Industry Opposes Both SEC Proposals to Regulate Money Market Funds

The Securities and Exchange Commission (SEC) is looking into two new proposals to stabilize money market funds. One of Chairman Mary Schapiro’s goals is to address the core structural weaknesses of the market. She stated, “Funds remain vulnerable to the reality that a single money market fund breaking of the buck could trigger a broad and destabilizing run.” The SEC is hoping to put both plans out for public comment, but it believes that it may adopt only one of the plans. If it chooses to adopt one, then the SEC will propose it before the end of March.

The SEC’s first proposal is to adopt a floating net asset value instead of the traditional $1 share price. This idea was also mentioned back in 2009; however it was not implemented. The second proposal would require funds to maintain a 1% capital cushion designed to absorb potential losses and to hold back at least 3% of client redemptions for 30 days.

The industry has shown outward hostility toward both of these proposals. The Investment Company Institute (ICI) has been very verbal about their reluctance to implement one of these proposals. President of ICI Paul Schott Stevens stated as quoted in Industry Attacks SEC Proposals to regulate Money Market Fund, “My concern is that within the councils of government there are people whose agenda it is to kill money market funds. We won’t go quietly.”

Fidelity Investments, the largest money-market fund manager, has also verbalized its opposition to the new proposed rules. It stated that if the SEC accepts the first proposal and allows the net asset value to fluctuate that more than half of its money fund clients would move all or some of their assets out of the investments. According to Fidelity, investors did not react well to these liquidity restrictions and 52% of retail investors would invest less or stop investing altogether in the money market funds if there was a 3% holdback feature on redemption. It claimed, “Given the importance retail investors place on the liquidity feature of money-market mutual funds, it is not surprising that investors reacted to negatively to a potential rule that would restrict access to principal” as quoted in Fidelity fights SEC money-market fund proposals.

Chief Executive Christopher Donahue of Federated Investors Inc. also had a very negative reaction to these proposals. He plans to take the next step and sue the SEC if the new regulations interfere with his firm’s ability to do business.

As well as these industry leaders, commissioners of the SEC are also not sure about these proposals. Three commissioners have expressed doubts about the need to reform. This concern is due to the fact that in 2010, the SEC already implemented rules for money market funds. The changes implemented included liquidity requirements, shorter maturity limits and enhanced disclosure mandates. Commission Dan Gallagher said, “As far as I know, theses issues were fully vetted in 2010. There has to be data that shows the need to act in this space or data that show that you don’t. But I just haven’t seen that yet.” Chairman Mary Schapiro does not believe that the rules implemented in 2010 are sufficient and still strongly believes that money market funds are susceptible to runs.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.