Regulators have voted by a narrow margin to end a longtime staple of the investment industry – the fixed $1 share price for money-market mutual funds – at least for some money funds used by big investors.
The idea is to minimize the risk of a mass withdrawal from the funds during a financial panic.
The Securities and Exchange Commission also is letting all money funds block withdrawals when their assets fall below certain levels or impose fees for withdrawals.
The new rules were adopted Wednesday on a 3-2 vote, culminating several years of regulatory haggling and false starts. They were opposed by one Democratic and one Republican commissioner.
The fund industry will have two years to comply, a shorter period than the industry had sought. The share prices of the funds involved will be required to “float,” as with other mutual funds, reflecting the market value of a fund’s holdings at a given time. Big institutional investors could lose principal if the value of the shares falls below $1. Individual investors likely won’t be affected.
The floating-price requirement applies only to prime institutional funds, which are considered riskier. They represent about a third of money-market funds, according to the SEC. Those funds attract mainly big institutional investors and are considered more risk-prone because they invest in short-term corporate debt.
The idea behind adopting floating prices for a portion of the $2.6 trillion money-market-fund industry is to remind investors that while the funds are safer than stocks and many other investments, they still carry some risk. Regulators say greater awareness of the risk would reduce the potential for crippling runs on money funds, because investors would have acclimated themselves to fluctuating prices.
The SEC action will also “provide important new tools that will help further protect investors and the financial system in a crisis,” SEC Chair Mary Jo White said at a public meeting of the five-member commission.
The Financial Stability Oversight Council, a group of high-level regulators that includes the heads of the Federal Reserve and the Treasury Department, has identified money-market funds as a potential risk to the global system. The council pressed the SEC in 2012 to require a floating rate for all money-market funds, and it wasn’t immediately clear whether it considered the new rules satisfactory. The FSOC, which is led by Treasury Secretary Jack Lew, issued a statement Wednesday saying it would examine them. Money-market funds are on its agenda for a closed meeting on July 31.
The fund industry had lobbied against the requirement for floating share prices. Its leading trade group, the Investment Company Institute, said that while it questions parts of the SEC action, the agency appears to have found a balance between bolstering money funds against financial stress and maintaining their value to investors.
A run on a money-market fund during the financial crisis showed how risky the funds can be. The Lehman Brothers collapse in the fall of 2008 triggered the failure of the Reserve Primary Fund, one of the biggest money-market funds, which held Lehman debt. The Reserve Primary Fund lost so much money that it “broke the buck,” as its value fell to 97 cents a share.
The decline escalated fears over the safety of money funds and inflamed the crisis. The next week, investors pulled around $300 billion from so-called “prime” money funds, representing 14 percent of the assets in those funds. Short-term lending, relied on by companies to pay suppliers and make payroll, froze up as investors abandoned the funds. The Fed stepped in to temporarily guarantee assets of all money funds so investors could be assured that they would be protected from losses.
Sheila Bair, who headed the Federal Deposit Insurance Corp. during the financial crisis, said the SEC’s action “marks an important step forward.” However, she said, it would have been “better and simpler” to require floating share values for all money-market funds.
Two groups that advocate strict financial regulation say that the SEC plan doesn’t go far enough and that all money funds should be required to have floating prices to reduce the risk to the system.
“It’s grossly inadequate,” said Dennis Kelleher, president of Better Markets, a nonprofit group.
Limiting floating prices to the funds favored by big investors could lead those investors to exit quickly at a time of stress and leave “retail investors holding the bag” in other funds that could be damaged, Kelleher said.
The previous SEC chair, Mary Schapiro, pushed unsuccessfully in 2012 for floating share prices for all money-market funds and a requirement that funds hold capital reserves of 1 percent of their assets. But three of the five SEC commissioners at the time opposed those changes, and her proposal was never brought to a vote.
Then the FSOC, which at the time included Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner, prodded the SEC to act. The SEC proposed the changes in June 2013, opening them to public comment.