By Jonathan Spicer and Sarah N. Lynch
Sept 12 Heads of the 12 U.S. Federal Reserve regional banks on Thursday strongly criticized a component of a U.S. Securities and Exchange Commission proposal aimed at preventing runs on money-market funds, saying it does little to change current rules.
The measure, part of a series of proposed SEC changes to reduce risks in the $2.5 trillion money-market industry, would let funds ban withdrawals or charge fees for them in times of stress like the 2008 credit crisis.
The Fed group warned that allowing money funds to restrict investor withdrawals could accelerate runs by sophisticated investors before triggers are breached, leaving other shareholders in the lurch.
The policymakers, however, endorsed an alternative in the SEC's plan that would require prime institutional money-market funds to let the value of their shares float. As a result, the funds would report the value of the shares on a daily basis and no longer automatically value each share at $1.
"We continue to believe that the liquidity fees and temporary redemption gates alternative does not constitute meaningful reform and that this alternative bears many similarities to the status quo," said the letter from policymakers, sent on behalf of the 12 Fed officials by Boston Fed President Eric Rosengren.
While the SEC is tasked with protecting investors and ensuring fair markets, the central bank's regulatory goal is ensuring overall financial-market stability.
The Fed officials, some of whom have been outspoken about the lingering dangers of money funds, said the SEC proposal to require funds to adopt a floating net asset value, or NAV, was a far better option from a financial stability perspective.
The letter from central bank officials, in response to an SEC request for comments, came as large fund companies and brokerage firms also offered their own views on how money-market rules should be reformed. The SEC is still probably months from finalizing any rules on the issue.
INDUSTRY REMAINS DIVIDED
The SEC's money market proposal has faced a difficult road. Even efforts to issue a proposal broke down last year after then-SEC Chair Mary Schapiro failed to muster enough votes from her fellow commissioners.
The plan faced major opposition from the industry, which historically has opposed a floating net asset value.
Late last year the industry's tone softened after the U.S. risk council chaired by the Treasury secretary threatened to intervene, and the SEC's economists completed a study requested by three of the agency's dissenting commissioners.
Eventually, some major companies in the fund industry said they could be open to a floating net asset value as long as it did not apply to all kinds of funds.
Two of those companies, Charles Schwab Corp and Blackrock, sent letters to the SEC on Thursday saying they are not opposed to having prime institutional funds float their share price.
However, they each expressed some differences in how the SEC should proceed.
Schwab, which manages about $168 billion in money-market accounts primarily for retail investors, asked the SEC to combine its two proposals so that institutional prime funds would both report floating values and be able to impose redemption gates and liquidity fees in times of stress.
Blackrock, by contrast, said it felt combining the two proposals would not be workable and that a stand-alone plan on liquidity gates and fees makes more sense. It said its clients in a survey had an "extreme aversion" to the idea of combining the two.
If the SEC does opt for a plan calling for gates, Blackrock said, the plan should not leave a fund board with the sole discretion to impose them.
"Making a gate mandatory removes any question of conflicts of interest or hesitancy to take action," Blackrock wrote.
Still, trying to win consensus on a floating net asset value may not be easy for the SEC.
Letters on Thursday also started to pour in from companies and local government officials who rely on money funds for cash management. Many said they staunchly opposed major structural changes.
"If a floating net asset value dries up this capital source, it will rob the commercial paper and short-term municipal securities markets of a major source of short-term financing," said a letter organized by the U.S. Chamber of Commerce and signed by more than 50 businesses.
The Chamber has been one of the most aggressive organizations fighting the SEC's money funds proposals. It also has a history of filing legal challenges to SEC rules and winning by using technical arguments, such as a failure to properly assess rules' economic costs and benefits.
While the SEC in this case went out of its way to use economic data to justify the proposals, some comments on Thursday said the SEC is still underestimating how much these rules will cost the sector.
Even Schwab, which in principle supports the rule, warned the SEC it still has "significant flaws" to address in the proposal and that the costs of implementing the new rules could outweigh the benefits for financial firms and the larger financial system.
A day earlier, Fidelity Investments also told SEC officials that their money fund proposals could increase borrowing costs for U.S. municipalities by as much as $13 billion.