WASHINGTON – The Securities and Exchange Commission is expected on Wednesday to propose stricter regulations for money-market mutual funds, hoping to shore up an industry that posed risks to investors at the height of the 2008 financial crisis.
SEC officials have yet to make public any proposed changes to its oversight of the $2.7 trillion industry.
Still, one rule likely to come up would allow shares of some money-market funds to “float”, instead of having a fixed value of $1 per share. The proposal failed last year but has since won the backing of a panel of regulators that include Federal Reserve Chairman Ben Bernanke.
A floating value would be a fundamental shift for the investments. But proponents say it is necessary because it would show money funds, while safer than stocks and many other investments, still carry some level of risk. Floating values would make money funds more like bonds, whose principal changes with increases or decreases in interest rates.
Other potential rule changes include requiring funds to hold capital reserves against losses and placing limits on how quickly investors can withdraw their money.
The SEC will vote to open proposed changes to public comment, which is likely to last for several months. At some later point, the agency would finalize the rules or settle on a modified version of them.
Proponents say stricter requirements are needed to make millions of investors and companies aware of the risks associated with money funds. They say that would reduce the risk of runs on money funds. Still, greater oversight of money-market funds has been heavily opposed by the mutual fund industry.
The rules would be the first major action under Chairman Mary Jo White, who took over at the agency in April. She has said that her goal is to preserve the funds’ economic benefits while also addressing their vulnerability to panic runs.
Mary Schapiro, who stepped down as SEC chairman in December, pushed unsuccessfully last year for a floating value for all money-market funds and a requirement that money funds hold capital reserves of 1 per cent of the fund’s assets. But three of the five commissioners opposed those changes and her proposal was never brought to a vote.
Some commissioners appeared to be sympathetic to arguments made by representatives for the industry, who complained that most of the changes previously recommended would make money funds unattractive and lead to fewer investors.
This time, however, the SEC is under pressure from the Financial Stability Oversight Council, a group of high-level regulators that has backed both the floating-value requirement and calls for strict capital reserves. Bernanke and Treasury Secretary Jacob Lew both sit on the panel.
In a possible compromise, the SEC could limit the floating-value requirement to those money-market funds known as “prime.” They attract mainly big institutional investors as opposed to retail customers and are considered more risk-prone because they invest in short-term corporate debt.
Investors learned how risky mutual funds could be during the financial crisis. The Reserve Primary Fund, one of the largest money market funds, lost so much money that it “broke the buck.” As a result, its value fell to just 97 cents per share.
The decline stoked fears over the safety of money funds. In the ensuing week, investors pulled out around $300 billion from prime money funds, representing 14 per cent of the assets in those funds. The government stepped in to temporarily guarantee assets of all money funds so investors could be assured they would be protected from losses.
While some say the change is necessary, Robert Plaze, a former deputy director of the SEC’s investment management division, acknowledged that a shift to a floating value should spark sharp debate.