Recent action from the Securities and Exchange Commission (SEC) is designed to strengthen the popular money market investment sector. Public comments are currently being accepted considering the proposals, which would impact the $3 trillion industry.
During the 2008 financial crisis, the money market industry encountered potential major risks. The SEC has indicated the proposed regulations would actually protect and strengthen the industry.
SEC commissioners unanimously adopted two proposals, which could combined into one package or handled separately, depending upon the outcome of the public comment. With the new regulations, there is a potential for investors to lose from the principal amount of their investments if the money market investment funds suffer from losses. Experts indicate the regulations and risks would most likely affect institutional investors rather than individuals.
The Proposals For Money Market Funds:
The net value of some of the money market funds available would be able to float, instead of maintaining a fixed $1 value per share. The end result would be that some funds would function more like bonds, which can lose some of the investment value when dropping below $1 per share. This would only affect prime funds, which are more risky because of their investment in short-term corporate debt. These types of money market accounts draw the institutional investors.
The other proposal involves setting a fee of two-percent to be charged for investor withdrawals from funds with liquid assets lower than the required amount. Those who direct such funds would have the option to set up a block, which would prevent investor redemptions for up to 30 days in any given 90-day period.
According to a press release distributed by the SEC, the proposed reform and regulations are designed to “mitigate money market funds’ susceptibility to heavy redemptions during times of stress, improve money market funds’ ability to mitigate and manage potential contagion from high levels of redemptions, preserve as much as possible the benefits of money market funds for investors and the short-term financing markets, and increase the transparency of risk in money market funds.”
In response to the SEC’s proposed money market reform, Timothy Cameron, the Securities Industry and Financial Markets Association (SIFMA)’s Asset Management Group (ASM) managing director and head, said, “While SIFMA’s Asset Management Group continues to believe that the need for additional regulation is premature in light of the SEC’s 2010 reforms, we are encouraged that the SEC has limited the scope of its proposal and believe that the imposition of redemption gates and fees is the most effective path forward. Overly broad regulation of money market funds, including a general mandate to float net asset values, would lead to serious negative consequences for the U.S. financial system and the broader economy and would be ineffective in preventing runs.”
“Investors would have fewer choices for cash investing and would lose the benefits of these relatively safe and highly liquid products that provide an attractive alternative to a deposit account. Corporations and financial institutions would find it more difficult and more expensive to access the short-term funding they need to carry out their daily operations, pay their employees and spur the economic growth that creates jobs,” he further stated.
Cameron continued that SIFMA AMG maintains that the SEC’s 2010 reforms have sufficiently increased the resiliency of money market funds, and said it has been proven through the funds’ ability to withstand unusual market volatility during the last three years because of increased Eurozone risks, the U.S. debt ceiling crisis, and the U.S.’s first ever credit downgrade.
“We urge the SEC to keep any final reform limited in scope and supported by empirical data,” he added.
Wells Fargo Advantage Funds spokespeople have not publicly spoken on their opinion of the matter, but instead, commented to ValueWalk, “Wells Fargo has been an active voice in the industry and with regulators on behalf of money market fund shareholders. Wells Fargo will be diligent in reviewing the proposal before submitting an official response, which will then be available on wellsfargoadvantagefunds.com.”
Several other financial institutions have been contacted as well, but they all have indicated they are reviewing the proposed reform before issuing a public statement or submitting official response to the SEC.
The SEC is accepting public comments for 90 days after the publication date, so comments can be submitted through early September.