WASHINGTON - The Securities and Exchange Commission voted unanimously yesterday to propose sweeping changes to the way tax-exempt and other money market funds are regulated in response to the financial crisis and the unprecedented havoc caused by the run on a taxable fund last fall.
The proposals - which will be subject to public comment for 60 days after they are published in the Federal Register - are designed to make the roughly $4 trillion money market fund industry more resilient to economic stresses and less exposed to such runs by investors.
Tax-exempt funds settled with $463.01 billion in total assets for the week ending June 15, according to the Money Fund Report, a service of iMoneyNet.com.
"I believe that the proposal the commission is considering today will go a long way toward better protecting investors and making money market funds more resilient to short-term market risks," SEC chairman Mary Schapiro said.
The proposals would shorten the weighted average maturity of fund holdings to 60 from 90 days, restrict funds from investing in so-called second-tier securities, require fund managers to conduct periodic stress tests to ensure they can maintain a stable net-asset value, and require monthly disclosures of holdings to both the SEC and investors.
In addition, the proposals would permit a fund that has "broken the buck" to suspend redemptions while it undertakes an "orderly liquidation" of assets. A firm breaks the buck when its net asset value drops below $1 per share.
One proposal that applies only to taxable funds would require retail and institutional money-market funds to hold a portion of their assets in cash or other instruments that can be converted into cash within one day. The provision does not apply to tax-exempts because there is a dearth of variable-rate demand obligations that are money-market eligible and reset on a daily basis, SEC officials said.
But Robert Plaze, associated director for regulation in the SEC's division of investment management, noted that the commision is seeking comment on whether a part of the liquidity proposal should apply to tax-exempts: the requirement that 15% of a retail money-market funds' assets, or 30% of an institutional fund's assets, be convertible to cash within one week.
Meanwhile, the agency is asking for comment on whether it should propose requiring a floating net-asset value rather than a stable share price and eliminating credit rating agency benchmarks in the SEC's Rule 2a-7 on money market funds. The SEC rule generally requires that all money-fund eligible securities be rated at least double-A by two nationally recognized statistical rating organizations.
Though the some market participants have argued that a floating NAV may better insulate investors from a run on funds, the Investment Company Institute, an industry group, yesterday reiterated its strong opposition to moving to a floating NAV,
"Such a change would be so unpopular with investors that it would likely push them into riskier, less-regulated products," the ICI said in a statement. However, it added that it "strongly supports" the SEC's goals of boosting credit quality, liquidity and maturity standards for money market fund holdings.
Speaking to reporters following the SEC vote, Plaze said that "there are really good arguments" for and against a floating NAV, and the SEC staff officials "simple weren't ready" to make a recommendation on this issue without public comment.
Both the ICI report and the SEC's proposals stem from a run last September on the Reserve Primary Fund, a taxable money market fund that had exposure to Lehman Brothers' debt and became the first fund to break the buck following the firm's collapse.
The primary fund's collapse had "ripple effects" for other money market funds, Schapiro said during the meeting, noting that during the week of Sept. 15, investors withdrew about $300 billion from "prime" money market funds, or 14% of the assets held in those funds.
A white paper on financial regulatory reform issued last week by the Treasury Department urged the SEC to continue its efforts to strengthen the money market fund regulatory framework, and called on the President's Working Group on Financial Markets to study whether fundamental changes, such as a floating NAV, are necessary.
Plaze said the SEC may act on the proposed rule changes first and then consider whether it should propose further restrictions based on the comments received. He also said there would be a transition period before the funds would have to implement the rules so that they would not have to sell off securities to meet them.
