U.S. Treasury Secretary Timothy Geithner yesterday urged the Securities and Exchange Commission to pursue new rules for money-market mutual funds, triggering fresh opposition from industry leaders who had beaten back similar proposals and are pursuing a weaker overhaul.
Geithner, heading a Washington meeting of the Financial Stability Oversight Council, a group formed by the Dodd-Frank Act to address systemic financial risks, won unanimous approval for a draft recommendation to the SEC spelling out three ways to overhaul the $2.6 trillion industry. A new option would require capital buffers of as much as 3 percent of assets, while two other solutions he offered were opposed earlier by the fund industry and rejected in August by an SEC majority.
Representatives for the fund industry, who last month put forth their own plan, immediately denounced the proposals as stale and unhelpful. While Geithner has said the SEC is best positioned to address money funds, he has also said that the regulators’ panel, often referred to as FSOC, might intervene and subject funds to oversight by the Federal Reserve if the SEC fails to act.
“Regrettably, today’s action by the FSOC fails to advance the debate,” Paul Schott Stevens, president of the Investment Company Institute, the trade association for the industry, said yesterday in a statement. “The Council apparently is proposing to send back to the SEC the very same concepts that a majority of the commission’s members declined to issue for public comment in August.”
FSOC’s action comes a week after President Barack Obama won re-election, ensuring the push for new restrictions on the industry would continue.
Two of the options proposed by Geithner included the major elements of a plan backed by SEC Chairman Mary Schapiro that she abandoned three months ago for lack of votes. That proposal would have given money funds a choice to either drop their traditional $1 share price for a floating value, or create capital buffers to absorb losses and temporary holdbacks on all withdrawals to discourage investor runs.
The new proposal mentions only a capital buffer and no withdrawal restrictions. The 3 percent buffer envisioned wouldn’t apply to assets held in U.S. Treasuries or Treasury- backed securities. Regulators would consider a buffer of less than 3 percent of assets if it was coupled with stricter rules forcing money funds to diversify their holdings, increased minimum liquidity levels and better disclosure requirements.
“Our preferred course, and I think ultimately this is what’s essential, is for the SEC to take this back and propose its own a set of options for moving forward,” Geithner said at the FSOC meeting.
Fund executives fought the Schapiro plan, saying it would destroy the product’s attraction for investors and utility for borrowers. They argued that capital buffers would be either too small to be effective or too large to afford, and that investors would reject a floating share price and withdrawal holdbacks.
Geithner’s proposals will “keep the pressure on the SEC to do something,” Peter Crane, president of research firm Crane Data LLC, said in an interview before the FSOC meeting. “Given the election results, the industry may be even more in the mood to compromise.”
Industry executives had been encouraged by a letter Geithner published Sept. 27 in which he directed FSOC staff to prepare proposals for yesterday’s meeting. He asked them to include elements of Schapiro’s plan and a third option that mentioned withdrawal restrictions and made no reference to capital buffers.
Less than a month later, on Oct. 26, company leaders met with SEC commissioners and Treasury officials with a new plan built around withdrawal restrictions. Under the proposal, money funds eligible to purchase corporate debt, or prime funds, would be allowed temporarily to limit withdrawals during periods of stress. If a fund’s weekly liquid assets at the end of any business day fell to 7.5 percent of total assets, normal withdrawals would be halted for as long as 30 days, three people familiar with the proposal said on condition of anonymity because they weren’t authorized to speak publicly. Weekly liquid assets refers to cash and securities that can be converted into cash within seven days.
The fund’s board could allow clients to withdraw money during the restricted period only by paying a non-refundable 1 percent “liquidity fee,” the people said. The board could elect to lift the restrictions as soon as liquidity rose to 7.5 percent. The fund would be forced to liquidate if liquid assets remained below the trigger point after 30 days.
The proposal also called for funds to disclose their weekly liquidity on a daily basis and their per-share market value, or “shadow” net asset value, on a weekly basis with a five-day lag, the people said. Current rules force funds to disclose their shadow NAV monthly with a 60-day lag.
“FSOC should have allowed the SEC to consider other approaches that would strengthen rather than severely weaken money market mutual funds,” David Hirschmann, president and chief executive officer of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said yesterday in a statement.
Luis Aguilar, a Democratic SEC commissioner, said in an interview he was optimistic that public comments generated in response to FSOC’s recommendations “will shed light into what is best for the public interest.” Aguilar’s decision to side with two Republican colleagues blocked Schapiro’s plan in August.
FSOC asked for public comment on its draft recommendations for 60 days. The recommendations may be altered to reflect that commentary before the panel, which also includes Schapiro and Federal Reserve Chairman Ben S. Bernanke, votes on a final set of recommendations.
Under Dodd-Frank, the SEC will have 90 days after final recommendations are published to adopt the ideas or explain in writing why it didn’t act.
Thousands of households and companies use money funds as a safe and liquid place to park cash. The funds invest in high- quality, short-term debt. They represent the largest collective purchaser of corporate and bank-issued debt in the U.S.
The debate over money funds began soon after the Sept. 16, 2008, collapse of the $62.5 billion Reserve Primary Fund. Its failure, because it owned debt issued by Lehman Brothers Holdings Inc., set off a run by money-fund investors that helped freeze global credit markets.
The panic abated only after the Treasury guaranteed shareholders against default for a year and the Fed began financing the purchase of fund holdings. The Treasury and Fed have since been restricted from repeating those bailouts.
A federal jury in Manhattan on Nov. 12 ruled that Bruce R. Bent, founder and chief executive officer of closely held Reserve Management Co., didn’t defraud clients in the fund. His son, Bruce Bent II, was found negligent on one claim of violating a securities law.
The SEC accused the Bents of fraud in May 2009 for allegedly engaging in a campaign to deceive investors into believing the fund was safe after Lehman declared bankruptcy on Sept. 15, 2008.
The SEC enacted new rules in 2010, creating liquidity minimums, imposing shorter ceilings on the average maturity of holdings, tightening credit standards and forcing the funds to disclose more information on holdings.
Schapiro called the changes a good start. Her staff worked for two additional years on a plan that was ready in August.
The industry, joined by the U.S. Chamber of Commerce, engaged in a months-long lobbying campaign to sway SEC commissioners, members of Congress and money fund investors and borrowers against the plan.
Aguilar and Republican commissioners Daniel M. Gallagher Jr. and Troy A. Paredes told Schapiro they wouldn’t support the plan. Schapiro then shelved the plan and appealed to FSOC to intervene.