Schwab's "modified floating NAV" marks latest tiptoe toward SEC

Thu Jan 17, 2013 6:39pm EST

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011.

Credit: Reuters/Jonathan Ernst

(Reuters) - Charles Schwab Corp outlined to regulators a plan to let the net asset values of some money funds vary from their traditional $1 per share, making it the latest company to embrace reform in the $2.6 trillion industry.

In a comment letter filed to the Financial Stability Oversight Council on Thursday, Marie Chandoha, president of Schwab's investment management division, said the company's position has evolved and that some prime money funds for institutional investors could "float" their net asset values, or NAVs, to cope with rapid withdrawals.

Even the suggestion of a floating NAV remains anathema to much of the funds industry. Yet, Chandoha wrote, offering such funds would aim "reform at the sector of the money market fund industry most likely to initiate a potentially destabilizing run, but do so without wreaking havoc" on smaller investors and markets.

Regulators including the risk council have been pressing to make money funds more resilient after bumps during the financial crisis. As major debt holders, money funds play a key role in the financial system and their problems threatened to freeze up global markets during the crisis.

The biggest scare came when investors rushed to pull cash from the well-known Reserve Primary Fund in the fall of 2008 because of its heavy holdings in the collapsed Lehman Brothers. The fund was unable to maintain its $1 per share value, known as "breaking the buck." Sponsor support kept at least 21 prime funds from a similar fate during the crisis, a later Federal Reserve study found.

Rule changes in 2010 made the funds more liquid and transparent. Before she stepped down as chairman of the U.S. Securities and Exchange Commission last year, Mary Schapiro pushed for further reforms like a floating NAV or capital buffers. She failed to gather support from other commissioners as industry leaders argued such changes could drive away big investors.

But lately there have been signs that even the agency's skeptics could embrace more change. Just on Wednesday, Republican SEC Commissioner Daniel Gallagher said he expects tax and accounting issues could be solved to allow floating NAVs.

Also, since last week the largest money fund sponsors, including Fidelity Investments, JPMorgan Chase & Co and Federated Investors Inc, have pledged daily disclosures of their net asset values, which in practice have not varied much from $1 in any case.

After Schapiro's setback, the risk council picked up the issue and requested public comments, such as the one it got from Schwab. Earlier this week asset manager Vanguard Group Inc and Wall Street trade group the Securities Industry and Financial Markets Association wrote letters backing "liquidity fees" for money funds during times of stress, another concept not universally loved in the industry.

FOLLOWING UP BETTINGER

Schwab Chief Executive Walter Bettinger had previously said he would support the floating NAV for some funds in an opinion piece in The Wall Street Journal in November.

In the comment letter, Chandoha fleshed out the idea she called a "modified floating NAV." She wrote that, pending more analysis, Schwab remained opposed to many of the risk council's proposals like having funds build up buffers or holding back some redemptions.

But, she wrote, measures could be worthwhile to address the behavior of large institutional investors, who pose the biggest "run risk," making rapid withdrawals that could destabilize the funds during a crisis.

The risks are minimal for funds that invest in Treasuries and other government instruments, she wrote. But for prime funds that also invest in corporate instruments, she said, a floating NAV could be appropriate if it allows a single shareholder to own more than 0.1 percent of total assets.

(Reporting By Ross Kerber; Editing by Steve Orlofsky)

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