An attempt by the Securities and Exchange Commission to put more safeguards on money market funds is generating caution and resistance from lobbyists for pension funds and institutional money managers concerned the move will make the funds a less viable investment option.
“We believe cash management is a distinct investment category, different from other fixed-income strategies,” wrote BlackRock Inc.'s Barbara Novick and Richard Hoerner in the firm's comment letter to the SEC. Ms. Novick is vice chairwoman and head of government relations for BlackRock; Mr. Hoerner is managing director and head of global cash management.
“Money market funds are important to a large number of institutional investors,” including pension funds, where their cash equivalent function can help meet investment policy guidelines, Ms. Novick said in an interview.
The proposed reforms, and the largely negative reaction to them, are also attracting attention on Capitol Hill. One day after the Sept. 17 comment letter deadline, the House Financial Services Committee will hold a hearing to address concerns raised by plan sponsor groups and money managers that the SEC's proposed cure could be worse than any potential problem.
As many as half of all defined contribution and defined benefit plans use money market funds for stability, liquidity and a low-cost diversified way to access commercial paper and government securities.
Plan executives worry that further regulation would alter the fundamental characteristics of the funds, while adding administrative and compliance headaches, plan sponsor lobbyists say.
In a survey and conversations with clients investing in its money market funds, BlackRock officials found other investors worried about negative impacts the SEC's proposed changes could have on zero-loss tolerance policies, or accounting and tax guidelines.
One key proposed change would make prime institutional money market funds have a net asset value that would float on a daily basis, as opposed to the current stable share price. Another option would be to keep the stable share price, but let the money market funds impose a 2% liquidity fee or redemption gates to temporarily suspend redemptions if a fund falls below 15% liquidity. A third option would be some combination of the two approaches.
Other proposals, made by the SEC in June, would require structural changes and add requirements on disclosure and stress-testing, among other steps. When the comment period ends Sept. 17, SEC staff is expected to face a mountain of letters to sift through before making final recommendations to the commission. Efforts to increase regulation of money market funds stems from the 2008 default of the Reserve Primary Fund related to Lehman Brothers losses. By falling below the $1 per share price, the fund “broke the buck,” which spooked investors and caused a wide market run.
While there is a lot of money at stake for money managers, pension plan executives are trying not to get lost in the shuffle, said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington, which represents employers and service providers. “We hope that the commission takes into consideration the potential effects on qualified retirement plans — both defined contribution and defined benefit — of any changes that they're contemplating.”