The SEC has been arguing and analyzing methodologies for harsher regulation of money funds for several years. The root of the discussion is the run on the funds which began following the Lehman bankruptcy and subsequent breaking of the buck at the Reserve Fund in the fall of 2008.
The SEC has before it two proposals. One would force riskier funds to float and the second proposal would hold the buck but would allow for a limitations on redemptions. I do not get it. Why not just tell the funds that they are required to mark to market each and every day with clarity and precision? If investors are uncomfortable with the volatility which that produces they can by the three month bill or park there money in an FDIC insured account.
Compelling money funds to mark to market will enlighten and educate investors and would allow the market place to weed out those firms which take imprudent risk.
Via the WSJ:
SEC Divided on Money-Market Fund Rules
Six years after money-market mutual funds became a source of vulnerability in the financial crisis, U.S. securities regulators are still hashing out how to limit the risks they pose to the financial system. Tighter rules might not be finalized for several months, according to people familiar with the process.
The five members of the Securities and Exchange Commission have been unable to reach agreement on how to finish long-awaited rules to curb structural features of money funds—cashlike instruments used by millions of individuals, businesses and municipalities to safely park cash—that make them prone to investor stampedes during periods of market stress, these people said.
The inability to agree on a plan stems in part from the recent addition of two SEC commissioners, Democrat Kara Stein and Republican Michael Piwowar, who are still fleshing out their views on what should be done to rein in fund risk. No clear consensus has emerged on the best approach and there is no agreement yet on how to move forward, according to people close to the process.
The commissioners have all indicated they agree money-fund risks need to be addressed but final rules could be delayed until the fall, a setback to SEC Chairman Mary Jo White who had pushed in private for the commission to wrap up its work by the end of April, according to people familiar with internal SEC discussions.
Resolving long-standing concerns about money funds is a top priority for Ms. White and a crucial test of her ability to forge agreement roughly one year into her tenure at the commission. A spokeswoman for Ms. White declined to comment.
In 2008, Reserve Primary, a $62 billion fund, “broke the buck” by falling under the price of $1 per share that money funds seek to maintain. Exposures to the bankrupt Lehman Brothers Holdings Inc. caused losses for Reserve Primary and sparked a run on other money funds that eased only after the U.S. government stepped in to backstop the industry.
Last June, the SEC commissioners unanimously proposed two options aimed at reducing the potential for money-fund runs: Requiring the riskiest funds catering to large, institutional investors to abandon their fixed $1 share price and float in value like other mutual funds, or allowing funds to restrict redemptions during periods of market stress. Supporters of a floating share price say it would train investors to accept slight fluctuations in the value of their shares and not panic if they fall below $1 in value.
Those who favor redemption limits say they would discourage investors from fleeing and ensure a fund could stop a trickle of outflows from turning into a flood.
The SEC indicated it could adopt either measure alone or in combination—a position that has complicated discussions since there are differing views on how to proceed, according to a person familiar with the SEC’s internal deliberations.
In a speech on systemic risk in Washington Thursday, Ms. Stein raised a series of questions about redemption limits, including whether they would exacerbate the risk of investor runs by encouraging “pre-emptive” redemptions just before the measures are implemented. “In an industry this important to our financial system, we should be very confident in the answers to these questions before moving forward,” she said.
Mr. Piwowar opposes coupling redemption limits with floating share prices, warning such a combination would make money funds untenable for investors, according to a person familiar with his thinking. He continues to meet with industry representatives to develop his views, the person said. Fund firms warn at least some of their customers will shun money funds if they are at risk of seeing their investments decline in value or if they are unable to access their cash because of a redemption limitation.
Mr. Piwowar’s views appear at odds with those of Daniel Gallagher, the SEC’s other Republican member, who has backed an approach that combines a floating share price with redemption limits.
Ms. White also has expressed support for a combined approach, according to people familiar with her thinking.
Peter Crane, president of Crane Data, which tracks money funds, said most in the industry expect a combined approach. Yet a move to floating share prices is seen as contingent on the Internal Revenue Service easing certain tax burdens on the funds and it is unclear if the IRS will act. “Stalemate is a very real possibility” at the SEC, he said.
Further complicating discussions are upcoming summer travel plans, according to SEC officials. At least one commissioner is traveling in each of the remaining weeks in June, these people said. The SEC has a narrow window in which it could meet to finalize tighter fund restrictions in July and August but only if commissioners are able to reach an agreement that so far remains elusive, the people said.
Despite hectic a travel schedule, the SEC’s commissioners have agreed on a plan to finalize separate rules for swaps entered into with foreign banks and firms, paving the way for the SEC to implement those rules as early as this month, said commission officials familiar with the matter. The swaps plan is a much less controversial matter but underscores the commission’s ability to act relatively quickly once its members are in agreement on an approach. The SEC proposed the long-awaited swaps measure last May.