The Securities and Exchange Commission on Wednesday issued its long-anticipated proposal for reforms to stabilize money market mutual funds and protect investors from the type of run that brought the sector to the brink of collapse at the height of the financial crisis in 2008.
With the proposed reforms, the SEC is looking to establish safeguards for retail investors who rely on money market funds as an important vehicle for cash management, while bring also bringing a measure of transparency to the asset class that would help investors better understand the risks that the funds entail.
The SEC first proposed amending its money market rules in 2009, setting in motion a process that has meandered through various permutations at the agency and that eventually became subject to a jurisdictional turf war when a consortium of federal financial regulators seemed poised to take over the process.
"It's been a journey to get to this point," SEC Chairman Mary Jo White said at a commission meeting on Wednesday.
By a unanimous vote, the SEC advanced its rule proposal, which envisions three potential scenarios for money market reforms. The commission is seeking comment from the public before it moves ahead with a vote on any final rules.
One proposal would untether the valuation of money market funds from their historic, static level of $1 per share. Instead, the net asset value (NAV) of the funds would float to track with their true market worth.
The floating NAV proposal would seek to ward off the upheaval of 2008 when, following a drop in shares of the $62 billion Reserve Primary Fund, a run on a broad class of money market funds helped lock up global credit markets. A floating share price, the reasoning goes, would avoid a similar run in the future by eliminating the advantage for fast-acting (and primarily institutional) investors who could dump their shares for more than their true market worth when they see signs of trouble.
Allowing the value of money market funds to float, just as other mutuals do, could also create a more effective disclosure of risk for investors.
The floating NAV aims to "make clear that money market funds aren't bank products, but investment products," SEC Commissioner Daniel Gallagher said.
The consultancy fi360 urges investment advisors to keep the memory of the 2008 run fresh as they discuss money market funds with clients, and to describe the products with due caution, keeping in mind their fiduciary responsibility to recommend investment vehicles appropriate for clients' risk tolerance.
"Although prior to the 2008 financial crisis money market funds were considered a safe, liquid asset, many investors and advisors learned that during a financial panic, a fixed $1 share value does not necessarily reflect the true market value of a client's holdings," the group said in an emailed statement.
Regardless of how the SEC proceeds with its proposed rulemaking, "fi360 believes that investment advisors should continue to closely monitor the suitability of seemingly 'safe' investment products for their clients in light of the issues raised by the commission regarding money market reform."
Importantly, the SEC's floating NAV proposal, in its current form, would only apply to institutional prime money market funds, exempting the retail and government funds that the commission sees as better insulated from a destabilizing run.
A second proposal to curb investor runs advanced by the SEC would allow the stewards of a fund to implement conditional redemption fees that would make the funds less liquid. Those fees would be coupled with the authority to impose a temporary moratorium on share sales in the event that large numbers of heavy investors simultaneously seek to redeem their shares, as in September 2008.
Commissioner Troy Paredes praised the so-called fees-and-gates proposal for doing something that he said the floating NAVs could not -- namely, offering a hard stop on sales that fund boards could put in place at times of stress.
"Even if NAVs float, plenty of reasons will remain for investors to redeem. ... If a run does start, a floating NAV is not able to stop it," Paredes said.
"Gates halt runs. Investors' incentive to redeem can be reduced, but not eliminated," he added. "When investors cannot redeem, they cannot run."
The third option the SEC is contemplating would implement both the floating NAV and the fees-and-gates proposals.
"These two options are not mutually exclusive solutions," said Commissioner Elisse Walter. "My preliminary preference would be to combine these two options."
With Wednesday's vote, Chairman White, who only took the reins at the SEC in April, has made good on her promise to speed along the money market proceeding that has long sat on the SEC's agenda. The next step will involve a period of collecting comments from industry stakeholders, advocacy groups and other interested parties, which the commission will use to inform the final rulemaking process.
"Our focus now is on moving forward, receiving and analyzing thoroughly the comments, and proceeding promptly to the final rules," White said.
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