U.S. investors are accustomed to treating money-market mutual funds as the equivalent of a checking account. That is about to change for the riskiest of the funds.
The Securities and Exchange Commission will vote Wednesday to adopt new rules that will change the way prime money funds price their shares. Instead of a stable price of $1, which means a dollar invested can always be redeemed for $1, prime money funds would have to price their shares in a way that will reveal fluctuations.
The SEC’s vote concludes a four-year struggle by regulators to toughen regulations after a run at one fund during the 2008 financial crisis brought the $2.6 trillion industry to near- collapse, halted only by a federal backstop.
The strongest of the new measures are reserved for prime money funds, which cater to institutional investors and buy riskier securities, such as commercial paper. Retail investors won’t see changes in how their shares are priced.
The rules will be closely examined by money-fund managers such as Federated Investors Inc., which fought the plan arguing that a floating-share price won’t prevent the type of investor flight that occurred in 2008.
The SEC has sought to calibrate the new rules so that money funds remain a useful alternative to bank deposits.
“It neither makes money-market funds into banks or something akin to banks, nor walks away from the problem,” said former SEC Chairman Elisse B. Walter, who helped draft the proposed rules last year. “It is very much an appropriately tailored and powerful answer to what happened during the financial crisis.”
Business groups such as the U.S. Chamber of Commerce have fought the changes, arguing they will destroy the appeal of money funds, which have become bank-like products that corporations use to manage cash. The move to a floating share price also could require corporate investors to pay taxes on gains and losses, making them more complex to use, the Chamber argues.
Boeing Co. would move its cash out of the types of funds, known as prime funds, whose share price could fluctuate, said Verett Mims, the company’s assistant treasurer. Boeing has $2 billion to $3 billion invested in money funds, most of that in prime funds, she said.
The company’s trust investments unit, which manages its pension assets, began moving out of prime funds over a year ago because of the SEC’s proposals, Mims told reporters on a conference call organized by the Chamber.
“We have already seen some banks sell us products that really can’t replace what would be lost in our current money-market fund investments,” Mims said. “The proposals, the way they stand now, are going to push more cash to timed deposits with banks or more non-traditional funds where there is less visibility.”
The SEC, along with the Federal Reserve and Treasury Department, has pressed to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered a run on other money funds and helped freeze credit markets. The crisis calmed only after the Treasury temporarily guaranteed shareholders against losses and the Fed began buying fund assets at face value to help them meet redemptions.
According to the proposal, funds would have to comply with the new rules within two years.
Federated has previously threatened to sue to block the changes. A spokeswoman, Meghan McAndrew, declined to say this week whether Federated is still considering legal action. The Pittsburgh-based company oversaw $202 billion in U.S. money market mutual fund assets as of June 30, according to research firm Crane Data LLC in Westborough, Massachusetts.
The company has kept pressure on the SEC in recent months, arguing that the rules would create new, onerous tax-reporting obligations for investors. At least one SEC commissioner, Republican Daniel M. Gallagher, has said his support is conditioned on relieving the tax burden.
“Unless you waive or change the tax rules regarding recognizing gains and losses, every time you redeem shares you have gains and losses,” said George C. Howell III, a partner at Hunton & Williams LLP which represents Federated. “That is a huge administrative and systems problem for institutional investors who invest in money-market mutual funds.”
Money managers Vanguard Group Inc. and Fidelity Investments also have lobbied to shape the rules.
“We’re hopeful these new rules preserve the value and utility that money-market funds provide individual investors,” Vanguard spokesman David Hoffman said in an e-mailed statement.
The SEC’s rules also would allow boards of directors to temporarily suspend or impose fees on withdrawals when a fund faces an inability to meet redemptions, according to a person familiar with the matter. SEC Commissioner Kara M. Stein has questioned whether investors might respond to such a feature by fleeing funds that look like they might impose fees or lock up investors’ money.
It’s unclear how Stein, a Democrat who joined the SEC last year, will vote. Commissioner Michael S. Piwowar, a Republican, has said he won’t support the SEC’s proposal for a floating share price, which he views as unnecessarily strict. Gallagher, SEC Chair Mary Jo White and Commissioner Luis A. Aguilar appear ready to vote for the rules, forming the majority required for passage.
Adopting the rules will relieve some pressure on White, who has to contend with outside scrutiny of the SEC’s efforts. After an earlier set of proposals failed in 2012, under the previous SEC chief, the secretary of the Treasury demanded the SEC take action and warned that if the agency failed he would seek to impose reforms via the Financial Stability Oversight Council. The group, set up under the 2010 Dodd-Frank Act, has the power to require money funds, or the firms that sell them, to submit to extra oversight by the Fed.
Piwowar and Gallagher have joined congressional Republicans in blasting the council’s intervention. In a speech last week, Piwowar called the council the “Capital Markets Death Panel” and said banking regulators were trying to impose their solutions on investment products overseen by the SEC.
“If the commission votes to do something on Wednesday, it will show that it hasn’t undermined the authority of the commission to move forward,” Walter said. “The commission is doing it. That was the right answer.”
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