The Securities and Exchange Commission is considering how regulation of money-market mutual funds could be tightened to better protect investors, the head of the agency said today.
SEC Chairman Mary Schapiro said that in the wake of a calamity last fall — when a $60 billion money fund "broke the buck"— the SEC must "comprehensively re-examine" the rules for money-market funds.
"We should do so with a view toward enabling money-market funds to afford investors the relatively safe and liquid investment that they expect" from a fund registered with the SEC, Schapiro said in an address to a meeting of the Mutual Fund Directors Forum.
Current requirements for credit quality and cash flow are among the aspects being examined by the SEC staff, which also is looking into possible changes to protect investors from potential abuses and panic-induced runs on funds, she said. Schapiro has asked the staff to present a proposal to the five SEC commissioners for possible action next month.
The collapse of the Primary Reserve Fund in September, which exposed investors to losses that could ultimately reach about 8 cents on the dollar was one in the cascading series of troubling events in the financial meltdown. It marked only the second such instance in the nearly four decades that money-market funds have been available to keep money safe and readily accessible while earning a modest return.
The "breaking of the buck" stoked fears over the safety of the nearly $4 trillion in assets held in money-market mutual funds.
After investment bank Lehman Brothers filed for bankruptcy protection on Sept. 15, New York-based Reserve Management Co.'s board declared its investment in Lehman debt's worthless. That triggered a rush of orders from institutional clients to pull money out of the fund, gutting the fund's value as its managers were forced to sell assets amid sharply declining markets.
The next day, Reserve Management said its Primary Fund had "broken the buck" when the value of its assets fell to 97 cents per investor dollar put in — below the dollar-for-dollar level needed to fully repay investors. The company said it now expects investors could receive 91.7 cents for every dollar they put in to the fund.
The Treasury Department stepped in with a temporary program to guarantee money-market funds, but the Primary Fund — the first U.S. money fund, established in 1970 — didn't qualify and had to liquidate.
The Investment Company Institute, the mutual fund industry's biggest trade group, has proposed to the SEC its own tightened rules for money funds. They include toughened requirements to screen money fund investments for safety, and to ensure that fund companies can return cash on demand to investors — even if redemption orders come in a panic-induced rush. The industry is rejecting private insurance to protect investors against losses, and opposes easing current requirements that money funds hold at least $1 in assets for each investor dollar put in.
The ICI's proposals are "an important and very constructive first step toward reconsideration of money-market fund regulations," Schapiro said today, "but it is just that, a first step." She said the SEC's examination of the issues and eventual rule changes are likely to go further.