Money-Market Fund Reform Down, Not Out

U.S. regulators are committed to increasing regulation on a popular holding for corporate cash.
Vincent RyanOctober 8, 2012

Corporate treasurers who oppose further money-market fund reform should refrain from cheering: the failure of Securities and Exchange Commission chair Mary Schapiro to push through new safety measures in August is not the last word from regulators.

Confronted by opposition from other commissioners, Schapiro called off an SEC vote on proposed new regulations for money-market funds. The regulations would have required funds to adopt a “floating” net asset value (meaning a fund’s NAV would rise and fall daily) and to accumulate a capital reserve to cushion against losses. Investors seeking to redeem their shares would have been obliged to wait 30 days to get back 3% to 5% of their principal.

Those rules would have made money-fund investing less attractive to treasurers, some say, because they would have lowered yields and forced firms to change the accounting for these investments. In a survey of its clients published last March by ICD, a provider of risk-management analytics tools, treasurers said they would withdraw up to 41% of their money-fund holdings if the rules were enacted.

For now, that money will probably stay put. But money-market funds could still turn into less appealing investments if regulators get behind a different set of rules. For example, the Financial Stability Oversight Committee (FSOC), a supervisory body created by the Dodd-Frank Act, could deem money-market fund asset managers systemically important financial institutions, allowing the Federal Reserve to impose new capital and liquidity requirements on funds. The FSOC could force the SEC to revisit the issue, says Tory Hazard, CFO and chief operating officer of ICD. (The FSOC is unlikely to do so before the November election, says Hazard, since the committee includes Presidential appointees who wouldn’t have the time or appetite to “push forth an FSOC designation prior to the election.”)

Longer-term scenarios include the SEC mulling reforms that would be more acceptable to the commissioners who opposed Schapiro’s proposal. For example, two SEC commissioners who were set to block Schapiro’s initiative disclosed that they would support a rule permitting the boards of money-market funds to “gate” redemptions — in other words, stop investors from redeeming shares to stave off a run on a fund — without prior regulatory approval.

The removal of the threat of further SEC regulation this year is not likely to drive corporate treasurers to move cash back into money-market funds, says Lance Pan, director of research for Capital Advisors, an investment advisory. But the funds could see greater inflows if the Federal Deposit Insurance Corp.’s guarantee on non-interest-bearing transaction accounts expires at year’s end, even though fund yields are extremely low. Treasurers have very few places to put cash to work, Pan explains.