WASHINGTON – The Securities and Exchange Commission this morning was set to vote on a series of proposed changes to its rule 2a-7 on money market funds designed to boost fund disclosures and liquidity.
The proposals include a requirement that funds enhance their disclosures by reporting on a delayed basis a “shadow” net asset value, or NAV, rather than the stable $1.00 NAV at which fund shares are bought and sold.
“I believe this new disclosure will impose a discipline on fund manager from taking undue risks that may result in disclosure of lower than expected shadow NAV,” SEC chairman Mary Schapiro said in opening remarks.
Even as the commission prepared to vote on the measures, Schapiro stressed that the SEC staff are considering additional reforms, including a floating NAV, a private facility to provide liquidity to funds in times of stress, as well as other options under discussion by the president’s working group on financial markets.
The SEC floated proposed changes to 2a-7 in June, partly in response to a run on the Reserve Primary Fund, which “broke the buck” when investors rushed to sell their shares following the collapse of Lehman Brothers in Sept. 2008.
In addition to the “shadow NAV” proposal, the commissioners also will consider proposals designed to boost fund liquidity by requiring that at least 30% of funds’ assets be in cash, Treasuries or certain government securities with maturity of 60 days or less, or securities that can concert into cash within one week.
The proposals redefines as “illiquid” any security that cannot be sold or disposed of within seven days at its “carrying value.”
The proposal would continue to limit a money market fund’s investment in securities rated generally in the top two rating categories by nationally recognized statistical rating organizations, or NRSROs.
At the same time, the rules also would continue to require money market funds to perform an independent credit analysis of every security purchased, the SEC said. “As such, the credit rating serves as a screen on credit quality, but can never be the sole factor in determining whether a security is appropriate for a money market fund.”
