While money market funds did not exist when Humphrey Bogart spoke his famous line in Casablanca, since the 2008 financial crisis, reforming money market funds have been the subject of high drama and intense scrutiny on Capitol Hill. Advocates for reform finally got their long awaited breakthrough last Wednesday, June 5, 2013, when the Securities and Exchange Commission voted unanimously to propose legislation that would reform money market funds. The SEC’s goal with the reform is to make money market funds less susceptible to “runs” that could harm investors.
The SEC’s goal of reform has been in the works for a long time, was championed by former Chair of the SEC, Mary Schapiro, and has been continued by current Chair Mary Jo White. A money market fund is a type of fixed-income mutual fund that invests in debt securities with short maturities and minimal credit risk. They first developed in the early 1970s as an option for investors to purchase a pool of securities that generally provided higher returns than interest-bearing bank accounts. Money market funds have grown considerably since then and currently hold more than $2.9 trillion in assets.
Money market funds seek stability and security with the goal of never losing money and keeping their net asset value (“NAV”) at $1.00. However, many felt reform was necessary after a money market fund “broke the buck” at the height of the financial crisis in September 2008 and re-priced its shares below its $1.00 stable share price to $0.97. Investors panicked and within a few days, investors had pulled approximately $300 billion from similar money market funds. Intervention from the United States Treasury Department prevented further runs on the funds.
What is the SEC’s proposal?
The SEC’s proposal includes two reforms that could be adopted separately or in conjunction with one another. The first reform would require a floating NAV for prime institutional money market funds, which are high minimum investment, low expense share classes and make up approximately 35% of the multi-trillion dollar industry. The reform would change the current system, which uses a fixed share price of $1.00, to a system in which the share price would fluctuate with the market. The second reform would allow the use of liquidity fees and redemption gates in times of stress to discourage or temporarily prevent investors from making runs on money market funds similar to the $300 billion of withdrawals in 2008. Each reform proposal would also require additional diversification and disclosure measures.
What is the most significant legal aspect for money market funds with the SEC’s proposal?
Both of the new reform proposals contain enhanced disclosure requirements that would force managers of covered money market funds and boards of directors to pay closer attention to compliance dates and disclosures. Failure to abide by the rules could subject them to litigation. Some of the new disclosure requirements include:
Daily disclosure on its website of the money market funds’ levels of daily and weekly liquid assets and market-based NAVs per share;
Disclosure of certain events such as the imposition or lifting of fees or gates, portfolio security defaults, sponsor support, and a fall in the fund’s market based NAV per share below $0.9975; and
Disclosure of historic instances of sponsor support
At this stage, the legal ramifications are merely speculative because these are just proposals. The public can submit comments on these proposals, which could lead to revisions, and the SEC is likely to vote on the proposals in late 2013 or early 2014. It will be important for boards of directors and money market fund managers to keep a close eye on the results.
So, “Of of all the gin joints, in all the towns, in all the world,” the SEC just walked into yours.