WASHINGTON - The Investment Company Institute, which represents mutual funds and other investment companies, is pushing for a series of regulatory changes to make money market funds more liquid and transparent, as Obama administration advisers push for more sweeping changes to the industry.
In a 216-page report released yesterday, ICI called on the Securities and Exchange Commission to add provisions to its Rule 2a-7 that would require all money market funds to be able to sell at least 20% of their assets within seven days, if necessary to maintain liquidity. Taxable funds would be required to be able to sell at least 5% of their assets within one day under the money market fund rule.
The report also recommends that the Treasury Department extend until Sept. 18 a $50 billion guarantee program for money market funds.
The program, which is currently set to expire on April 30, was hastily put together last fall to stop investors from pulling investments out of their money market funds amid the market turmoil immediately following the collapse of Lehman Brothers and a run on the Reserve Primary Fund, a taxable money market fund that had exposure to the firm's debt.
John J. Brennan, chairman of ICI's money market working group, which wrote the report, and chairman of the Vanguard Group, said: "The recommendations respond directly to weaknesses in current money market fund regulation, identify additional reforms that will improve the safety and oversight of money market funds, and will position responsible government agencies to oversee the orderly functioning of the money market more effectively.''
As of January, money market fund assets totaled $3.9 trillion, according to ICI. For the week ending March 9, $482 billion was held by tax-exempt funds, according to an estimate by the Money Fund Report, a service of iMoneyNet.com.
In its report, ICI calls on the SEC to authorize an internal fund "circuit breaker" allowing funds to temporarily suspend redemptions and purchases of fund shares for up to five business days if a fund has either broken, or "reasonably believes" it is about to break, a net asset value of $1 per share - otherwise known as breaking the buck.
ICI also urges the SEC to amend 2a-7 to reduce the weighted average maturity limitation to 75 from 90 days. The stricter limitation is designed to ensure that a money market fund's overall sensitivity to changing interest rates does not jeopardize its ability to maintain a stable net-asset value. In addition, the group proposes a new "spread WAM" that does not exceed 120 days to further insulate investors funds and shareholders from volatile markets.
ICI reiterated the industry's opposition to the SEC removing from 2a-7 references to the ratings of nationally recognized statistical rating organizations, which market participants use to comply with the rule's risk requirements.
The SEC proposed removing the NRSRO references from the rule last year. But ICI said the commission should instead amend the rule to require money market fund advisers to designate and publicly disclose a minimum of three NRSROs that the adviser will monitor for determining the eligibility of a fund's securities.
The ICI report opposes floating NAVs as well as bank-like regulation for the industry - two of the recent recommendations made in a report written by former Federal Reserve chairman Paul Volcker for the Group of 30 economic council. Volcker is also chair of the President's Economic Recovery Advisory Board.
But ICI believes those recommendations would not reduce systemic risk and may scare off investors in money market funds.
"Fundamentally, changing the nature of money market funds (and in the process eviscerating a product that has been so successful for both investors and the U.S. money market) goes too far and will create new risks," the group said in the report in response to the idea of a floating NAV. It warnde that "because of the very real and well-ingrained institutional and legal motivations driving the demand for a stable NAV product, investors will continue to seek such a product."
SEC spokesman John Nester said: "We appreciate the ICI's attention to these issues and look forward to analyzing the report to help inform the SEC's anticipated rule proposals to strengthen the money market fund regulatory regime."
A Treasury spokesman could not be reached for comment.