Updated Wednesday, October 22, 2014 as of 2:25 AM ET

Geithner’s Money Fund Overhaul Push Sparks New Industry Outcry

U.S. Treasury Secretary Timothy Geithner yesterday urged the Securities and Exchange Commission to pursue new rules for money-market mutual funds, triggering fresh opposition from industry leaders who had beaten back similar proposals and are pursuing a weaker overhaul.

Geithner, heading a Washington meeting of the Financial Stability Oversight Council, a group formed by the Dodd-Frank Act to address systemic financial risks, won unanimous approval for a draft recommendation to the SEC spelling out three ways to overhaul the $2.6 trillion industry. A new option would require capital buffers of as much as 3 percent of assets, while two other solutions he offered were opposed earlier by the fund industry and rejected in August by an SEC majority.

Representatives for the fund industry, who last month put forth their own plan, immediately denounced the proposals as stale and unhelpful. While Geithner has said the SEC is best positioned to address money funds, he has also said that the regulators’ panel, often referred to as FSOC, might intervene and subject funds to oversight by the Federal Reserve if the SEC fails to act.

“Regrettably, today’s action by the FSOC fails to advance the debate,” Paul Schott Stevens, president of the Investment Company Institute, the trade association for the industry, said yesterday in a statement. “The Council apparently is proposing to send back to the SEC the very same concepts that a majority of the commission’s members declined to issue for public comment in August.”

Election Fallout

FSOC’s action comes a week after President Barack Obama won re-election, ensuring the push for new restrictions on the industry would continue.

Two of the options proposed by Geithner included the major elements of a plan backed by SEC Chairman Mary Schapiro that she abandoned three months ago for lack of votes. That proposal would have given money funds a choice to either drop their traditional $1 share price for a floating value, or create capital buffers to absorb losses and temporary holdbacks on all withdrawals to discourage investor runs.

The new proposal mentions only a capital buffer and no withdrawal restrictions. The 3 percent buffer envisioned wouldn’t apply to assets held in U.S. Treasuries or Treasury- backed securities. Regulators would consider a buffer of less than 3 percent of assets if it was coupled with stricter rules forcing money funds to diversify their holdings, increased minimum liquidity levels and better disclosure requirements.

“Our preferred course, and I think ultimately this is what’s essential, is for the SEC to take this back and propose its own a set of options for moving forward,” Geithner said at the FSOC meeting.

Industry Plan

Fund executives fought the Schapiro plan, saying it would destroy the product’s attraction for investors and utility for borrowers. They argued that capital buffers would be either too small to be effective or too large to afford, and that investors would reject a floating share price and withdrawal holdbacks.

Geithner’s proposals will “keep the pressure on the SEC to do something,” Peter Crane, president of research firm Crane Data LLC, said in an interview before the FSOC meeting. “Given the election results, the industry may be even more in the mood to compromise.”

Industry executives had been encouraged by a letter Geithner published Sept. 27 in which he directed FSOC staff to prepare proposals for yesterday’s meeting. He asked them to include elements of Schapiro’s plan and a third option that mentioned withdrawal restrictions and made no reference to capital buffers.

Redemption Limits

Less than a month later, on Oct. 26, company leaders met with SEC commissioners and Treasury officials with a new plan built around withdrawal restrictions. Under the proposal, money funds eligible to purchase corporate debt, or prime funds, would be allowed temporarily to limit withdrawals during periods of stress. If a fund’s weekly liquid assets at the end of any business day fell to 7.5 percent of total assets, normal withdrawals would be halted for as long as 30 days, three people familiar with the proposal said on condition of anonymity because they weren’t authorized to speak publicly. Weekly liquid assets refers to cash and securities that can be converted into cash within seven days.

The fund’s board could allow clients to withdraw money during the restricted period only by paying a non-refundable 1 percent “liquidity fee,” the people said. The board could elect to lift the restrictions as soon as liquidity rose to 7.5 percent. The fund would be forced to liquidate if liquid assets remained below the trigger point after 30 days.

‘Shadow’ NAV

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