SEC Edges Closer to Final MMF Reform Plan

WASHINGTON — The Securities and Exchange Commission appears poised to soon finalize a plan to reform the $2.6 trillion money market mutual fund industry.

After years of failed attempts by the agency to complete new rules, SEC Chairwoman Mary Jo White hinted recently that a final regulation would be coming out in the "very near term."

Speaking at an Investment Company Institute conference, White said staff at the SEC were "intensely focused" on delivering rules that were not only "cost effective," but also "robust" and "workable."

The final step by the SEC has already taken nearly a year since it released a June proposal and dealt with significant pushback by mutual fund heavyweights like Vanguard and Fidelity Investments.

The agency last summer proposed two alternatives to revamp money funds in order to reduce their vulnerability to runs.

The first option would force the money funds that are the riskiest to abandon their $1 share price and float in value like other mutual funds. A second plan would require money funds to impose withdrawal fees and allow them to temporarily block redemptions.

"We continue to believe that the SEC will require MMFs that focus on institutional investors to either adopt a floating NAV or impose redemption limits if they are prime funds or invest in municipal securities," Jaret Seiberg, an analyst for Guggenheim Partners, wrote in a recent analyst note.

Those who are supportive of a floating NAV argue it would help to encourage investors to accept slight differences in the value of the shares, so it would create less of a panic if the price falls below $1.

A third option that has been floated is to combine both of the requirements. The SEC has weighed the issue publicly in a series of memos from economists, but has yet to draw a firm conclusion. The SEC's five-member board has had difficulty reaching an agreement on an approach even while the industry has resisted many reform ideas.

Tim Cameron, the head of the Securities Industry and Financial Markets Association's asset management group, said combining the two proposals would be "too destructive" to the product. "If you are requiring a floating NAV, then don't impose fees and gates," he said.

Some also suspect that the agency will broaden an exemption for smaller retail investors from the reform plan to allow certain money funds to forgo their signature $1 share price and float in value like other mutual funds.

Cameron said he hopes regulators will take a "pragmatic approach" in clearly defining and exempting retailer investors from the floating NAV.

Regulators from across a range of different agencies, including the heads of all 12 Federal Reserve banks, have repeatedly expressed concerns that money market mutual funds pose a systemic risk without significant structural reforms.

Policymakers worry that the funds are particularly susceptible to runs because investors are not necessarily aware of the market risks associated with them. They also argue that a stable net asset value creates a "first mover" advantage for early redeemers if there is a market crisis.

Federal Reserve Gov. Daniel Tarullo has repeatedly stressed the necessity to remedy risks tied to short-term wholesale funding in order to avert episodes seen during the 2008 financial crisis, calling it "the most important remaining task of financial regulatory reform."

The SEC has also been under some pressure to finalize its reform efforts by other regulators. It's been named each year as one of the top priority reform issues by the Financial Stability Oversight Council, a 10-member voting panel of financial services agencies.

A spokeswoman for the Treasury Department declined to comment on the SEC's plans.

In November 2012, the FSOC, under former Treasury Secretary Tim Geithner, intervened in the hopes of breaking a logjam at the agency by utilizing its authority under the Dodd-Frank Act. The council acted after then SEC Chair Mary Schapiro was unable to win board approval to move forward with the agency's own reform plan.

The decision made by the FSOC to advance the ball was consistent with Dodd-Frank's mandate that the council should ensure systemic events do not cripple financial markets. Regulators have held persistent concerns that money market mutual funds are vulnerable to the types of liquidity runs seen during the financial crisis.

Under the council's proposed plan, funds could be required to float their net asset values, which has been an idea opposed by many in the industry.

Alternatively, the funds could be required to hold a capital buffer in order to absorb losses, as well as face restrictions on how much investors can redeem at one time. A third alternative would require a fund to keep a buffer of 3% to help absorb losses and potentially use other measures to increase its resiliency.

Despite the intervention, the council has repeatedly stressed it would prefer that a singular regulator like the SEC handle the job.