SEC’s draft regs for money market funds assailed as too much, not enough

The panel of witnesses included industry officials who warned that the regulations hold dire consequences for the use of money market funds, seen as a low-cost and efficient short term financing option that has for decades given American businesses a competitive advantage in the global market.

“This could destroy the product of money market funds,” said James Gilligan, an assistant treasurer for Great Plains Energy.

Gilligan, testifying on behalf of the U.S. Chamber of Commerce, objected to the SEC’s proposed requirement that funds used by institutional investors such as pensions or hedge funds to operate with a floating net asset value (NAV).  That would represent 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.

The provision would eliminate the ability of early redeemers to receive $1 dollar per share, even when a fund has taken a loss and shares are worth less than that. The floating value, regulators say, would reduce incentives for shareholders to redeem from institutional money market funds during economic scares.

Business groups argue the plan does not address accounting and tax-related obstacles that could undermine the money market funds.

Retail and government money market funds would be exempt from the proposed rule.

Former Federal Deposit Insurance Corporation Chairman Sheila Bair said the proposed floating NAV provision should go further.

“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,” testified Bair, who now chairs the Pew Charitable Trusts’ nonpartisan Systemic Risk Council.

Bair said the SEC’s second alternative would make matters worse

That proposal would allow funds to set up 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.

“Because investors who run first can still get their $1.00 and investors who stay could bear the losses of the first movers – and the potential for delays accessing their funds and new fees – (money market fund) investors will have an incentive to run from these products even earlier than they do now,” Bair testified.

The SEC has asked interested parties to comment on whether either or both of the alternatives should be adopted, suggesting they could work together to address problems exposed during 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.