WASHINGTON, Oct 31 (Reuters) - Nine fund managers are urging U.S. regulators to expand the number of retail money market funds that would be exempted from a proposal that aims to reduce the risk of runs by changing how money funds are priced.
In a joint letter to the U.S. Securities and Exchange Commission on Thursday, managers including Blackrock, Fidelity, Vanguard and Wells Fargo, told the agency it had erred in the way its proposal defined which funds qualify as “retail” and proposed an alternative definition.
The SEC’s proposal, released in June, would require only prime institutional money market funds used by institutional investors to move from the current $1 per share stable net asset value to a floating one.
The measure is designed to address concerns highlighted by the 2007-2009 financial crisis, in which the Reserve Primary Fund suffered losses on Lehman Brothers debt and “broke the buck” when its net asset value fell below $1.
The incident prompted a large run by investors, cutting off a major source of overnight funding for companies and forcing the federal government to step in to guarantee the funds.
The SEC’s proposal is very scaled back compared to what was once envisioned by former SEC Chairwoman Mary Schapiro.
Schapiro and the country’s banking regulators had pushed for a tougher rule that captured more funds and also contemplated potentially imposing capital buffers.
However, the industry fought back fiercely, arguing among other things that retail funds should be allowed to maintain a stable net asset value because ordinary investors do not tend to yank their money out during times of financial stress.
Under the leadership of its current chief, Mary Jo White, the SEC ultimately heeded that suggestion and included an exemption for retail funds in its June proposal.
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.
But fund managers are concerned that this definition would not properly capture the universe of retail money market funds.
In their letter Thursday, fund managers said the SEC should instead define retail funds as a fund that “limits beneficial ownership interest to natural persons” such as individuals who are investing in money funds through individual accounts, retirement accounts, health or college savings plans, and ordinary trusts.
The SEC’s proposed definition, they said, “would be burdensome to implement for both funds and third party intermediaries, resulting in significant costs and operational complexity.”
Other firms who signed the letter included Invesco, T.Rowe Price, Legg Mason, Western Asset and Northern Trust.
The letter from the nine money market fund managers comes one day before many of the same firms are expected to submit another round of comment letters responding to a U.S. Treasury research report that could lead to other costly new regulations for large asset managers.
The report, issued last month by the Office of Financial Research, concluded that large asset managers could pose systemic risks to the broader marketplace.
The findings sent shockwaves through the industry because it may encourage regulators who sit on the Financial Stability Oversight Council (FSOC) to designate big asset managers as “systemic” - a tag that brings tougher capital requirements and supervision by the Federal Reserve.
FSOC on Thursday held “an initial discussion” on the report, according to a brief readout of the meeting.
So far, the industry has reacted negatively to the new report, saying it is flawed and riddled with errors.
Earlier this month, Reuters reported that some within the SEC were also unhappy with its findings, and decided to seek input from the industry.
Comments are due by Friday, and on Thursday some already started to roll in.
In one harshly worded letter, the U.S. Chamber of Commerce told the SEC it fears the report “lacks information fundamental to the asset management industry” and “makes general assertions that are not grounded in facts.”
The Chamber went so far as to ask the SEC to request for the report to be withdrawn, noting that it does not provide a “reasonable basis” for the FSOC to consider whether to designate asset managers as systemic.