The riskiest money-market mutual funds will be required toabandon their stable, $1-share value and allow their prices tofloat under rules adopted by the U.S. Securities and ExchangeCommission.

The rules, approved today on a 3-2 vote, conclude a four-yearstruggle to toughen regulations after a run at one money fundduring the 2008 credit crisis brought the $2.6 trillion industry tonear-collapse, halted only by a federal backstop. Money-fundmanagers and other business groups largely opposed the newrules.

The strongest of the measures are reserved for prime moneyfunds, which cater to institutional investors and primarily buyriskier securities, such as commercial paper issued by banks.Instead of a stable price of $1, which means a dollar invested canalways be redeemed for $1, prime funds will have to price theirshares in a way that will reveal fluctuations. Funds will have twoyears to comply with the change.

“Today's reforms will fundamentally change the way that mostmoney-market funds operate,” SEC Chair Mary Jo White said beforethe vote. “They will reduce the risk of runs in money-market fundsand provide important new tools that will help further protectinvestors and the financial system in a crisis.”

White and Commissioners Luis A. Aguilar, a Democrat, and DanielM. Gallagher, a Republican, voted for the rules. RepublicanCommissioner Michael S. Piwowar and Democratic Commissioner Kara M.Stein opposed them.

The rules include an agreement with the Treasury Department andInternal Revenue Service to reduce the tax burden from investing ina fund whose share price can change. Investors will only have toaccount for gains and losses once, at the end of a year, instead oftracking prices at which they buy or sell throughout a year. TheIRS also will waive its “wash-sale” rule, which could havepenalized investors who frequently move cash in and out of moneyfunds.

Retail investors won't see changes in how their shares arepriced. Funds that primarily invest in government and municipalsecurities are largely exempt from the new requirements.

The rules will be closely examined by money-fund managers suchas Federated Investors Inc., which argued that a floating shareprice wouldn't prevent investor flight in a crisis.

The SEC has sought to calibrate the rules so that money fundsremain a useful alternative to bank deposits. Gallagher said thefinal rules averted earlier proposals, backed by the FederalReserve, to require that funds hold a capital buffer.

'Market-Based Pricing'

“Addressing a three-decade-old error in a nuanced and tailoredmanner to reinstate market-based pricing should not be seen, assome have argued, as a heavy handed act of government,” Gallaghersaid in a statement. “This is especially true when the fix willpositively impact investor behavior and eliminate the perception ofa federal backstop.”

Still, business groups such as the U.S. Chamber of Commerce havecomplained that the changes will destroy the appeal of prime funds,which corporations use to manage cash. The move to a floating shareprice also will require corporate investors to pay taxes on gainsand losses, making them more complex to use, the Chamber ofCommerce said.

Boeing Co. will move its cash out of prime funds because theycould lose principal if a fund's share price declines, said VerettMims, the company's assistant treasurer. Boeing has $2 billion to$3 billion invested in money funds, most of that in prime funds,she said.

“The proposals, the way they stand now, are going to push morecash to timed deposits with banks or more non-traditional fundswhere there is less visibility,” Mims said yesterday in a call withreporters.

Boeing could use money funds that invest in short-term U.S.government securities as an alternative, Mims said. Governmentfunds will be allowed to continue pricing their shares at $1,although the rules include restrictions on assets they canpurchase. Government funds will now have to invest 99.5 percent oftotal assets in cash, government securities or repurchaseagreements backed by government debt or cash, according to a factsheet released by the SEC today.

The SEC, along with the Fed and Treasury Department, has pressedto make money funds safer since the September 2008 collapse of the$62.5 billion Reserve Primary Fund, which triggered a run on othermoney funds and helped freeze credit markets. The crisis calmedonly after the Treasury temporarily guaranteed shareholders againstlosses and the Fed began buying fund assets at face value to helpthem meet redemptions.

Block Changes

Federated has previously threatened to sue to block the changes.A spokeswoman, Meghan McAndrew, declined to say this week whetherFederated is still considering legal action. The Pittsburgh-basedcompany oversaw $202 billion in U.S. money market mutual fundassets as of June 30, according to research firm Crane Data LLC inWestborough, Massachusetts.

The SEC's rules also would allow boards of directors of moneyfunds to temporarily suspend withdrawals or impose fees when a fundfaces an inability to meet redemptions. Stein said she fearsinvestors will react to the prospect of having to pay fees orlosing access to their cash by preemptively fleeing.

“If investors are not able to redeem before the gate comes down,they will be harmed as they are deprived of access to theircapital,” Stein said. “Ultimately, this contagion could freeze thewholesale funding markets in much the same way as occurred duringthe recent financial crisis.”

In a letter made public yesterday, top executives at GoldmanSachs Group Inc.'s asset management arm wrote that they agreed withStein's views. A drop in share price won't stop investors fromrushing to the exits if they believe their funds could be frozen,Goldman's executives wrote.

Piwowar also voted against the rules, saying the design of thefloating share price was unnecessarily strict and won't detersophisticated investors from redemptions that could lead to lossesfor other investors. In addition, he said, many companies that useprime funds will no longer find them attractive once they losetheir stable value.

“The continued utility of institutional prime and tax- exemptmoney market funds as a cash-management tool is highlyquestionable,” Piwowar said in a statement.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.