After several years of wrangling over the future of money market funds, Mary Jo White's
SEC has finally unveiled its reform package
for the $2.6 trillion industry.
The package included no major surprises, including floating NAV requirements for institutional money funds, as well as granting boards the ability to level liquidity fees and gates in the event of market turmoil.
As it should, the reforms garnered massive attention from the financial press: including several articles from the Wall Street Journal
, including here
, and here
. Other publications that covered the move included USA Today
, and PlanSponsor
The reform package got, at best, mixed support from SEC commissioners, who voted 3-2 to pass the proposal.
The two-pronged reform will only impact the "prime" money market funds, which make up about 37% of the industry, sidestepping the funds used by retail investors. Money-market funds for retail investors and institutional money market funds that invest at least 99.5% of their assets in cash, government securities and/or repurchase agreements will be exempt from the floating NAV rules that are set to shake up the $2.6 trillion industry.
The reform will force the top money market funds whose shares are held by corporations and large institutional investors to float their share price, rather than remaining stationary at the stable $1 NAV. This would be in hopes of preventing investors from being frightened by the fund falling below the $1 benchmark and stampeding out of money market funds, which in times of market tumultuousness, such as the 2008 financial crisis, could freeze corporate lending. The new rules will allow fund boards to charge a liquidity fee of up to 2% and suspend redemptions entirely if weekly liquid assets fall below 30% of total assets. Disclosure of liquid assets, shareholder inflows and outflows and any imposition of fees and gates will come also come along with the proposed reform.
The plan will also allow certain funds to temporarily stop investors from redeeming shares in times of market tumult, or impose fees on them to do so. This would imply that corporations and other investors may not always have instant access to their cash. The prospect of such possibilities coming to fruition has already caused some corporate treasurers to shift money out of their money market funds.
Even with the reform likely to effect the prime niche of money market funds, industry officials said implementing the new rules would likely cost tens of millions of dollars per firm, simply because they have intricate systems in place to ensure only retail clients invest in fixed $1 funds.
The Financial Stability Oversight Council has been pushing for the SEC to strengthen money market fund regulations since 2012, and it seems they finally got what they wished for. Prepare for the landscape of the money-market fund industry to alter drastically, with the bigwigs bearing the bulk of the cost.
Other publications that analyzed the move included Reuters
; Financial Times
; Fox Business
; Business Insider
, and InvestmentNews
The industry also had a fair bit to say on the subject, including Fidelity
, and SIFMA
, which had been vociferously lobbying the SEC on the subject, had this comment:
Washington, DC, July 23, 2014—ICI President and CEO Paul Schott Stevens made the following statement today about the new rules for money market funds approved by the U.S. Securities and Exchange Commission:
“Through six years of deliberations, the Securities and Exchange Commission has received extensive analysis and comment from the sponsors of money market funds, investors, issuers, and many other parties. The Commission in recent months has proceeded thoughtfully to craft a robust and meaningful final rule that will impose significant structural changes across the industry, particularly on money market funds used by institutional investors.
“While we may question some aspects of the rule as adopted, we strongly believe that the SEC has the long regulatory experience and deep technical expertise required to strike the proper balance, making money market funds more resilient in times of financial stress while preserving the utility and value of these funds for investors.
“We will work with the Commission and with ICI’s members to ensure a smooth transition to these new rules as they are implemented over the next two years.”
The package will become effective 60 days after publication in the Federal Register
, while the floating NAV, the liquidity fee and gates will kick in two years after they are published in the Register
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