Is the SEC about to deliver a kill shot to money market funds with its next round of proposed regulations, now widely expected by March? Or will the SEC decide to leave well enough alone, at least for the time being, given its extensive — and relatively new — set of existing reforms?
The firestorm started in November, when SEC chairman Mary Schapiro floated a trial balloon at the Securities Industry and Financial Markets Association’s annual meeting in New York City. In a lengthy speech, she said she believed “additional steps should be taken to address the structural features that make money market funds vulnerable to runs,” as a follow-on to the original reforms adopted by the SEC in February 2010. Those reforms had already “tightened credit quality standards, shortened weighted-average maturities, and for the first time imposed a liquidity requirement,” she noted. But she described the stable $1.00 net asset value (NAV) used by money market funds as “brittle,” and said that out of the “numerous reform options on the table,” the options that looked to have “the greatest viability” were “floating NAVs and capital buffers, possibly combined with redemption restrictions.”
Under an SEC rule, money market funds are the only mutual funds that are allowed to sell and redeem shares at a fixed price of $1.00 per share, but that has always been conditional. The day-to-day value of the funds’ assets cannot deviate from that $1.00 per share mark by more than a very slim margin, or they risk being marked down to less than a dollar. That risk became real when Lehman Brothers went into bankruptcy, and the Reserve Primary Fund ‘broke the buck’ because it was holding $785 million of Lehman’s short-term paper, equal to 1.2 percent of its assets. That set off a panicked run of redemption requests throughout the industry, threatening a meltdown, and the SEC and the Federal Reserve have been trying to come up with solutions ever since.....