SEC to Look at Steps to Prevent Runs on Money Market Funds

WASHINGTON, D.C. -- The Securities and Exchange Commission is set to meet next week to address how to prevent runs on money market funds that could disrupt the $2.7 trillion market and the nation's financial system as a whole.

The federal regulator will hold a roundtable involving industry experts, academics, other regulators and agencies making up the newly created Financial Stability Oversight Council at its headquarters at 2 p.m. Tuesday. Here is a list of participants.

They will look at various existing proposals, such as the liquidity emergency facility proposed by the Investment Company Institute, as well as liquidity buffers, capital requirements, floating net asset values and two-tier money market structures, among others, that have come since the release last year of a report by the President's Working Group on potential ways to create more stability and resiliency, in the face of financial crises.

The roundtable will look at "what further steps can be taken to ensure that we don't have a run on money market funds that spreads broadly throughout the financial system and has the potential for" having a reverberating impact, SEC chairman Mary L. Schapiro told money market and other mutual fund executives at the General Membership Meeting of the Investment Company Institute.

The discussion comes less than three years after the failure of the nation's oldest money market fund, the Reserve Primary Fund, which suffered a run on its assets in September 2008 because those assets were concentrated in Lehman Brothers holdings. The fund's net assets "broke the buck," meaning their value fell to 97 cents a share, instead of $1, the bedrock promise of shares in these funds.

To prevent a recurrence of the Reserve collapse, where the U.S. government actually stepped in and provided reserve funds to Reserve shareholders, the Investment Company Institute in January proposed the creation of an industry-funded Liquidity Facility, for a future emergency.

But exchange-traded fund giant BlackRock and mutual fund paragon Fidelity Investments want funds to stand on their own. BlackRock wants "special purpose entities" created (and regulated) that can only operate money market mutual funds. And Fidelity recommends that every fund be required to retain a portion of its income to build a reserve against potential losses.

Here's how the three approaches stack up.

On May 16, the Investment Company Institute (ICI) will host its own one-day money market fund summit.

ICI, the national association for bond, stock and money market mutual funds, plans to bring together top analysts and industry leaders to discuss the current state of money markets, progress to date in strengthening money market funds since the financial crisis and the future of money market fund regulation.

The summit will be held Monday, May 16, at the St. Regis Hotel in Washington.