, the lack of a stable NAV could force large institutions and municipalities to leave the funds en masse because of their investment mandates, the ICI argued.

The changes enacted last week by the six companies seem to bridge the gap between the two sides.

The providers now offer investors a look at day-to-day share values — transparency the SEC claims has been lacking — while still maintaining the stable $1 share that large investors covet.

“It's certainly meant to convince investors that the actual NAVs don't really float anyway,” Mr. Crane said.

“It's extremely rare that a fund deviates more than a thousandth of a cent from one day to the next,” he said. “It really takes an event to move the NAV.”

Money market fund NAVs can legally vary anywhere from $1.0050 to $0.9995 per share while still maintaining their $1-per-share price.

The potential consequence of an “event” that moves money fund NAVs dramatically is what spurred on regulators in the first place.

At least one company doesn't plan to make the switch to disclosing daily NAVs.

The Vanguard Group Inc., which has $168 billion in money market assets, said it won't follow the crowd.

“We have not seen an increased demand for more-frequent disclosure from our clients, who are primarily retail investors,” Katie Henderson, a spokeswoman, wrote in an e-mail.

jkephart@investmentnews.com Twitter: @jasonkephart

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Martin Dempsey: Geopolitical hotspots (and how they could impact investing)

What are the big international hotspots and how could it affect advisers and investors. Gen. Martin Dempsey, the former chairman of the joinst chiefs of staff, offers his unique perspective.

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Broker, retirement groups make last-minute pleas to change tax legislation

Pass-through provisions are target of groups representing employee-model brokerage firms, as well as retirement plan advisers.

House and Senate reach tentative compromise for tax overhaul

Lawmakers still need to get a cost analysis of their agreement, so it's not yet definite, according to a source.

Advisers' biggest fears for 2018

What keeps advisers up at night.

One adviser's story of losing his son to the opioid epidemic

John W. Brower, president and CEO of JW Brower & Associates, shares the story behind his son's death from a heroin overdose and how it inspired him to help others break the cycle of addiction.

Tax reform will boost food, chemicals, rail stocks. Technology? Not so much

Conagra and Berkshire Hathaway are two stocks that should benefit most from changes in the tax code.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print