Money Fund Reform Pushes Regulatory Endgame

by Kelli McMorrow

Money market fund reform made overcame a significant hurdle, but only after some political jostling between regulators.

The threat of further regulation surrounding the $2.6 trillion U.S. money market fund industry by the Financial Stability Oversight Council (FSOC) — an umbrella regulator charged with monitoring other regulators’ blind spots — likely encouraged the U.S. Securities and Exchange Commission (SEC) and industry groups to come to some consensus on these new rules.

The FSOC has kept up pressure on the SEC to finish its money-fund rules by examining whether fund sponsors pose a systemic risk to the financial system. A systemic risk designation would lead to stiffer regulation by the Federal Reserve Board, so the SEC’s rulemaking action should reduce the likelihood that the FSOC takes that step.

On Wednesday, July 23, the the voted to approve a new rule governing money market funds, following years of heated debate between regulators and industry groups dating back to the financial crisis.

The SEC’s new rule will force "prime" money market funds used by large institutions to float their share price. Many critics have objected to this part of the rule, which is a major change from the current structure in which all money market funds maintain a stable $1 per share net asset value (NAV), and will cut off a major supply of short-term funding for corporations who rely on the funds.

Another piece of the rule will permit fund boards to impose so-called redemption "gates" or fees of up to two percent in stressful market conditions if a fund's weekly liquid assets fall below 30 percent of its total assets. These “gates” could only remain in place for 10 business days.

Both reforms are slated to go into effect two years after they are published in the Federal Register, a longer than normal time frame, given the difficulties these rules are expected to raise for fund users.

The SEC approved the measure in a 3 to 2 vote. Republican SEC Commissioner Michael Piwowar and Democrat Commissioner Kara Stein both voted against the measure, while Chair White and Commissioners Gallagher and Aguilar voted in favor. Commissioner Piwowar remains concerned with issues surrounding the floating net asset value, while Commissioner Stein was concerned that the fees and gates may actually fuel firesales and runs.

The SEC also said that the U.S. Treasury Department and the Internal Revenue Service will unveil a plan permitting investors to use a simplified tax accounting method. Tax implications were a major sticking point for critics of the floating NAV.