Regulators are closing in on new rules for money market funds that they have been hinting at for almost two years.
Ever since the Securities and Exchange Commission made small reforms in February 2010, SEC officials have reminded the industry regularly that they think more still needs to be done to prevent a run on the funds.
That concern stems from September 2008 when Lehman Brothers Holdings Inc. collapsed and the Reserve Primary Fund, which had loaned money to the investment bank, “broke the buck,” or fell below $1 a share. Investors withdrew $310 billion from prime money market funds, and the federal government had to step in and provide some guarantees.
SEC Chairman Mary Schapiro said last Monday that the commission within a couple of months will release a plan to change the structure of money market funds so that they are less vulnerable to runs.
After exploring at least eight different approaches over the past year, the SEC's staff now is focused on developing a rule that would require money market funds to have a capital buffer to draw on during emergencies, she said.
“It could mitigate the incentive for investors to run, since there would be dedicated resources to address any losses in the fund,” Ms. Schapiro said at the annual meeting of the Securities Industry and Financial Markets Association in New York.
The SEC hasn't entirely ruled out forcing funds to move to a floating net asset value, a step that industry officials strongly oppose.
Ms. Schapiro said that that approach would satisfy one of the SEC's goals: to make clear to investors that these aren't guaranteed products.
But policymakers appear stymied about how to prevent chaos during a transition to a floating NAV.
“The buffer has its own problems, not the least of which is that it cuts down on money fund yields, which are already very low,” said a former SEC investment management director who asked not to be identified.
Nobody wants to be responsible for damaging the $2.6 trillion money market industry, which is suffering from such low interest rates that firms have had to cut fees to keep funds from falling into negative territory.
At its height in January 2009, nearly $4 trillion was parked in money market funds. A run the funds now would be crippling to the financial markets, said Lance Roberts, chief executive of Street-talk Advisors LLC, which manages about $430 million in assets.
“Anything to provide liquidity to the market is going to be beneficial, but does it take away from profitability? Absolutely,” Mr. Roberts said.
“An extra layer of expense is going to provide real problems if we remain at these low levels of interest,” he said.
The SEC is considering three alternatives for funding a capital buffer, Ms. Schapiro said last week.
The capital could come from money market fund sponsors, fund shareholders, or from the market through debt or equity offerings.
In addition, the SEC staff is looking at whether the commission should impose redemption restrictions, Ms. Schapiro said.
Some said that it won't even matter how the buffer is funded.
“Everything ultimately gets passed on to the end user,” Mr. Roberts said.
Fidelity Management & Re-search Co., The
Charles Schwab Corp. and Wells Fargo Funds Management LLC told the SEC in May that they support the creation of a NAV buffer to be funded by taking a portion of income paid to shareholders over time and use it to maintain redemptions at $1 a share.
Fidelity spokesman Adam Banker said last week that a buffer would be easy to implement and would retain the current core structure of money market funds.
It also would allow funds to handle volatility and sell securities during times of market stress, he said.
“Our modeling has shown that a fund with a NAV buffer could withstand significant redemptions and market losses, and still maintain a NAV above $1,” Mr. Banker said.
The approach for which the Investment Company Institute had pressed, creation of a liquidity facility that would be formed as a state-chartered bank or trust company, appears to be off the table.
ICI chief executive Paul Schott Stevens said in a statement that higher costs “would make large numbers of advisers unwilling or unable to continue to sponsor these funds.”
The slew of comments that will follow the SEC proposal likely will include those who argue that additional regulation is unwarranted.
“In the middle of the worst crisis since the Great Depression, only one fund broke the buck, and the SEC prosecuted the fund sponsor for fraud,” said Todd Cipperman, a securities firm compliance attorney and principal at Cipperman & Co. and Cipperman Compliance Services. “The private market stepped up and supported all the funds.”
CAPITAL BUFFER
The capital buffer would reduce “the disincentive against making risky investments” and make money market funds more expensive to operate, Mr. Cipperman said.
One industry lawyer is surprised that money market funds seem to be leapfrogging over another industry concern, the issue of 12(b)-1 fees.
“It was understood that more would be coming to address larger money fund concerns that tweaking wouldn't get at,” said Josh Sterling, a securities lawyer and partner at law firm Bingham McCutchen LLP.
Now it appears that the concerns about money market funds are on track for resolution before the 12(b)-1 fee issue is finalized, he said.
The SEC had said that this past summer, it would address a 12(b)-1 fee proposal that it introduced the previous summer to cap “marketing and service” fees at 0.25%. Greater amounts would be considered a sales charge and would be limited to the highest fee charged by the fund for shares without such a fee.
The SEC received more than 2,400 comment letters on that plan, mostly in opposition.
Email Liz Skinner at [email protected] and Mark Schoeff Jr. [email protected]
