The U.S. Securities and Exchange Commission was presented with a 337-page staff proposal to require the $2.5 trillion money-market fund industry to float share prices or hold more capital and curb redemptions, according to a person familiar with the proposal.
The proposal may put the SEC on course for a clash among commissioners and with the industry. The plan won’t advance if the three commissioners who have already raised concerns about its impact on money funds hold firm. If SEC Chairman Mary Schapiro wins enough support to release the proposal for public comment, the agency will face renewed opposition from the U.S. Chamber of Commerce and Federated Investors Inc. (FII:US) Chief Executive Christopher Donahue, who has threatened to sue if a rule is ultimately adopted.
SEC staff delivered the measure to the five commissioners on June 25, two people said. It tracks with provisions Schapiro outlined in testimony last week before the Senate Banking Committee and includes multiple questions for the public, the people said.
The two Republican commissioners, Troy Parades and Daniel Gallagher, are opposed to additional regulation for money-market funds and Luis Aguilar, a Democrat, has expressed concern about the impact on the industry of changes in money-market fund rules.
John Nester, an SEC spokesman, declined to comment on the proposal.
Since November, Schapiro has spoken of the need for money funds to float their share price, which would be more realistic than the current fixed $1 share price. State, municipal and corporate treasurers, which often rely on investments that carry a stable-value, have joined the industry in criticizing the measure.
Money funds would have the option under the proposal of keeping their stable share price. If they chose that path they would have to raise capital and prevent customers from withdrawing all their money at once.
Washington business groups including the Investment Company Institute and the U.S. Chamber of Commerce have led the fight against the changes sought by Schapiro. They have argued that requiring net asset values to float or preventing full redemptions could make the funds less valuable to investors.
The Chamber of Commerce has been especially vocal, blanketing a Washington subway station adjoining SEC headquarters with advertisements questioning the need for a regulatory overhaul and releasing a study last week suggesting that even proposing changes could roil markets. The chamber said the study concluded that the rules would lead commercial paper users to seek financing from banks, where rates are almost 14 times higher.
Donahue, head of Pittsburgh-based Federated Investors Inc., the third-biggest U.S. money-fund provider, said Jan. 27 that his firm would sue the SEC if it went forward with a proposed rule. Donahue and John McGonigle, Federated’s chief legal officer, met with Aguilar on June 22 to discuss the money fund proposal, according to an agency memo.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy F. Geithner have sided with Schapiro in her bid to rewrite money-fund rules. She told the Senate Banking Committee last week that even with rules the SEC adopted in 2010 to improve liquidity standards at money funds, she is concerned that the industry remains vulnerable to runs.
“Every morning when I pick up the newspaper and read about an earthquake in Japan or problems in European financial institutions, the first question I ask our staff is, ‘What is money market fund exposure to these incidents and to these institutions?’” she told the Senate panel.
Money-market funds were once considered among the safest investments available. Financial regulators grew more concerned after the September 2008 collapse of the $62.5 billion Reserve Primary Fund contributed to a freeze in global financial markets. The run calmed after the Treasury Department temporarily guaranteed money-fund shareholders against losses and the Fed began buying fund assets at face value to help them meet redemptions.
SEC members could meet as soon as next month to vote on sending the proposal for public comment. The agency would have to hold another vote before completing the rule.
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