SEC’s Money Market Rule Changes Assailed by Fund Companies

ICI’s Paul Schott Stevens warns agency ‘hat trick’ will jeopardize investors, businesses, governments and the economic recovery

SEC headquarters in Washington. (Photo: AP) SEC headquarters in Washington. (Photo: AP)

The mutual fund industry has reacted with speed and fury to an SEC proposal to tighten regulation of money market funds.

Paul Schott Stevens, president of the fund industry group the Investment Company Institute, said in a statement released Tuesday that the proposed new regulations could cause “enormous” harm to investors and the economy.

The SEC is polishing off regulatory changes to increase capital requirements for fund companies, limit customers’ ability to withdraw all their funds immediately and allow funds’ net asset value to float (rather than maintain a fixed dollar value). Agency staff will soon submit the proposed changes to the SEC’s five commissioners, three of whom must give their approval in order to advance the proposal to a public comment stage.

Fidelity Investments, the largest manager of money market assets, has already sent a report to the SEC urging a retreat from the changes, and Federated Investors’ president and CEO J. Christopher Donohue is quoted in The Wall Street Journal saying of the SEC proposal: "The generosity of giving you the choice of which way to die is really not much of a choice.”

ICI’s Stevens (left) spelled out the regulatory “hat trick,” as he called it, of changes he said would “harm investors, damage financing for businesses and state and local governments, and jeopardize a still-fragile economic recovery.” Moving to a floating NAV and preventing investors from withdrawing all their assets at once — the proposal calls for a wait of 30 days before investors could redeem the final 5% of their funds — would diminish money market funds’ utility as cash management tools, he said.

“Compliance with redemption freezes will impose hundreds of millions of dollars in added costs on investors, funds, and financial intermediaries and impair features — like check writing, debit-card access, and sweep accounts — that investors demand,” he added. And he said the imposition of bank-like capital requirements, in combination with the other changes, would impose costs that will drive fund sponsors out of the industry, reducing competition.

But regulators worried about the threat of systemic risk to the economy, including the dangers of a bank-run-style wave of redemptions, defend the proposals. SEC Chairman Mary Schapiro is quoted in the Journal saying "the taxpayer simply can't be on the hook for failure, and the tools to ameliorate a run that existed in 2008 when Reserve broke the buck don't exist anymore."

Ben Bernanke, in his testimony before the Senate Banking Committee on Tuesday, commented vaguely on the need for further regulation:

"There has been progress made both by banks and by money market mutual funds in reducing

exposures and improving hedging but again I don't want this to be interpreted as a complacent statement. I think that if there is a major problem in Europe, the risk aversion, the volatility, the uncertainty –all of those things would have a powerful impact on our financial system,” Bernanke said.

The ICI’s Stevens said increased regulatory requirements the SEC imposed in January of 2010–boosting credit quality, liquidity, and transparency, while shortening the maturity of portfolio holdings–have already proved their worth. He said that amid the European debt crisis and U.S. debt ceiling turmoil of last summer, “about 10 percent of prime funds’ assets were redeemed from June to August — some $170 billion — with nary a hiccup in the money market. U.S. money market funds met the redemptions, maintained liquidity well in excess of the new standards put into place in 2010, and saw no change in the mark-to-market value of their portfolios.”

While the fund companies anxiously await the commissioners’ vote on whether to consider the proposals, stock market investors have already rendered their negative judgment. Shares of Federated Investors (FII) were down more than 4% in midday trading, and shares of Charles Schwab (SCHW) were down over 2%.

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