To avoid future panics in money market funds, the mutual fund industry is calling on federal regulators to force broker-dealers to disclose information about their money fund clients. Industry experts think that fund operators will get their way.
Concern about the stability of money market funds stems from the 2008 financial crisis, when investors withdrew billions of dollars from the accounts in a matter of days. The Reserve Primary Fund from Reserve Management Co. Inc. “broke the buck” — that is, its net asset value fell to 97 cents a share. With few options, the U.S. government was forced to step in and provide a backstop for the reeling funds.
To prevent similar situations from occurring, the Securities and Exchange Commission last year passed more stringent rules for the $28 trillion money market fund industry, mandating that funds meet daily and weekly liquidity requirements. The SEC also instructed money fund operators to “adopt policies and procedures designed to assure that appropriate efforts are undertaken to identify risk characteristics of shareholders.”
Specifically, the SEC said that fund boards “should make sure that the adviser is monitoring and planning for ‘hot money.'”
But getting this information has “proven to be quite burdensome and costly for funds,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, wrote in a Jan. 10 letter to the Presidents Working Group on Financial Markets. He went on to note that shifting the information-gathering burden to broker-dealers would spare the fund managers of those costs.
“By imposing an affirmative legal requirement on intermediaries the SEC can significantly mitigate these burdens, an especially desirable result at a time when money market funds are not well-positioned to absorb additional costs,” Mr. Stevens wrote.
The ICI's request was just a few lines in a 58-page letter that focused largely on the eight proposed reforms made by the President's Working Group, which comprises officials from the Treasury Department, the Federal Reserve, the Financial Stability Oversight Council and the SEC.
But the sentiment was echoed in a number of fund companies' comment letters, including those written by BlackRock Inc. and J.P. Morgan Asset Management, which runs the largest money market fund, the $133 billion JPMorgan Prime Money Market Fund.
The issue is that institutional clients often buy money market funds through electronic portals and omnibus accounts, making it impossible for money fund providers to know who their clients are, said Bob Deutsch, head of global liquidity and a managing director at J.P. Morgan Asset Management.
“We don't need to have the names of the clients,” he said. “But it would be helpful to know if a client is a hedge fund or other type of institution and if they could tell us about the nature of the money being invested.”
In its comment letter, J.P Morgan requested that money fund managers receive “an analysis and profile (not the identity) of the largest shareholders investing through each omnibus account and portal.”
Although the SEC's rules last year addressed a number of the issues that have bedeviled money funds in the past, getting the client information would be “very helpful in funds managing the liquidity of their portfolios,” said Karrie McMillan, general counsel at the ICI.
Given that so many fund companies are asking the regulators to look at this issue, it is very likely that additional money fund rules will include some kind of requirement for broker-dealers to provide client information to money funds, said Peter Crane, president and chief executive of Crane Data LLC.
“The trick will be in the details of what exactly broker-dealers will have to provide the funds,” he said.
Calls to the Securities Industry Financial Markets Association weren't returned by press time. Florence Harmon, a spokeswoman at the SEC, said that the commission is looking forward to considering the public comments that it received about money fund regulation.
Some industry observers expect that the broker-dealer community will put up a fight against a plan that forces them to identify their clients, said Jack Winters, a money market fund consultant.
“The guys who run these portals don't want this to happen,” he said. “They don't want to lose control of those relationships with the customers.”
It may not come to that.
Jack Murphy, a partner at Dechert LLP, said that under the plan, broker-dealers wouldn't have to give up the identities of their clients. Instead, they would only be required to divulge key characteristics, such as the size of investors' accounts, their cash flows and redemption activity.
Still, this could mean substantial operational updates if brokers are forced to provide the information on a periodic basis, Mr. Murphy said.
“If the SEC goes down this road, it would have to provide the brokerage industry with a long lead time to implement it,” he said.