WASHINGTON — The Securities and Exchange Commission formally released a series of final changes to its Rule 2a-7 on money market funds Tuesday aimed at boosting the resilience of funds during market crises, and set a March 5 effective date for them.
The commission voted 4 to 1 on Jan. 27 to approve the changes, which the industry generally applauded as improvements to fund transparency, credit quality and liquidity.
The extensive money market fund rule changes originally were proposed in June largely in response to a run on the Reserve Primary Fund, which “broke the buck,” or fell below a $1.00 NAV — net asset value — in 2008, when Lehman Brothers bonds it owned defaulted following that firm’s collapse and fund investors rushed to sell their shares.
The rule changes address fund liquidity and disclosure requirements as well as funds’ reliance on rating agencies. Notably, they include a requirement that funds enhance their disclosures by reporting on a delayed basis a “shadow” NAV, meaning the fund’s actual net “mark to market” NAV, rather than the stable $1.00 NAV at which fund shares are bought and sold. The shadow NAV must be reported on a monthly basis with a 60-day lag.
In addition, the changes would permit a fund that has “broken the buck” to suspend redemptions while it undertakes an “orderly liquidation” of assets.
The changes also 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.
Even as the commission voted on the measures last month, SEC chairman Mary Schapiro stressed that the commission staff are considering additional reforms, some of which are controversial. They include a floating, rather than stable, $1.00 NAV. The industry opposes the floating NAV concept.
Only one commissioner, Kathleen Casey, a Republican, voted against the changes, saying that they go “in the wrong direction.” She complained that some of the changes would give nationally recognized statistical rating organizations, or NRSROs, “new and more exalted legitimacy” rather than decrease the reliance on their ratings in federal rules and regulations.
Rule 2a-7 generally requires that funds invest in securities rated double-A or higher, though they must perform an independent credit analysis of the assets that they purchase. The rule also allows them to invest in high-quality, unrated securities.
Specifically, the proposal opposed by Casey would require fund boards to annually designate at least four NRSROs whose ratings it considers reliable, permitting a fund to disregard ratings by agencies that the fund has not designated.
SEC staff said the provision would satisfy certain minimum rating requirements for funds while fostering NRSRO competition.
Elisse Walter, a Democratic commissioner, who said she shares Casey’s concerns about the references to NRSROs, said eliminating them would weaken investor protections. She said she was swayed by arguments that the references are needed in this particular rule.
