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The Resource for the Global Finance Profession

Speculation Grows Around Proposed SEC Changes to MMFs

  • By Jeanine H. Arnett
  • Published: 2012-07-13

For the past few months, financial professionals have waited with baited breath for the proposed changes to money market fund (MMF) rules that have been discussed by the U.S. Securities and Exchange Commission. Since January 2012, SEC Chairman Mary Schapiro has publicly stated that she believes additional reforms are needed so as to avoid another major incident of funds "breaking the buck." For the first time since Schapiro announced that she intended to introduce additional proposed changes, the Wall Street Journal is reporting that they have received some insight into the specific proposals believed to be in this new rules package.

According to a report released July 10, the SEC is considering requiring MMFs to hold a small capital buffer of less than 1 percent of the overall value of a fund's holdings. A senior SEC official signaled that the general size of a capital buffer the agency is weighing would insulate money funds from sudden losses in the values of their holdings.

Schapiro is pushing her fellow commissioners toward a vote on tougher rules for the MMF industry as early as this month. It appears that the SEC staff distributed a 337-page draft proposal to the agency's five-member commission last week, but its details have yet to be made public.

Schapiro and other top financial regulators from other agencies have remained firm in their stance that money funds are a continuing vulnerability in the U.S. financial system.

AFP study: MMFs would suffer

In June and July 2012, AFP released the results from our 2012 AFP Liquidity Survey, which found that organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings in MMFs in their short-term investment portfolio under three regulatory reform proposals, which are reported to be under consideration by the SEC.

AFP has been vocal on this issue and our members have offered their views before Congressional Committees to explain the impact that MMF proposals would have downstream on both their investment choices and on their sources of funding. We believe that such changes to MMFs would greatly reduce investors' interest in utilizing MMFs as a cash management and investment tool, whether applied to all investors or just institutional investors. For purchasers of MMFs, the return of principal is a much greater driver of the investment decision than return on principal. For a large number of institutional investors, the potential of principal loss would preclude floating NAV MMFs from being an internally approved investment alternative.

Further, our survey results indicate:

  • 77 percent of companies would stop investing if the NAV were allowed to float, with 56 percent immediately liquidating all or some of their current MMF holdings;
  • 80 percent of companies would stop investing if MMFs were subject to redemption holdback provisions, with 73 percent immediately liquidating all or some of their current MMF holdings; and
  • 66 percent of companies would stop investing if fund companies were required to raise reserve capital (e.g., through fees), with 55 percent immediately liquidating all or some of their current MMF holdings.

To learn more about AFP's position on MMFs, visit the Money Market Fund Resource page at www.afponline.org/moneyfunds.

Jeanine H. Arnett is Director, Government Relations & Policy, AFP.

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All rights reserved.

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