SEC money fund rule changing $1 share faces less opposition

No more fixed values for riskiest funds

‘Careful Thought’

“This time around, there seems to be more careful thought into putting out a proposal and more of an openness of the staff and commissioners to listening to the views of the stakeholders,” Joe said in an interview.

SEC Chairman Mary Jo White said last month that the goal of new regulation is to mitigate the systemic risk posed by some money funds while preserving the product’s value to investors.

The Chamber, which has sued the SEC over other regulations, lauded a recent commission analysis for rigorously studying the issue. The report found that SEC reforms passed in 2010 wouldn’t have prevented the Reserve Primary Fund from breaking the buck and being liquidated. Those rule changes included new minimum liquidity levels, shorter average maturity limits, tougher credit quality standards and new disclosure requirements.

The SEC has held talks with the Internal Revenue Service over the tax implications of a floating-share value for money funds, since investors could owe taxes if they recorded a capital gain when selling shares. The proposal considered tomorrow isn’t expected to indicate the IRS’s decision on whether to waive the tax rules.

Congressional Action

“I am not quite sure they can just wave their magic wand and at a the drop of a pin, give relief to it,” Joe said. “It may require congressional action to solve that problem.”

The $2.6 trillion money fund industry includes 580 funds, according to the Investment Company Institute. The top 10 fund families, including those run by Fidelity Investments, JPMorgan Chase & Co., and Federated Investors Inc., control 75 percent of assets, according to Crane Data LLC, a research firm in Westborough, Massachusetts.

The largest U.S. money-fund providers shifted their lobbying this year away from all-out opposition to limiting the scope of potential new rules.

A proposal limiting rule changes to prime institutional funds would be a victory for companies including Fidelity, Vanguard and Charles Schwab Corp. All three called for exempting funds that invest only in government debt or municipal bonds, as well as all funds that serve only retail investors. They pointed to data showing that withdrawals in the weeks following Reserve Primary’s demise were concentrated in prime institutional funds.

BlackRock Ideas

The proposal also appears to favor ideas championed by asset manager BlackRock Inc., which called for allowing funds to maintain their $1 share value while imposing a 1 percent fee on withdrawals when a fund’s weekly liquidity dropped below half the required level.

Federated Investors Inc., the third-largest manager of U.S. money-market funds, said last year it would sue to block changes contemplated by the SEC. Federated has said a floating net-asset value would destroy the value of money funds and lead to a substantially smaller industry.

Meghan McAndrew, a Federated spokeswoman, said the Pittsburgh-based fund company believes the SEC’s 2010 reforms were sufficient to improve the transparency and strength of money funds.

“You have a lack of consensus about whether there is an issue that needs to be resolved and how it needs to be resolved,” said Barbash, co-chairman of the asset management practice at Willkie Farr & Gallagher LLP. “That is what makes this an extraordinarily difficult environment in which to do a rule.”

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