Six years after the financial crisis, the Securities and Exchange Commission adopted new rules for money funds. While some were happy with the balance, others found that the compromise still didn’t hit the mark.
William Alden had this story in The New York Times:
Regulators on Wednesday imposed new restrictions on a vast market that played a major part in the 2008 financial crisis.
By a 3-to-2 vote, the Securities and Exchange Commission adopted a set of new rules for money market funds, a $2.6 trillion industry where ordinary individuals and sophisticated institutions alike park their cash. The rules come after years of debating among regulators and lobbying from Wall Street.
The new rules “will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system,” Mary Jo White, the S.E.C. chairwoman, said in a statement. “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investors.”
The Wall Street Journal story by Andrew Ackerman and Kirsten Grind detailed the new rules and said that many in the industry found them a good balance:
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.”
Writing for USA Today, Jayne O’Donnell said that despite the praise, many were unhappy with the process and how the rules turned out:
Still, SEC Commissioner Luis Aguilar called the rule-making process “one of most flawed and controversial” the commission had ever undertaken.
Attorney Joan Ohlbaum Swirsky, who wrote a handbook on money-market mutual funds, said it was “pretty draconian” for SEC to require floating NAVs (net asset values) plus fees and/or gates at the same time.
“They are two significant reforms that will make the funds less appealing to many investors,” says Swirsky.
Some commenters had asked for the 30% liquidity level to be lower, says Swirsky, who is counsel with the law firm Stradley Ronon Stevens & Young and represented clients commenting to the SEC.
The rule could prompt shareholders to become uninterested in funds that float or are not totally liquid and move to government or FDIC-insured products, which could have a big effect on the capital market, she says.
Former Federal Deposit Insurance Corporation chair Sheila Bair, on the other hand, thinks the SEC didn’t go far enough. Bair now chairs the Systemic Risk Council, a non-profit and non-partisan group of former government officials and other financial experts working on financial risk issues.
The Reuters’ story by Sharon N. Lynch detailed some of the events that led regulators to examine the money funds and change the rules:
The final adoption of the reforms was the culmination of years of fierce debate, dating back to the financial crisis.
In 2008, the Reserve Primary Fund’s exposure to Lehman Brothers prompted panicked investors to withdraw their money in a run that led the fund to “break the buck.”
That in turn forced the Federal Reserve temporarily to backstop the $2.6 trillion industry until the chaos subsided.
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The laundry list of reform possibilities over the years has included an industry-backed liquidity facility, minimum risk balances, capital buffers, a floating NAV and liquidity fees and gates.
In a separate story, Tim McLaughlin and Ross Kerber wrote for Reuters that the new rules could scare off some investors:
New rules announced on Wednesday will likely drive safety-oriented retail investors away from some money market funds because they highlight risks and make it harder to pull cash out when market turmoil strikes.
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Institutional prime money funds attract mostly professional investors and are considered more risky because of their exposure to short-term corporate debt. Investment advisers say money could flow away from these funds and into funds composed of safer government securities.
Bank-insured sweep accounts will be a clear alternative for the safety-first crowd, while short-duration bond funds appeal to investors hunting for higher yields, financial advisers said.
Money funds already have lost some luster during an extended period of near-zero interest rates. Investors typically receive yields of 0.01 percent on their money, a losing proposition if you factor in inflation.
Money fund providers have waived some $24 billion in fees over the past five years to give customers that yield.
Whether investors actually leave the funds or not, the new rules will likely increase fees as funds figure out how to comply with the new rules. Some may see withdrawals as investors shift to funds that offer more liquidity. But despite the debate, only another crisis will tell if they have strengthened the system – and no one is wishing for that.
