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By Linda Stern
NEW YORK, June 7 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
"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
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)