The five members of the U.S. Securities and Exchange Commission today voted unanimously to move forward with new rules designed to safeguard money market funds and make them less susceptible to runs.
Both Democrat and Republican commissioners widely praised the proposed rules, which will be open for public comment for 90 days, calling them thoughtful, comprehensive and reasonable.
It's a marked contrast to the last time the issue was before the commission, in August 2012, when then-chairman Mary Schapiro failed to muster enough votes to move her proposal forward.
In the meeting this morning, Republican Daniel Gallagher, a former partner at Wilmer Cutler Pickering Hale and Dorr, contrasted Schapiro’s proposal, which he called “unfocused, unrefined, and, ultimately, un-implementable,” with the new effort. “As I sit here today, it’s hard to believe that we have produced such an excellent proposal given where this agency stood last August,” he said.
Money market funds hold nearly $3 trillion in assets. In the early 1980s, the SEC in Rule 2a-7 granted the funds an exemption, allowing them to maintain a stable share price of $1.00 instead of changing it according to the market value of the securities held by the fund.
But in the 2008 financial crisis, money market funds teetered dangerously after investors pulled out $300 billion, requiring unprecedented government intervention by the Treasury Department and Federal Reserve.
The SEC adopted limited money market reforms in 2010. Today, SEC Chair Mary Jo White unveiled two new alternatives to “address one of the most prominent events arising from the financial crisis,” she said.
The agency was under pressure to act by the Financial Stability Oversight Council, which issued proposed money market regulations last fall after the SEC failed to do so. In its 2013 annual report issued in April, the council said the SEC was “best positioned” to oversee money market reform, and agreed not to issue its final regulations provided the SEC “moves forward with meaningful structural reforms.”
The first proposal outlined by White would require all institutional prime money market funds to operate with a floating net asset value, or NAV. That means the share price would fluctuate, reflecting the fund’s changing value rather than holding steady at a set dollar.
The benefit of doing so, White explained, is that “by eliminating the ability of early redeemers to receive $1.00—even when the fund has experienced a loss and its shares are worth somewhat less—this proposal should reduce incentives for shareholders to redeem from institutional prime money market funds in times of stress.”
She also argued that the proposal “increases transparency and highlights investment risk because shareholders would experience price changes as an institutional prime money market fund's value fluctuates.”
Retail and government money market funds, which have historically not experienced runs, would be exempt from the rule.
Commissioner Troy Paredes, a Republican, was skeptical about the floating net asset value, though he voted in favor of moving the proposed rule forward for consideration. “At present, I remain unconvinced that floating the NAV is justified on a cost-benefit basis,” he said. “The floating NAV alternative suffers from a fundamental limitation.
Because money market fund investors will always prefer to exit at a higher price instead of a lower one, even if NAVs float, plenty of reasons will remain for investors to redeem, particularly during a period of financial turmoil … if a run does start, a floating NAV is unable to stop it.”
Paredes favored the second alternative: to permit money market funds to continue transacting at a stable $1 share price, but requiring them to impose a liquidity fee on redeeming investors if the fund’s weekly liquid assets drop below 15% of its total assets. Also, the fund's board would be able to temporarily suspend redemptions for up to 30 days—or "gate" the fund, if it fell below the 15 percent weekly liquid assets threshold.
White stressed that the two alternatives could also both be adopted and combined into a single package.