The SEC will seek comment on a proposal that would impose a floating-share value on the riskiest money market funds or allow them to suspend redemptions in times of stress.
The Securities and Exchange Commission's five commissioners voted unanimously at a meeting in Washington on Wednesday to apply the changes to prime institutional funds, which invest in short-term corporate debt such as commercial paper. The proposal wouldn't apply to funds that hold at least 80% of assets in cash, government securities or repurchase agreements collateralized with government securities, the SEC said.
“The two alternative approaches in today's proposal target the common goal of reducing the incentive to redeem in times of stress, albeit in different ways,” SEC Chairwoman Mary Jo White said in a statement. “Accordingly, the proposal requests comment on whether a better reform approach would be to combine the two alternatives into a single reform package.”
Corporate balance sheet cash accounts for the vast majority of assets in institutional prime money market funds, sources told Pensions & Investments.
Wednesday's vote, which releases the proposal for 90 days of public comment, will kick off a months-long burst of lobbying from investors, fund companies and other stakeholders before SEC commissioners consider a final version.
Under the SEC's proposal, prime funds would have a choice of adopting the floating-share value, putting gates on redemptions or doing both. A money fund would be able to suspend redemptions for as long as 30 days if its weekly liquid assets fell below 15% of total assets, or half of the required level. Investors would be charged a 2% fee if they still wanted to withdraw funds.
Prime retail funds, which limit redemptions to $1 million per day, would be exempt from the regulation. Institutional funds hold a majority of the assets in the $2.9 trillion money-fund industry, according to the SEC.
The proposal is regulators' second response to vulnerabilities exposed by the 2008 financial crisis, when the $62.5 billion Reserve Primary Fund collapsed and money funds temporarily required a U.S. government guarantee. The Reserve Fund “broke the buck” when the value of its shares fell below $1, sparking a run on money funds.
