The five-member panel voted unanimously to propose two alternative measures to protect against mass withdrawals of money from panicked investors when the economy is strained.
The first would require funds used by institutional investors such as pensions or hedge funds to operate with a floating net asset value (NAV), a departure from current rules allowing for set $1 per share prices. The floating NAVs would fluctuate, reflecting the changing values in the money market funds.
“By eliminating the ability of early redeemers to receive $1 (per share), even when the fund has experienced a loss and its shares are worth somewhat less, this proposal would reduce incentives for shareholders to redeem from institutional prime money market funds in times of stress,” SEC Chairwoman Mary Jo White said.
Retail and government money market funds would be exempt from the proposed rule, though the commission invited comments on whether there should be such an exemption.
Business groups expressed concern about the plan, saying it does not address accounting, tax and operational obstacles that could undermine the money market funds which are seen as a crucial short-term funding source for corporations, cities and states.
“We remain concerned that a floating NAV will weaken rather than improve the product,” said David Hirschmann, president and CEO of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “We urge the SEC to work in tandem with other agencies and governing bodies to work out these issues.”
The second alternative unveiled Wednesday would allow funds to utilize liquidity fees and “gates” to discourage investors from redeeming money when a fund is in distress.
Funds could impose a 2-percent fee on redemptions if their level of weekly liquid assets fell below 15 percent of its total assets. Fund boards would also be able to temporarily suspend redemptions for up to 30 days, thereby gating the fund.
Following the comment period, the SEC would review the feedback, potentially make changes to one or both proposals and would then hold a second vote before they are finalized.
White and the other commissioners urged interested parties to comment on whether either or both of the alternatives should be adopted, suggesting they could work together to address problems exposed at the height of the financial crisis.
In 2008, Reserve Primary Fund “broke the buck,” a term used when the value of a fund drops and investors are no longer able to get back the full dollar they put in. In the following week, investors pulled roughly $300 billion from prime money market funds.
“The contagion effect was rapid,” White recalled. “Short-term credit dried up and corporations had trouble borrowing to run their businesses.”