WASHINGTON - The Securities and Exchange Commission yesterday published rule changes that would make money market funds less susceptible to market turmoil and runs by investors, and asked for public comments on the proposals to be submitted by Sept. 8.
The five-member commission voted unanimously two weeks ago to propose the rule changes for the roughly $4 trillion money market fund industry.
The proposals and request for comments were published in the Federal Register yesterday.
The proposed rule changes would seek to make money market funds safer by requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash and to reduce the weighted average maturities of their portfolios.
The rule changes also would permit a fund that has "broken the buck" to suspend redemptions to allow for the orderly liquidation of its assets.
In addition, the commission is proposing to restrict funds from investing in so-called second-tier securities, as well as to require fund managers to conduct periodic stress tests to ensure they can maintain a stable net-asset value and make monthly disclosures of holdings to both the SEC and investors.
The SEC also is seeking comment on more controversial measures that it is considering proposing, including whether it should require funds to maintain a floating net-asset value rather than a stable share price.
In its rulemaking notice, the SEC says that funds serve as a "substantial" source of financing in the broader capital markets and hold 65% of state and local government short-term debt. The amount of short-term debt, in turn, represents 22% of all state and local government debt, according to the commission.
"As a consequence, the health of money market funds is important not only to their investors, but also to a large number of businesses and state and local governments that finance current operations through the issuance of short-term debt," the SEC wrote in the notice.
One of the controversial issues on which the SEC is merely seeking comment is whether it should strip its Rule 2a-7 of explicit references to credit rating agencies designated as nationally registered statistical rating organizations, or NRSROs.
The SEC rule generally requires that all money-fund eligible securities be rated at least double-A by two NRSROs. This is the third time since 2003 that the SEC has asked the public to address the issue of rating agency references in rules.
The commission previously sought to eliminate references to NRSROs in its and other agency rules to avoid a so-called moral hazard that could be caused by the SEC's seeming endorsement of the ratings. But the industry has widely criticized such efforts, which one fund manager last year compared to driving a car without seat belts.
Nevertheless, the SEC asks commentators for "alternatives ... to encourage more independent credit-risk analysis."
"Should we consider establishing a roadmap for phasing in the eventual removal of NRSRO references from the rule?" the commission asked. It noted that it's also considering requiring a money market fund's board to designate three or more NRSROs that would determine whether a security is eligible for the fund.
The proposal to decrease the average fund-portfolio maturity would shorten the maximum weighted average maturity of fund holdings to 60 from 90 days. Though the Investment Company Institute recommended the WAM be shortened to 75 days, the SEC said a 60-day weighted average is "more appropriate" because most funds have historically maintained maturities shorter than that and a number of European money funds with stable share prices are limited to a 60-day WAM.
The SEC also is seeking comment on a proposal to limit the weighted average life maturity, or WAL, of a portfolio to 120 days. The WAL was recommended by the ICI, which describes it as a "spread WAM."
