Big asset managers propose new ‘retail investor’ definition for money-fund reform

Several major fund companies are trying to persuade the Securities and Exchange Commission to modify the definition of “retail investor” in the agency’s money market reform proposal.

The SEC defines a retail investor as one who withdraws less than $1 million daily from a money fund. Money funds with investors who stay under that threshold would be designated as “retail” funds and exempt from a requirement to let their share value fluctuate daily rather than maintain the traditional $1 valuation.

But in a letter to the SEC on Thursday, eight fund firms suggested that retail funds should be defined as those that limit share ownership to actual people who have a Social Security number. Such investors hold individual and retirement accounts, college and health savings plans, as well as ordinary trusts, with the firms. The firms’ definition would exclude accounts held by businesses, defined-benefit plans and endowments.

The bifurcation would achieve the SEC’s money fund reform goal of limiting runs on money funds that could occur when major shareholders flee during market stress, according to the letter.

“Often, in each of these accounts, individuals would be responsible for making the decision to leave a fund during a time of crisis rather than an institutional decision maker,” the letter states. “Our experience has shown that in time of crisis, these individuals are less likely to redeem en masse.”

The letter was signed by BlackRock Inc., Fidelity Investments, Invesco, Legg Mason & Co., Western Asset Management Co., Northern Trust Corp., T. Rowe Price Associates Inc., The Vanguard Group Inc. and Wells Fargo Funds Management.

Since the financial crisis, the SEC has been trying to strengthen money fund rules. One set of reforms was approved in 2010 following the collapse of the Reserve Primary Fund, when it fell below a $1 net asset value in 2008.

This summer, the SEC advanced further reforms. On June 5, it released a proposal that outlined two approaches. One would institute a floating NAV for prime institutional funds, which invest mostly in corporate debt and are seen as the riskiest in the approximately $2.66 trillion money fund market. The other reform option would allow all money funds to maintain a stable NAV but establish “liquidity fees” for redemptions from funds that fell below a certain liquid-asset level. It also would allow a fund’s board of directors – at its discretion – to lower a temporary redemption “gate” for up to 30 days.

SEC Chairman Mary Jo White has said that the proposals could be combined. Skeptics argue that the proposals risk undermining money funds’ most attractive features – their stable returns and liquidity.

In Thursday’s letter, the fund companies reiterated objections they made in individual comment letters this fall about the daily redemption limit. They wrote that it would be burdensome and costly to implement, and complex to monitor.

“More importantly, investors do not want a continuous limitation on their ability to redeem shares,” the firms wrote.