“The status quo of implicit guarantees for money funds is unacceptable, just as it was for Fannie Mae and Freddie Mac in the decades leading up to the financial crisis.” SEC Commissioner Daniel Gallagher
SEC Approves Tighter Money-Fund Rules
Plan Allows Funds to Temporarily Block Withdrawals in Times of Stress
By ANDREW ACKERMAN and KIRSTEN GRIND
Updated July 23, 2014 6:11 p.m. ET
U.S. regulators approved rules intended to prevent a repeat of an investor exodus out of money-market mutual funds during the financial crisis, addressing one of the biggest unresolved issues from the 2008 meltdown.
The asset-management industry, long wary of stricter rules, largely said it could live with the new regulations, which the Securities and Exchange Commission backed in a 3-2 vote.
Photographs from left: Reuters; Bloomberg News (3); Prensa Internacional/Zuma Press
The rules would require prime money funds catering to large, institutional investors to abandon their fixed $1 share price and float in value like other mutual funds. Prime funds sold to individual investors can keep the $1 share price. The rules also allow all money funds to temporarily block investors from withdrawing cash in times of stress or allow the funds to impose fees for investors to redeem shares.
“This strong reform package will make our financial system more resilient,” SEC Chairman Mary Jo White said. Companies will have two years to comply with the new restrictions. Prime funds invest in short-term corporate debt. Money funds that purchase short-term Treasurys and debt issued by government agencies are excluded from the floating-share-price requirement.
Paul Schott Stevens, president and chief executive of the Investment Company Institute, an industry group that had resisted floating share prices, said it “may question some aspects” of the rules but said the SEC has “proceeded thoughtfully to craft a robust and meaningful” set of rules.
Nancy Prior, president of fixed income for Fidelity Investments, said “our initial reaction is that the SEC has struck a reasonable balance.”
Boston-based Fidelity was among the large fund companies that spent years lobbying the SEC against stricter regulation. Fidelity also ranks as among the largest holders of institutional money-fund assets, with $100.7 billion, according to money-fund research firm Crane Data LLC.
Ms. Prior said she doesn’t think the new rules will cause Fidelity’s institutional clients to immediately pull their money from the funds.
The rules are aimed at making the $2.6 trillion money-fund industry less prone to investor runs by training institutional investors to accept fluctuations in the value of their investments. The SEC also hopes to ensure funds catering to both individual and institutional investors have tools to limit outflows.
Money funds are short-term instruments used by corporations, individual investors and municipalities to safely park cash. The 2008 exit from money funds threatened to freeze corporate lending markets.
The regulations are arguably not as far reaching as a proposal that sputtered in 2012. Fund companies that cater to individual investors won support for an approach that focuses some requirements on institutional investors, who exited the funds at a far greater rate than individual investors during the crisis. Still, Marie Chandoha, president and chief executive of Charles Schwab Corp.’s mutual-fund arm, said funds will undergo “a total makeover in their inner workings” because of the rules, which also require greater transparency about the health of the funds and tighter restrictions on certain funds’ investments.
Jerome Schneider, a managing director at Pacific Investment Management Co. in Newport Beach, Calif., and head of the short-term funding desk, called the new SEC rules an “evolutionary change in liquidity management.”
Cathy Gregg, a partner at Chicago-based Treasury Strategies, a consultant to institutional clients that use money funds, said she expects an initial pullback from investors. “I think there’s going to be some segment of them who will have to stop using money-market funds because they’re not permitted to invest in a floating rate product like that” according to their investment guidelines, she said.
In a statement on its website, Pittsburgh-based Federated Investors Inc. said it was “disappointed” that the SEC voted to adopt a floating share price for institutional funds, saying the change would impose “significant and costly daily operational burdens on money-market fund users.” But Federated, the company perhaps most affected by the rules because its business is so heavily focused on money funds, said there was no imperative for clients to change their cash-management tools right away, because the new rules don’t take effect for two years.
Mary Jo White (Independent), chair of the U.S. Securities and Exchange Commission Reuters
Kara Stein, one of two SEC commissioners to vote against the effort, said she feared the redemption restrictions would spark, rather than curb, investor flight from the funds in a crisis. That concern is shared by some fellow policy makers, including the presidents of all 12 Federal Reserve Banks.
The Financial Stability Oversight Council, a panel of top regulators created by the Dodd-Frank financial-overhaul law, pushed the SEC to address risks posed by the funds but has expressed concern about limiting investor redemptions. In a statement Wednesday, the panel said it would examine the SEC’s new rules.
Sheila Bair, a former head of the Federal Deposit Insurance Corp. during the financial crisis and supporter of tighter money-fund rules, said she is concerned the SEC’s approach is “too limited” to address systemic risk posed by the funds and that the new redemption limits “could exacerbate it.”
Vanguard Group Chairman and Chief Executive Officer F. William McNabb III, who was instrumental in the industry’s lobbying effort, said he was generally pleased with the rule changes in part because they wouldn’t greatly affect small investors.
During the financial crisis, the Reserve Primary Fund “broke the buck” by falling under the $1-a-share value funds seek to maintain. Investors yanked money from the fund, igniting a wider panic that eased only after the federal government stepped in to backstop all money funds.Write to Andrew Ackerman at firstname.lastname@example.org and Kirsten Grind at email@example.com Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit djreprints.com