The Securities and Exchange Commission last week unveiled its money market fund proposals that, in part, seem to have won the support of its biggest critic: the Investment Company Institute.
The SEC's proposal includes two principal alternative reforms that could be adopted alone or combined into one package. One alternative would require a floating net asset value for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress.
Under the first alternative, prime institutional money market funds would be required to transact at a floating NAV, not at a $1.00 stable share price. Currently, money market funds "penny round" their share price to the nearest one percent (to the nearest penny in the case of a fund with a $1.00 share price). Under the floating NAV proposal, prime institutional money market funds instead would be required to "basis point round" their share price to the nearest 1/100th of one percent (the fourth decimal place in the case of a fund with a $1.0000 share price). Government and retail money market funds would be allowed to continue using the penny rounding method of pricing and maintain a stable share price.
Under the second alternative, money market funds would continue to transact at a stable share price, but would be able to use liquidity fees and redemption gates in times of stress. If a money market fund's level of "weekly liquid assets" were to fall below 15% of its total assets (half the required amount), the money market fund would have to impose a 2% liquidity fee on all redemptions.
Once a money market fund crosses this 15% threshold, its board of directors can impose a temporary suspension of redemptions (or "gate"). A money market fund that imposes a gate would need to lift that gate within 30 days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 30 days in any 90-day period.
Money market funds would be required to promptly and publicly disclose the fund crossing of the 15% weekly liquid asset threshold, the imposition and removal of any liquidity fee or gate, and a discussion of the board's analysis in determining whether or not to impose a fee or gate. Government money market funds would be exempt from the fees and gates requirement.
There is also a third option on the table. The SEC is considering whether to combine the floating NAV and the liquidity fees and gates proposals into a single reform package. If adopted in that form, prime institutional money market funds would be required to transact at a floating NAV and all non-government money market funds would be able to impose liquidity fees or gates in certain circumstances.
The SEC's proposals also include disclosure requirements whereby money market funds would be required to disclose on their website, on a daily basis, their levels of daily and weekly liquid assets and market-based NAVs per share. They would be required to promptly disclose the imposition or lifting of fee or gates, portfolio security defaults and -for funds that would continue to maintain a stable share price under either alternative-a fall in the fund's market based NAV per share below $0.9975, on a new form (Form N-CR).
The public comment period for the proposal will last for 90 days after its publication in the Federal Register.
"It has been a journey to get to this point," stated Mary Jo White, Chair of the SEC.
"Commission staff has spent literally years studying different reform alternatives and performing extensive economic analysis in arriving at these recommendations. These proposals are important in and of themselves and because they advance the public debate that will shape the final rules to address one of the most prominent events arising from the financial crisis."
White added that the SEC's goal is to implement an effective reform that decreases the susceptibility of money market funds to run risk and prevents money market fund events similar to those that occurred in 2008 from repeating themselves.
Paul Schott Stevens, president and chief executive officer of the ICI, said that: "We commend the Commission for the extensive research and discussion that the Chair, Commissioners and staff have devoted to examining money market funds in recent months. We are particularly pleased that the Commission recognized the effectiveness of liquidity fees and gates in addressing risks that might arise in a widespread crisis. We also welcome the inclusion of fees and gates as a standalone option in the proposal."
In a previous interview with Money Management Executive, Stevens noted that the 73-year-old trade association submitted follow-up proposals of its own, which include "redemption gates and liquidity fees that could be imposed to prevent 'run on a money market fund.'"
On Wednesday, J. Christopher Donahue, president and chief executive officer of Pittsburgh-based Federated Investors, the third-largest money fund operator managing $377.3 billion in assets as of March 31, reportedly said redemption fees and a temporary moratorium on redemptions would stop runs more than allowing money fund share prices to fluctuate based on the net asset value of the investments in a fund's portfolio.
"A floating [net asset value] has little if anything to do with stopping a run," he told attendees of the Keefe, Bruyette & Woods asset management conference in New York.
Donahue labeled the fluctuating share price proposal "the bad cop" and the redemption fees and moratoriums "the good cop." "We're going to go all in on the good cop," he said.
Boston-based Fidelity Investments, the biggest money fund purveyor with $420 billion in assets under management, said it is evaluating the proposed regulations. "We plan to provide the SEC-and our customers-with our perspective on these proposals in the near future," according to a statement on the firm's website.
"We will continue to advocate on behalf of all of our money market mutual fund shareholders and work with all policymakers as these important regulatory discussions continue. Our funds invest in money market securities of high quality, and our customers have full access to their investments anytime they wish."