Nine months after the Securities and Exchange Commission failed to advance money market fund reform amid a storm of industry protest, the agency will try again next week — this time with a new leader at the helm.
On June 5, the SEC, now headed by Mary Jo White, is slated to vote on money fund proposal. The agency's first attempt, spearheaded by former Chairman Mary Schapiro, was abandoned last August.
Ms. White, who was sworn in April 10, has not revealed her position. In a speech at an Investment Company Institute conference earlier this month, she said that the SEC's goal is “to preserve the economic benefits of the product while addressing potential redemption pressures and the susceptibility of these funds to runs — runs in which retail investors are especially likely to suffer losses.”
It's not just the language that has soothed money fund advocates. It's also the SEC's work over the last few months — under short-term Chairman Elisse Walter as well as Ms. White — to answer concerns of those who opposed Ms. Schapiro's original proposal and to develop consensus.
“That doesn't guarantee a result we will like, but it does show the commission is working in a constructive manner,” said Mike McNamee, chief ICI spokesman. The industry is concerned that previous attempts to reform money markets would make the funds less attractive to investors and less profitable to fund owners.
One of the major players in the money fund debate is hopeful about the next round.
“I have an optimistic view that good policy in the end will win out,” said J. Christopher Donahue, president and chief executive of Federated Investors Inc. “So far, I think [Ms. White's] approach is very good. She has intellectual strength and will come at things in a thorough, do-your-homework way.”
In her short time in office, Ms. White has jumped into the money fund issue, according to Jerry Klein, managing director of Treasury Partners at HighTower Advisors LLC.
“She certainly seems to be taking the time to get to know the product and understand the alternatives that have been put forth,” Mr. Klein said. “Yet, at the end of the day, I don't know whether her view on the topic will be any different than Mary Schapiro's.”
Observers are expecting that the new proposal will include a provision to allow a floating net asset value for prime institutional money funds — those that invest mostly in commercial debt and are seen as riskier funds.
If at least three of the five SEC commissioners approve releasing the proposal, it will be open to a 60- or 90-day comment period after it is published in the Federal Register. The agency will review the comments and then proceed to a final rule, which requires an SEC majority.
In August, Ms. Schapiro presented a plan to strengthen rules surrounding the funds, which total about $2.6 trillion. It would have allowed net asset values to fluctuate with changing market conditions for a wider range of funds instead of staying fixed at the traditional $1. Another approach was to require funds to maintain capital reserves and institute redemption controls.
Ms. Schapiro argued that precipitous withdrawals from money funds — such as those that caused the collapse of the Reserve Primary Fund in 2008 — continue to represent a systemic risk to financial markets.
The money market fund industry and three SEC members — Luis Aguilar, Daniel Gallagher and Troy Paredes — opposed Ms. Schapiro's plan. A couple of months later, the Financial Stability Oversight Council prodded the SEC to try again.
“Mary Jo White brings lighter baggage to her relationship with the industry on the issue,” said Joan Ohlbaum Swirsky, counsel at Stradley Ronon Stevens & Young LLP, and author of The Guide to Rule 2a-7: A Map Through the Maze for the Money Market Professional. “Mary Schapiro's views were more baked in. She took money funds as a signature issue — and she pushed for reform in August when other commissioners did not support reform.”
In addition to the focus on prime institutional funds, Ms. Swirsky anticipates that the SEC proposal will include other alternatives, such as a “gate” — combined with a liquidity fee — that fund board directors could lower to prevent withdrawals during times of economic stress.
The gate-and-fee system is popular in the industry.
“That structure would go much further in preventing a run than a floating NAV,” Mr. Klein said.
The idea of a floating NAV – even for prime institutional funds only – doesn't sit well with Neal Solomon, managing director of WealthPro LLC. He said that such a mechanism would undermine the stable value that makes the vehicles popular.
“The only thing that makes sense to me is to have some kind of private insurance that is operated in coordination with the industry,” Mr. Solomon said.
Advisers say that money funds play a key role in client portfolios as a location for collecting dividends and proceeds from sales of holdings or building up funds for a big purchase.
“At any point in time, they could have significant money,” said Diahann Lassus, president of Lassus Wherley and Associates PC. “It is more about the safety than it is about the returns.”
But the returns, too, could go up – making the function of money funds more valuable, according to Martin Hopkins, president of Hopkins Investment Management LLC.
“When interest rates come back, I believe you'll get a better return from money market funds than you will from cash interest,” Mr. Hopkins said.