The Securities and Exchange Commission (SEC) is set to take a major step to rein in money-market-mutual funds on Wednesday.
The SEC’s proposal would require only the riskiest funds to abandon their fixed $1 share price and permit shares to float value like other mutual funds.
The proposal is meant to eliminate the fixed share value only on prime money funds that invest in short term corporate debt. However the proposal will not affect money funds that invest in government and municipal debt. The affected money funds are used by big institutional investors and not by small investors.
Prime money funds are seen as the most vulnerable as they were the source of investor runs during the height of the 2008 financial crisis. Over $300 billion or 15 percent of prime-fund assets fled the mutual funds in the week during September 2008, after the collapse of Lehman Brothers Holdings Inc.
In recent years, concerns about money funds have increased as regulators started worrying about a sudden jump in interest rates. Such a rise could depress the value of the funds’ asset holdings. The Financial Stability Oversight Council, for a third year running, referred to money funds as a source of systemic risk.
The former Chairman Mary Schapiro championed in late 2011 and 2012 a proposal to change the accounting standard encompassing all money funds, including those invested only in government and municipal bonds. However, the revised floating-share proposal would affect only a fewer funds.
The revised proposal got support from various financial regulators, including Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Timothy Geithner. They even threatened to override the SEC if it failed to act.
The revised proposal, however, doesn’t include recommendations made by Financial Stability Oversight Council last year, including requiring money funds to hold capital against potential losses.
The $2.6 trillion money-market-mutual-fund industry has continued to lobby vigorously on the issue. According to SEC records, members of the commission have had nearly 30 meetings with representatives of the industry during this year.
Interestingly since January, the bulk of the largest money-fund providers have moved to voluntarily disclose the daily market values of their fund share prices. For instance, in January 2013, Fidelity Investments announced its decision to disclose net asset values (NAV’s) of its money-market-mutual funds on a daily basis.
If the proposal is passed on Wednesday, it will be subjected to public comments for several months before a final vote is made.