Money market funds will have to disclose on a delayed basis their fluctuating “shadow” net asset values rather than their $1-per-share value, thanks to a rule that the Securities and Exchange Commission adopted last week.
Under the rule, money market funds will be priced at the $1-per-share value, but funds will also have to report the “floating” value based on the market value of their underlying securities after 60 days.
The SEC adopted the rule by a vote of 4 to 1, with commissioner Kathleen Casey voting against it.
The mutual fund industry, led by the Investment Company Institute, has strongly opposed resorting to a floating-rate NAV, arguing that it has the potential to cause a run on the funds when values decline.
But Peter Crane, president of Crane Data LLC, which tracks money market fund performance, said that requiring money market funds to disclose a shadow NAV on a delayed basis is “a baby step toward more transparency in the actual NAV.”
The concern is that either a floating rate or a shadow price will be interpreted the wrong way by investors, he said.
“If [investors] see $0.999 [per share] they're going to say, "Oh my God, my fund broke the buck,' when these are just normal fluctuations that happen all the time,” Mr. Crane said.
The yield on money market funds is likely to decline by 0.1% as a result of the changes, Mr. Crane wrote in an e-mail. However, most of the decline is already reflected in fund returns, since most of the funds have already started operating under the new rules, which were first proposed in June, he wrote.
In a fact sheet issued last week, the SEC said that the new disclosure requirement will allow the regulator and fund investors “to better assess the risk profile of a money market fund and acclimate investors to the idea that money market funds may not always maintain a stable $1 share value.”
“While no set of rules could make money market funds impervious to risk of loss, money market fund investments will be safer as a result of [Wednesday's] action,” SEC Chairman Mary Schapiro said. Money market fund investors will have a better sense of the holdings, value and risk profile of their money market funds as a result of the new rules, she said.
Ms. Schapiro pledged to pursue more rule changes to protect money market funds from the risk of runs. She said that the SEC may contemplate adopting a real-time floating NAV, requiring mandatory redemptions in kind for large redemptions by institutional investors, setting up a private liquidity facility for the funds in times of stress, and adopting a two-tiered system of money market fund regulation with a stable NAV for funds subject to greater risk-limiting conditions and liquidity requirements.
Ms. Casey questioned, however, whether the additional issues outlined by Ms. Schapiro will receive enough consideration. The new regulations adopted last week “simply do not go far enough,” Ms. Casey said.
Without more fundamental regulatory reforms, she argued, money market funds will remain susceptible to runs and investors will view them as being implicitly guaranteed by the government, which stepped in to stop a run on the funds in September 2008 after the Reserve Management Co.'s Primary Reserve Fund's value dropped below $1 a share.
Money market funds either need to be backed by liquidity facilities, in which case they should be regulated like banks, or they should be priced based on a floating NAV, Ms. Casey said.
At the very least, she called for providing shadow pricing information closer to real time.
“Part of the reason we are releasing information after so long a delay is because we fear that greater transparency may result in runs,” Ms. Casey said. That is reason to question the regulatory model, she said.
Other steps taken by the SEC to revamp money market fund rules included tightening maturity and credit quality standards and imposing new liquidity requirements.
The new rules will restrict the maximum weighted average maturity of fund portfolios to 60 days, down from the current 90-day limit.
For all taxable funds, at least 10% of assets must be in cash, Treasury securities or securities that can be converted to cash within a day. At least 30% of assets must be in the same type of liquid investments that can be converted within a week.
New limits will be placed on funds' ability to acquire lower-quality securities, prohibiting funds from investing more than 3% in such securities, instead of the previous limit of 5%.
Fund boards will be able to suspend redemptions if a fund is about to break the buck, and a board can decide to liquidate a fund in order to allow for an orderly sell-off of the portfolio. Affiliates of money market funds will be able to purchase distressed assets to protect a fund from losses.
Funds will be required to hold enough liquid securities to meet foreseeable redemptions by identifying institutional investors who are more likely to make large redemptions.
In a statement, Paul Schott Stevens, president and chief executive of the Investment Company Institute, urged that the SEC not “take steps that would undermine money market funds' value to investors or the significant role that these funds play in the U.S. economy.”
The ICI will continue to oppose strongly any move that would require money market funds to abandon the $1 fixed NAV “that has been a defining feature of these funds,” he said. Changing to a floating NAV could inflict “serious damage” on investors, markets and the economy, he said.
Money market funds currently hold $3.3 trillion.
E-mail Sara Hansard at [email protected].
