John C. Bogle, the founder of Vanguard Group Inc. who popularized index-based investing, said proposed rules for money-market mutual funds don’t go far enough to protect investors and the financial system.
The U.S Securities and Exchange Commission’s June 5 proposal to make only the riskiest money funds, known as prime funds, adopt a floating share price is a “compromise” forced by the fund industry’s resistance to reform, Bogle said today in remarks at the Morningstar Investment Conference in Chicago. Regulators should force all money funds to float their share price, he said.
“The fact is money-market fund net-asset values fluctuate and they don’t want to let the world know,” Bogle said, referring to fund-company executives.
Bogle, 84, has spent his career advocating for lower costs and investor-friendly practices in the financial industry, sometimes putting him at odds with the firm he founded in 1975. Vanguard was among a group of firms including Fidelity Investments and Charles Schwab Corp. that earlier this year urged regulators to exempt retail-oriented money funds from regulation and focus only on those prime funds that cater to institutional clients.
U.S. regulators have debated how to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on prime funds that helped freeze global credit markets.
Former SEC Chairman Mary Schapiro championed a plan in late 2011 and 2012 that envisioned changing the accounting standard for all money funds, including those that invest only in government securities or municipal bonds.
After running into opposition from the fund industry, the SEC, now led by Mary Jo White, approved a set of narrower proposals. The plan includes one that would require prime funds, which invest in corporate debt and cater to institutional investors, to abandon their fixed $1 share price. The proposal also included an industry-favored alternate plan that would limit the ability of investors to pull out of a fund that comes under stress. The SEC has left open the option of adopting either approach or both together.
“The probability of something bad happening in money market funds is tiny, but the consequence of something going wrong is fatal,” Bogle said. “We really should be thinking about the shareholders and about society.”
Mike McNamee, a spokesman for the Investment Company Institute, the Washington-based trade group for the mutual-fund industry, said today in an e-mailed statement that “floating the net asset value of money-market funds would not serve the interests of investors.”
“Money-market fund shareholders value the stable net asset value of these funds, as evidenced by the public comments filed by more than 300 groups representing businesses, state and local governments, and nonprofits in opposition to floating NAV proposals,” McNamee said.
Bogle retired from Valley Forge, Pennsylvania-based Vanguard in 2000 and established the Bogle Financial Markets Research Center. Vanguard, known for its low-cost index funds funds, is the biggest U.S. mutual-fund company.