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
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
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
"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
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.