U.S. securities regulators are inching closer to completing new rules for money market funds, though no final decision on how to proceed has been made just yet, according to a person familiar with the matter.
The Securities and Exchange Commission staff in charge of the rulewriting has been meeting with the agency's five commissioners, circulating some documents that highlight potential courses of actions and sounding them out to get their thoughts, the person said.
The SEC is still actively eyeing a plan that would force prime institutional money market funds to abandon their stable $1 per-share net asset value and float their share price.
In response to some complaints from the industry, the SEC is also exploring whether to make some changes from its initial proposal that could effectively expand the number of money market funds that would be exempt from a floating net asset value, the person added.
The SEC has been exploring ways to reform the $2.6 trillion money market fund industry as a direct response to the financial crisis.
In 2008, exposures to Lehman Brothers caused a large prime institutional fund known as the Reserve Primary Fund to have its net asset value dip below $1, an event known as "breaking the buck."
Spooked investors rushed to get their money out, and the U.S. government ultimately stepped in to prop up the money market fund industry until the panic subsided.
The SEC's proposal, first released last summer, is aimed at preventing similar runs.
In addition to proposing a floating NAV for prime funds, the plan also contemplates an alternative which would permit fund boards to impose liquidity fees and redemption gates during times of stress.
The SEC could potentially adopt one of the two options alone or in combination.
The source added that the proposal for gates and fees are also still on the table as well.
Earlier this week, the SEC released four new economic analyses on money market funds that it is using to help inform a final rule and asked the public to submit feedback on the studies.
SEC Republican Commissioner Michael Piwowar said on Wednesday that he is advocating internally for the SEC to allow funds to choose which option they prefer.
"My idea is, rather than us choosing for everybody, why don't we allow for both options to be offered and then investors can choose which one they want?" Piwowar said on the sidelines of an SEC event.
"I call it the investor choice model, or the belts or suspenders model," he added.
It is unclear if his idea could gain traction. A majority of the five commissioners must agree before a rule can be adopted.
RETAIL EXEMPTION EYED
As part of the SEC's internal discussions, staff is discussing making changes that would broaden an exemption for retail money market funds from having to float their share price.
Retail funds were always supposed to be exempted from the floating NAV plan because they are considered less at risk for runs. But many in the industry have said that how the SEC defined retail is problematic.
In October, nine fund management companies including Blackrock, Fidelity, Vanguard and Wells Fargo proposed an alternative definition of retail.
Under the SEC's plan, a fund would be considered retail if it prohibits a shareholder from redeeming more than $1 million per business day.
The nine companies have urged the SEC to instead define a retail fund as one that "limits beneficial ownership interest to natural persons" such as individuals who are investing in money funds through individual accounts or retirement accounts.
The Wall Street Journal reported earlier on the SEC's internal deliberations concerning broadening the retail exemption.
(Reporting by Sarah N. Lynch in Washington, D.C.; additional reporting by Supriya Kurane in Bangalore; Editing by Gopakumar Warrier and Andrew Hay)