WASHINGTON May 15 Federal Reserve economists
have released a study that found that imposing redemption fees
and temporary suspensions, or gates, on money market mutual
funds could spur investor runs, rather than reduce them.
The study concludes that "informed investors" would most
likely wait to withdraw their cash in times of stress if no fees
or gates were imposed, but would "redeem pre-emptively if fees
or gates are possible."
"Rules that provide... money market funds the ability to
restrict redemptions when liquidity falls short may threaten
financial stability," it concluded.
It is unclear whether the study's conclusions could
influence the ongoing deliberations at the U.S. Securities and
Exchange Commission, which is in the final throws of drafting
new money market fund rules.
The SEC's proposal contains two critical components. One
calls for imposing a floating net asset value on prime money
market funds, instead of letting them maintain a stable $1 per
share net asset value.
The other measure, which is the industry's preferred
alternative, would permit fund boards to impose a combination of
redemption fees and gates in times of stress.
The SEC could opt to choose just one of the proposals, or
adopt them in combination.
The study was completed in April by Patrick McCabe, an
economist at the Fed in Washington, D.C., along with two New
York Fed economists and an academic.
People familiar with the matter said McCabe was frequently
in contact with SEC officials during former SEC Chair Mary
Schapiro's tenure to discuss money fund reforms.
A Fed spokeswoman declined to comment on what role McCabe
may have played behind the scenes in the money fund debate at
the SEC, or on the study's potential impact.
The SEC's money fund plan was spurred by a desire to avoid a
repeat of the 2008 financial crisis when the Reserve Primary
Fund's net asset value fell below $1 and "broke the buck" as
panicked investors flocked to redeem their money.
The SEC has been under pressure from other regulators,
including the Fed, who sit on the Financial Stability Oversight
Council to enact stricter money market fund reforms.
At one time, Schapiro, who was an FSOC member, had called
for considering even tougher measures for money funds, such as
But the idea never took flight, both because of staunch
industry opposition and because three fellow SEC commissioners
declined to support proposed reforms until more study was
conducted to justify them.
Ultimately, the SEC released the current pending proposal in
June 2013. The agency had hoped to issue a final rule by now,
but delays have ensued.
SEC Chair Mary Jo White told a U.S. Senate panel on
Wednesday she expects the agency to finalize the rules in the
She is due to speak to an audience of fund executives next
week at an industry conference in Washington, D.C.
(Reporting by Sarah N. Lynch; Editing by Dan Grebler)