SEC Narrowly Adopts Money Market Fund Reforms

Years of debate between regulators and the securities industry dating back to the financial crisis came to an end on July 23 when the Securities and Exchange Commission (SEC) narrowly approved rules aimed at lessening the risk of investor runs on money market funds, Reuters reported.

The Commission approved the new rules in a 3-2 vote. Commissioners Michael Piwowar, a Republican, and Kara Stein, a Democrat, cast the two no votes.

The new rules require prime institutional funds to do away with their fixed $1 share price and float in value. All money funds will also be permitted to impose fees for investors to redeem their shares and temporarily block investors from withdrawing cash at times of market stress, The Wall Street Journal reported.

“Today's reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system,” SEC Chair Mary Jo White said in a statement. “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America's investors.”

Prime funds invest in short-term corporate debt. The new rules ' with which companies will have two years to comply ' will only apply to prime funds that cater to large, institutional investors. Those sold to individual investors will be able to keep the stable $1 share price. Money funds that purchase short-term Treasurys and debt issued by government agencies will also remain unaffected by the floating share price requirement, The Wall Street Journal reported.

“Today's adoption of final money market fund reforms represents a significant additional step to address a key area of systemic risk identified during the financial crisis,” Norm Champ, director of the SEC's Division of Investment Management, said in a statement. “These reforms are important both to investors who use money market funds as a cash management vehicle and to the corporations, financial institutions, municipalities and others that use them as a source of short-term funding.”

However, there are those who believe the new rules make money funds no longer appealing. The U.S. Chamber of Commerce has argued that the changes have made money funds more complex to use, because a floating share price requires corporate investors to pay taxes on gains and losses. Corporations are now also at risk of losing principal if a fund's share price declines, Investment News reported.

Commissioner Stein expressed concern that the prospect of fees or losing access to their money during times of market stress could cause investors to flee preemptively.

“If investors are not able to redeem before the gate comes down, they will be harmed as they are deprived of access to their capital,” Ms. Stein said, according to Investment News . “Ultimately, this contagion could freeze the wholesale funding markets in much the same way as occurred during the recent financial crisis.”

The Financial Stability Oversight Council ' a panel of regulators created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ' urged the SEC to move forward with money market fund reforms, but has also expressed concern about the restrictions on investor redemptions. The panel has said it will examine the SEC's new rules..

According to the SEC statement, the rules will become effective 60 days after their publication in the Federal Register, and the re-proposal will have a 60-day public comment period after its publication in the Federal Register.

' Isobel Markham, Law.com

'

Years of debate between regulators and the securities industry dating back to the financial crisis came to an end on July 23 when the Securities and Exchange Commission (SEC) narrowly approved rules aimed at lessening the risk of investor runs on money market funds, Reuters reported.

The Commission approved the new rules in a 3-2 vote. Commissioners Michael Piwowar, a Republican, and Kara Stein, a Democrat, cast the two no votes.

The new rules require prime institutional funds to do away with their fixed $1 share price and float in value. All money funds will also be permitted to impose fees for investors to redeem their shares and temporarily block investors from withdrawing cash at times of market stress, The Wall Street Journal reported.

“Today's reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system,” SEC Chair Mary Jo White said in a statement. “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America's investors.”

Prime funds invest in short-term corporate debt. The new rules ' with which companies will have two years to comply ' will only apply to prime funds that cater to large, institutional investors. Those sold to individual investors will be able to keep the stable $1 share price. Money funds that purchase short-term Treasurys and debt issued by government agencies will also remain unaffected by the floating share price requirement, The Wall Street Journal reported.

“Today's adoption of final money market fund reforms represents a significant additional step to address a key area of systemic risk identified during the financial crisis,” Norm Champ, director of the SEC's Division of Investment Management, said in a statement. “These reforms are important both to investors who use money market funds as a cash management vehicle and to the corporations, financial institutions, municipalities and others that use them as a source of short-term funding.”

However, there are those who believe the new rules make money funds no longer appealing. The U.S. Chamber of Commerce has argued that the changes have made money funds more complex to use, because a floating share price requires corporate investors to pay taxes on gains and losses. Corporations are now also at risk of losing principal if a fund's share price declines, Investment News reported.

Commissioner Stein expressed concern that the prospect of fees or losing access to their money during times of market stress could cause investors to flee preemptively.

“If investors are not able to redeem before the gate comes down, they will be harmed as they are deprived of access to their capital,” Ms. Stein said, according to Investment News . “Ultimately, this contagion could freeze the wholesale funding markets in much the same way as occurred during the recent financial crisis.”

The Financial Stability Oversight Council ' a panel of regulators created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ' urged the SEC to move forward with money market fund reforms, but has also expressed concern about the restrictions on investor redemptions. The panel has said it will examine the SEC's new rules..

According to the SEC statement, the rules will become effective 60 days after their publication in the Federal Register, and the re-proposal will have a 60-day public comment period after its publication in the Federal Register.

' Isobel Markham, Law.com

'