RPT-U.S. SEC poised to adopt reforms for money market funds

Wed Jul 23, 2014 7:00am EDT

(Repeats story released earlier with no changes)

By Sarah N. Lynch

WASHINGTON, July 23 (Reuters) - U.S. regulators are expected to adopt rules on Wednesday that force "prime" money market funds used by large institutions to float their share price.

Proponents have suggested that moving from the current stable $1 per share net asset value (NAV) to a floating NAV would help prevent investors from getting spooked by the prospect of funds "breaking the buck," or falling lower than that amount.

The Securities and Exchange Commission is also likely to finalize a second provision that will permit fund boards to lower so-called redemption "gates" or charge fees in stressed market conditions, according to people familiar with the matter.

The reform will impact a wide variety of asset managers, from Blackrock Inc, Fidelity and Vanguard to Charles Schwab Corp, Pimco and Federated Investors Inc.

The two-pronged reform for the $2.6 trillion industry comes after a long battle between the SEC, the industry and federal banking regulators.

The industry and the U.S. Chamber of Commerce have warned that any rules that drastically change the structure of money market funds could cut off a major supply of short-term funding for corporations.

Wednesday's final rule is expected to carve out exemptions for a wide swath of money funds.

Funds used by retail investors, for instance, will still be permitted to maintain a stable $1 per share net asset value because they are considered less likely than institutional investors to run on a fund if the market deteriorates.

The U.S. Treasury Department, which has been working to devise a way to relieve investors in funds with a floating NAV from burdensome tax rules, is also expected to unveil its plan sometime on Wednesday, several people familiar with the matter said.

The Financial Stability Oversight Council, a panel of regulators charged with policing for risks, has been pressuring the SEC to bolster money market fund regulations since 2012.

In 2008, the Reserve Primary Fund's heavy exposure to Lehman Brothers led panicked investors to yank out their money, causing the fund to break the buck when its net asset value fell below $1 per share.

The Federal Reserve was ultimately forced to backstop the industry until the chaos subsided.

Former SEC Chair Mary Schapiro initially pushed two potential plans for money funds, including either a floating NAV or a capital buffer requirement.

The majority of the industry and three of the SEC's fellow commissioners, however, rejected the ideas, saying they could kill the product and that more study was needed to justify new rules.

After the SEC completed a study and the agency assumed new leadership, sentiment toward a floating NAV softened.

While some funds and industry groups are still opposed to requiring a floating NAV, others say they are fine with it as long as it only applies to prime funds and as long as all of the tax and accounting issues associated with a floating share price are resolved. (Reporting by Sarah N. Lynch. Editing by Andre Grenon)