To prevent another instance of a money market fund “breaking the buck,” the Securities and Exchange Commission is discussing placing capital requirements on such funds.
The idea could trump the Investment Company Institute's proposal to create a liquidity bank, to which all money market funds would contribute. The bank would help backstop funds in case of an investor panic.
Concern about the stability of money market funds stems from the 2008 financial crisis, when customers withdrew billions of dollars from their accounts in a matter of days.
In September that year, the Reserve Primary Fund from Reserve Management Co. Inc. “broke the buck” when 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 reserve for reeling funds.
To prevent similar situations from occurring, the SEC last year passed more-stringent rules for the $28 trillion money market fund industry, mandating that funds meet daily and weekly liquidity requirements. Also last year, the President's Working Group, which comprises officials from the Treasury Department, the Federal Reserve, the Financial Stability Oversight Council and the SEC, came out with a list of proposals to further address potential liquidity problems in the money fund industry.
As a result, the ICI came out with its proposal in January for a liquidity bank, to which each provider of money market funds would contribute to establish a pool of money that funds could tap into if there was another run on their products.
Although the fund industry “largely supports” the notion, the support has been “somewhat tentative,” Robert Plaze, associate director of the Division of Investment Management at the SEC, said via a video hookup during a panel discussion at the ICI's Mutual Funds and Investment Management Conference, which is being held this week in Palm Desert, Calif.
Given that tepid response, the SEC is discussing other ideas to address the issue, such as those suggested by
Fidelity Investments and
BlackRock Inc., both of which opposed the notion of a liquidity bank in their comment letters to the President's Working Group.
Under the Fidelity proposal, money market funds would create a capital reserve or an “NAV buffer” by charging investors more over a period of time, said Norman Lind, head of trading for the taxable and municipal money market desks at Fidelity Management & Research Co., the investment advisor for Fidelity's family of mutual funds.
The SEC would work with fund boards to determine a range that a fund should keep for capital reserve, he said during a panel discussion.
“Let's say you retain five basis points per year, and you accrue that over time,” Mr. Lind said. “The idea is that once you have a buffer in place … you stop charging that fee.”
Unlike the ICI's proposal, Fidelity thinks that its idea is simple to implement and doesn't require regulatory changes, Mr. Lind said.
“I think it's a fascinating idea,” Mr. Plaze said during a teleconference. “This does help with the liquidity issue.”
The SEC is also considering a proposal from BlackRock, under which each fund would set up its own capital reserve, Mr. Plaze said.
The problem with implementing capital requirements on money market funds is that ultimately it means that investors will end up paying more, said Robert Kurucza, a partner at Goodwin Procter LLP and a former associate director of the SEC's Division of Investment Management.
“A capital requirement in some fashion is going to increase the costs of money market funds,” he said. “It would be a shame to have those costs passed on to shareholders.”
But Fidelity has spoken to a number of institutional shareholders who said that they would be willing to pay the added costs in exchange for the security of knowing that the buffer is there, Mr. Lind said after the panel discussion.
And Fidelity's idea is gaining traction.
“We have six or seven big-name fund companies that have expressed interest,” Mr. Lind said, though he declined to name the firms. “Also, we have spoken to the ICI about it, and they are very intrigued.”
The SEC will be host a round table in May to discuss the issues, Mr. Plaze said. A date for the round table hasn't been set.
