A group of Federal Reserve officials would like the Securities and Exchange Commission to take another stab at proposed rule changes that would affect the $3 trillion money-market-fund industry.
Overall, while they support the SEC’s attempts to protect investors and address the risks to financial stability posed by money-market mutual funds, they take issue with one of the major aspects of the proposal.
The SEC introduced the reforms in June as a response to how the industry dealt with the financial crisis of 2008. Its proposal includes two ideas that the SEC said could be adopted alone or in combination. Under the first, municipal money market funds would have to move away from a stable, $1 per share price, to a floating net asset value, or NAV. Under this scenario, current amortized cost valuation and penny rounding rules would be eliminated, requiring that money market funds mark their NAV daily.
The second idea would allow the use of liquidity fees and redemption gates in times of stress. Under this alternative, if a money market fund’s weekly liquid assets fell below 15 percent of total assets, the fund would be required to impose a liquidity fee of 2 percent on all redemptions.
In a letter to the SEC, 12 Federal Reserve Bank presidents from Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco expressed support for the floating NAV alternative but offered suggestions on how to enhance that feature, such as monitoring funds’ procedures for determining that amortized cost accurately reflects fair value and eliminating the retail exemption.
The SEC has received numerous letters in response to its proposed rule changes, the bulk of which take issue with the floating NAV proposal. Some commenters have said they believe investors will stop investing in money market mutual funds if the constant NAV feature is eliminated, but the Federal Reserve presidents rejected that notion. Those who prefer a constant NAV, they said, can continue to invest in stable NAV vehicles by purchasing shares of government money market mutual funds, which do not have to comply with the floating NAV requirement.
In the letter, the Fed presidents strongly opposed the proposed changes to liquidity fees and temporary redemption gates alternative and said they don’t believe it constitutes meaningful reform.
Under this alternative, non-governmental money market mutual funds would be permitted to transact at a stable share price under normal market conditions but would be required to impose a standby liquidity fee of no more than 2 percent on all redemptions if a fund’s Weekly Liquid Assets were to fall below 15 percent of total assets.
“Investors will still have an incentive to be the first to redeem and the price of those early redemptions (before the trigger is breached) may still be inaccurate and unfair to remaining shareholders if such redemptions occur under a fixed NAV regime,” the letter said.