By Jonathan Spicer
NEW YORK, Sept 27 A top Federal Reserve official
on Friday took a swipe at a fellow U.S. regulator's proposal to
rein in money market mutual funds, saying a key part of the
Securities and Exchange Commission's plan is a step backward and
should be ditched.
Eric Rosengren, president of the Boston Fed branch who has
long called for reform in the $2.5-trillion industry, took aim
at one part of the SEC's two-part plan to protect investors in
times of stress like the 2008 financial crisis.
In the fall of that year, money funds threatened to freeze
global markets as investors rushed to flee the well-known
Reserve Primary Fund because of its heavy holdings of collapsed
investment bank Lehman Brothers. The fund was unable to maintain
its $1-per-share value, a situation known as "breaking the
Rosengren said reform was overdue, but that what was needed
are reforms that actually reduce the financial stability issues
that remain today.
"The SEC proposal to allow funds to impose liquidity fees
and redemption gates should be dropped," he said at a workshop
on stable funding hosted by the New York Fed.
"This particular proposal is, in my view, worse than the
status quo. It would only increase the risk of financial
instability," he told the bankers, academics and government
regulators in attendance.
The speech pushed back hard against industry resistance to
change of any kind. It took an even harder line than a letter
the Fed's 12 regional banks sent to the SEC earlier this month,
in which they criticized the SEC's plan as doing little to
While the SEC is tasked with protecting investors and
ensuring fair markets, the U.S. central bank's regulatory goal
is ensuring overall financial-market stability.
The measure that has received most attention from the Fed,
part of a series of proposed SEC changes to the industry, would
let funds ban withdrawals or charge fees for them in times of
stress. Fed officials worry that would only accelerate runs in
times of panic.
"These alterations would likely increase the incentive to
run" from money market funds, Rosengren said. "But in addition,
they increase the risk of 'contagious' runs" in which investors
also flee funds that are not in trouble.
He backed a parallel SEC proposal to require funds to adopt
a floating net asset value, or NAV, but urged the regulator to
expand it beyond only institutional funds to include retail
The idea of a floating NAV is that investors are able to see
the fluctuations in a fund's value and can decide whether to be
more tolerant of the changes or leave the funds, either way
lowering the risk of destabilizing runs.
Industry players have criticized the plan as disruptive to
customers. Even the treasurers of U.S. local and state
governments have called the plan unnecessary.
Last week, giant provider Fidelity Investments said the SEC
proposal grossly underestimates the total money fund assets that
could be affected by its reforms. The floating NAV plan would
hit some 65 percent of such assets, more than the 30 percent the
SEC estimated, Fidelity said in a letter to the regulator.
The SEC's money market proposal has faced a difficult road.
Efforts to merely issue a proposal broke down last year
after then-SEC Chair Mary Schapiro failed to muster enough votes
from fellow commissioners. The current chair, Mary Jo White,
managed to get enough support to issue the proposals, which are
pending consideration of public comments such those from the Fed