Measuring money... faster, cheaper, cleaner

As we mentioned in yesterday's "Link of the Day," the Securities & Exchange Commission is planning to adopt money market reforms in as soon as two weeks. This is according to two news reports, including one from Bloomberg News, which published the article, "Prime Money Funds Said to Float $1 Price," on July 10. "The riskiest money-market mutual funds will have to let their share prices fluctuate and charge investors withdrawal fees during times of stress under tougher U.S. rules set for adoption this month. The Securities and Exchange Commission is poised to impose both requirements on some money-market mutual funds, which required a federal backstop during the 2008 financial crisis, according to a person familiar with the matter who asked to not be named because terms of the final rule haven't been made public," wrote Dave Michaels at Bloomberg. "The final rule, which began as a proposal issued last year, is likely to be voted on by the five-member commission on July 23, the person said." (Note: Crane Data's July Money Fund Portfolio Holdings, with data as of June 30, were released on Friday. Watch for our Holdings story on Monday.)

Bloomberg quoted SEC Chair Mary Jo White at today's meeting of the SEC's Investor Advisory Committee as saying, "`The commission is actively engaged with the staff in proceeding to finalize rules in the near-term and I am confident we will adopt very robust rules." Continues the article, "The plan would require prime institutional funds to float the value of their share price, traditionally set at a stable $1, which makes them a popular place to park cash. It also would require funds to impose a 1 percent fee on redemptions and permit them to temporarily suspend withdrawals when liquidity drops below required levels." (Note: the original proposal had a 2% redemption fee, so this is a big concession if true.)

The Bloomberg piece adds, "White is pushing to hold the vote on July 23, the person said. The SEC has been under growing pressure from the Federal Reserve and other U.S. and global regulators to finish the rule. Federal Reserve Chair Janet Yellen said July 2 that progress on new rules for money funds has "been frustratingly slow." Details of the rule could still change before the vote, with at least two commissioners having voiced objections to parts of the plan. Commissioner Kara M. Stein, a Democrat, has questioned whether allowing funds to suspend redemptions could exacerbate, instead of reduce, the risk of runs on a fund. Stein's concerns are consistent with a paper published in April by Fed economists. They wrote that well-informed investors would preemptively pull out money when they believed a money fund might suspend redemptions after suffering a loss."

The Wall Street Journal's article, which broke the news Wednesday evening (July 9), was written by Andrew Ackerman. It said, "Ms. White's plan is expected to gain support from a majority of the agency's five commissioners, overcoming years of internal debate about how best to address money-fund vulnerabilities. Ms. White, Democrat Luis Aguilar and Republican Daniel Gallagher are expected to support the plan, these people said."

The Ackerman piece goes on, "Ms. White still is seeking support from a fourth commissioner, Democrat Kara Stein, who has expressed reservations about redemption limits but is developing her views, these people said. Commissioner Michael Piwowar, a Republican, doesn't support a combined approach, and isn't expected to support the plan, according to people familiar with the matter."

The Journal adds, "Ms. White's approach would combine two options the agency presented last summer when it voted to propose tighter rules: a floating share price for prime institutional funds, which are considered riskier than other money funds and invest in short-term corporate debt, coupled with redemption "gates" and fees. Because floating share prices would apply only to prime institutional funds -- which comprise about 37% of the industry -- mom-and-pop retail investors aren't expected to be directly affected."

Ackerman writes, "A deal is partly contingent on the Treasury Department agreeing to ease tax rules on the small gains and losses for investors in floating-rate funds, requirements that funds say would be too burdensome. A person familiar with the matter said Treasury is close to an agreement with the SEC on the issue. A Treasury spokeswoman declined to comment. Ms. White's inclusion of redemption restrictions comes despite the concerns of other regulators who have said limits would encourage investors to bolt over fears they wouldn't be able to withdraw money." (The Journal writer also comments in a video posted on WSJ.com.)

Finally, Time columnist Jacob Davison also wrote about the pending reforms in a piece called "Does Anybody Need a Money Market Fund Anymore?," published July 10. Writes Davidson, "Fund companies are really, really unhappy about the SEC's proposed regulations. They've been fighting the rules for years, and until there's an official announcement, you shouldn't be sure anything is actually going to happen. Others are worried the new regulations, specifically redemption restrictions, might actually cause runs on the market as investors fear they could be prevented from pulling money out if things get worse."

Note that there has been no public or official word from the SEC on these articles or issues, and it's unclear whether the leaks and "sources" cited are from within the SEC or from outside. If the SEC does schedule a vote and meeting on Money Fund Reform, it likely will appear first in the form of a Sunshine Act Notice and will be listed on the SEC's "Upcoming Events" page. (The SEC met July 10, but there is no agenda yet for an expected July 23 meeting.)

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