(Bloomberg) -- Providers of money-market mutual funds and the states and corporations relying on them to manage cash will tell U.S. House lawmakers today to be wary of new regulation of the $2.6 trillion industry.
A hearing before the House Financial Services Committee today provides a public forum for the industry to kick off a new lobbying campaign against the proposal. The SEC is weighing new arguments from providers of money funds as it decides whether to amend its plan, which was issued in June after a previous effort splintered the five-member commission last year.
Interest groups with divergent views about a Securities and Exchange Commission proposal for new rules agree that funds focused on municipal debt should be exempt from the regulator’s plan. The SEC’s proposal would force funds that buy corporate and municipal debt and cater to institutional investors to adopt a floating share price.
Some parts of the SEC’s proposal “would devastate the industry, rendering money-market funds entirely unattractive to investors,” Investment Company Institute President Paul Schott Stevens said in testimony prepared for the hearing.
The SEC’s plan is aimed at improving the stability of an industry that experienced an investor run in 2008, when the $62.5 billion Reserve Primary Fund was brought down by a loss on Lehman Brothers Holdings Inc. debt. Thousands of households and businesses invest in money funds, which aren’t federally insured.
Reserve Primary’s move to reprice its shares under $1, known as breaking the buck, set off a panic among investors, who had assumed their principal would never be lost. They pulled $310 billion from money funds in a single week, almost exclusively from those that were big buyers of corporate debt, according to the SEC.
The move to a floating net-asset value, or NAV, is intended to reduce the willingness of investors to run during a panic. An investor exiting a fund whose share price dropped below $1 would share in the fund’s losses.
The SEC’s proposal also includes a recommendation favored by the ICI: allowing funds to impose withdrawal fees during times of stress. The regulator said a final regulation could feature the so-called liquidity fees in combination with a floating-share requirement.
Representatives of the Investment Company Institute, San Francisco-based Charles Schwab Corp., the National Association of State Treasurers and the U.S. Chamber of Commerce are scheduled to testify today. Sheila C. Bair, former chairman of the Federal Deposit Insurance Corp., is also on the witness list.
Schwab, Valley Forge, Pennsylvania-based Vanguard Group Inc., and Boston-based Fidelity Investments all say the SEC should allow municipal funds to retain a constant share price. ICI and the state treasurers group also will tell lawmakers today that these funds, which account for about $266.8 billion in assets, should be allowed to keep a $1 share price.
“Since municipal money-market funds have been very stable through many market cycles and did not experience large redemptions in the 2008 financial crisis, imposing a floating NAV on such funds seems entirely unnecessary,” Georgia State Treasurer Steve McCoy said in prepared testimony.
Bair, who now leads the nonpartisan Systemic Risk Council, has urged the SEC to apply the floating-share price to all types of money funds, including those that cater to retail investors. The current proposal “picks winners and losers” by imposing a floating-share price on some funds while allowing others to maintain the stable $1 price, Bair said.
“A floating NAV for all money market funds would not only address the core structural weakness and systemic risks posed by money funds, it would improve market functioning and fair competition by applying equally to all issuers and all investors,” Bair said.
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