REUTERS SUMMIT-SEC retail fund definition came from USAA

Fri Jun 7, 2013 11:40am EDT

(For other news from Reuters Wealth Management Summit, click here)

By Linda Stern

NEW YORK, June 7 (Reuters) - A key part of the U.S. Securities and Exchange Commission's new proposal on regulating money-market funds came from an idea raised by a single financial firm, a senior SEC official said.

The SEC proposal, issued Wednesday, would require institutional funds - those marketed to large organizations and ultra high net worth investors - to transition from a fixed $1 share price to a floating net asset value (NAV). Retail funds, aimed at smaller investors, would be exempt.

The SEC defines retail funds as those that prohibit individual redemptions of more than $1 million a day. That is the piece that came from the financial firm, San Antonio, Texas-based United Services Automobile Association (USAA).

In a Feb. 15 comment letter to the regulator, USAA first raised the idea of distinguishing between retail and institutional money-market funds on the basis of redemption activity.

"That is where we got the idea," Norm Champ, director of the SEC Division of Investment Management, told the Reuters Global Wealth Management Summit on Thursday. "It's a very simple way to draw the line."

Some critics - notably former SEC Chairman Arthur Levitt - have questioned the SEC's decision to exempt retail funds from its proposal, suggesting that even retail funds could run into problems with mass redemptions or insufficient cash cushions during a market run or other credit crises.

Champ said the proposal was carefully targeted at areas where problems cropped up in the 2008 credit crisis.

"The issue was institutional investors," he said.

USAA had suggested a $250,000 redemption limit but Champ said he recommended $1 million. The SEC wanted to give individual investors leeway to withdraw large sums for special situations, like home purchases or retirement moves, he said.

"We didn't think institutional investors would put up with a limit of any size, and we were trying to get one with some flexibility," he said.

Champ said the idea of a redemption limit appealed to him because it was so simple. The regulatory agency also considered and rejected defining institutional funds by their concentration of ownership or by account size.

A USAA spokesman said, "We view the SEC's proposed limit of $1 million as reasonable and consistent with our philosophical approach."

Even the simpler approach leaves some room for confusion. For one, many small investors actually buy institutional money market funds via their 401(k) plans and brokerage accounts. To qualify as retail, those funds would have to limit their withdrawals to $1 million, and not the bulk withdrawals that the 401(k) plans and brokerage firms make on behalf of multiple clients at the same time. (For more summit stories see ; Follow Reuters Summits on Twitter @Reuters_Summits; Editing by Frank McGurty and Nick Zieminski)