Fund Providers Look for a Way Around Money-Market Rules

Dissatisfied with new SEC rules, providers of prime money-market funds are thinking of offering alternatives that would be less heavily regulated.
Katie Kuehner-HebertMarch 17, 2015
Fund Providers Look for a Way Around Money-Market Rules

As an end-run around upcoming requirements for floating net asset values for prime money-market funds, major mutual funds providers such as Federated Investors and BlackRock might offer private funds with a fixed $1 share price, according to a Bloomberg article on Sunday.

Other firms, such as Invesco, are letting clients move money into existing private pools.

Fidelity’s head of fixed income Nancy Prior reportedly said in a speech last week at an iMoneyNet conference that the company plans to convert several of its prime money-market funds to ones that buy only securities issued or backed by the U.S. government.

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Fidelity’s prime fund assets would drop by half to about 30% and government funds would account for more than 50% of all money fund assets.

The Securities and Exchange Commission last year made rule changes in order to make the biggest money funds safer, after the 2008 collapse of the $62.5 billion Reserve Primary Fund that caused a widespread run on funds and helped freeze global credit markets.

In addition to a floating NAV, the SEC allowed boards of prime money-market funds to impose “redemption gates” and “liquidity fees” — measures that presumably would halt or at least slow an investor exodus in a financial crisis.

Opponents to a floating NAV and the liquidity measures have always said they would spur alternatives. The result, if other mutual fund firms follow the leaders, could be the transfer of billions of dollars from regulated funds into pools largely outside the reach of the SEC.

“If you have a vehicle buying the same things, you are simply rearranging the deck chairs on the Titanic,” Brandon Semilof, a managing director at StoneCastle Cash Management, told Bloomberg. “It violates the spirit of all of these regulations.”

Last December, Moody’s said changes to money fund product structures would “cause investors to significantly reduce their exposure to prime funds, and even though the implementation of the reform is not due until Q3 2016, some shifts are likely to occur already in 2015.”

The new rules go into effect in October 2016.