The Securities and Exchange Commission today voted unanimously to propose rules that would reform the way that money market funds operate in order to make them less susceptible to runs that could harm investors. A 90-day period will begin now in which the agency invites comments from the public and financial services experts on the proposal.
The SEC’s proposal includes two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative.
"The proposal requests comment on whether a better reform approach would be to combine the two alternatives into a single reform package -- requiring that prime institutional funds have a floating NAV and be able to impose fees and gates in times of stress, and that retail funds be able to impose fees and gates," SEC chairman Mary Jo White said in remarks at an open meeting of the commission. " We specifically solicit and I am interested in commenters' views on this combined approach."
The SEC began evaluating the need for money market fund reform after the Reserve Primary Fund “broke the buck” at the height of the financial crisis in September 2008.
Invented in the early 1980s, money market funds are now a significant piece of the nation's financial system. They provide short-term financing to corporations, banks and governments and hold nearly $3 trillion in assets, the majority of which are in institutional funds. In September 2008, the height of the financial crisis, a money market fund "broke the buck" and could not offer the $1 NAV to its shareholders. Within the same week, according to White, investors pulled approximately $300 billion from other institutional prime money market funds. "The contagion effect was rapid," White saiud. "The short term credit market dried up, and corporations had trouble borrowing to run their businesses. This reaction contributed to the significant disruption that already was consuming the financial system."
“Our goal is to implement effective reform that decreases the susceptibility of money market funds to runs and prevents events like what occurred in 2008 from repeating themselves,” said Mary Jo White, Chair of the SEC.
The public comment period for the proposal will last for 90 days after its publication in the Federal Register.