Securities and Exchange Commission members on Wednesday unanimously agreed to propose reforms for money market funds, which muni market participants greeted with mixed reaction.
The commission directed staff to propose rules for money market funds to make them less susceptible to runs, such as those that occurred in 2008 when the Reserve Primary Fund “broke the buck” and investors pulled nearly $300 billion from other prime money market funds.
The proposed reforms consist of two alternatives. The first would require that all institutional prime money market funds operate with a floating net asset value (NAV), instead of the current stable NAV of $1.00 per share. The other would allow money market funds to use a stable NAV, but would require them to impose a 2% liquidity fee if the fund’s weekly liquid asset level falls below 15% of total assets, unless the fund’s board determines this was not in the best interest of the fund. After falling below the 15% weekly liquid asset threshold, the fund’s board also would be able to temporarily suspend redemptions in the fund for up to 30 days.
Government money market funds would be exempt from this requirement. A government money market fund would be defined as any money market fund that holds at least 80% of its assets in cash, government securities, or repurchase agreements collateralized with government securities. Government securities mean U.S. securities, sources said.
These options could be adopted either together or separately.
The SEC commissioners and market participants generally viewed these proposals as much more researched and acceptable than the ones proposed in 2012 and championed by then-chairman Mary Schapiro. Those proposals would have required funds to use a floating rate NAV and were roundly criticized by money market funds as well as state and local governments, who maintained that previous money market reforms adopted in 2010 were sufficient to curb systemic risk.
Schapiro could not drum up enough support from the commissioners, including Daniel Gallagher, who spoke about his change of heart now that the proposal no longer includes the “capital buffer” featured last year. That proposed reform would have required money market fund advisors to hold on to a small amount of capital as a reserve fund to draw on in emergencies.
“I believe last year’s draft proposal was never intended to be serious about floating the NAV,” Gallagher said. “Floating NAV was included in the proposal merely as a stalking horse intended to intimidate money market fund stakeholders into accepting the other initiative in last year’s proposal, the so-called ‘capital buffer.’ It is critically important to me that today’s proposal does not include the capital buffer alternative.”
Gallagher added that the previous proposal would not have worked as intended. “It would not have stopped mass redemptions in 2008,” he said. “It would not have prevented MMFs from breaking the buck.”
SEC chairman Mary Jo White said she believed the floating NAV approach could achieve the commission’s goals in several ways. “First, by eliminating the ability of early redeemers to receive $1, even when the fund has experienced a loss and its shares are worth somewhat less. This proposal should reduce incentives for shareholders to redeem from institutional prime money market funds in times of stress,” she said. “Second, the proposal increases transparency and highlights investment risk because shareholders would experience price changes as an institutional prime money market fund’s value fluctuates. Third, the proposal is targeted by focusing reform on the segment of the market that experienced the run in the financial crisis.”
The SEC is seeking public comments on the proposed reforms, but if they are adopted, money market funds that invest in munis would be require to meet the liquidity fee and redemption gate proposals. They would only have to meet the floating NAV requirement if they are institutional, not retail, funds. The SEC defines a retail money market fund as one that limits each shareholder’s redemptions to no more than $1 million per business day.
Commissioner Elisse Walter, a driving force behind the SEC’s recent interest in the muni market and of these new proposed reforms, said she wanted to hear comments on whether funds that invest in munis would be willing to submit to that restriction and thus be exempt as retail funds.
All together money market funds currently hold nearly $3 trillion in assets and the floating NAV would affect about 30% of these funds, the SEC said. But the commission’s definition of a retail fund differs significantly from the ones used by companies that compile fund statistics, making it difficult to gauge the impact.
Timothy Cameron, managing director and head of the Securities Industry and Financial Markets Association’s Asset Management Group, said the group can back the gates and fees proposal but has reservations about a floating NAV.
“Overly broad regulation of money market funds, including a general mandate to float net asset values, would lead to serious negative consequences for the U.S. financial system and the broader economy and would be ineffective in preventing runs. Investors would have fewer choices for cash investing and would lose the benefits of these relatively safe and highly liquid products that provide an attractive alternative to a deposit account,” he said. “We urge the SEC to keep any final reform limited in scope and supported by empirical data.”
Bond Dealers of America president and chief executive officer Mike Nicholas urged the SEC to tread cautiously but said the regional broker-dealers group would work with the commission on the issue.
“The BDA views the money market fund vehicle as an essential component of taxable and tax exempt short-term financing for our capital markets,” said Nicholas. “State and local governments and corporations depend upon the short-term financing provided by money market funds on a daily basis.”
“As we have long maintained, any proposal to make money market funds even more resilient must be judged against two principles,” said Investment Company Institute president and chief executive officer Paul Schott Stevens. “First, changes must preserve the key features of money market funds that have made them so valuable to investors and so important to the businesses and state and local governments that rely upon these funds for financing. Second, changes must preserve choice for investors by ensuring a continued robust and competitive global money market fund industry.