March 29, 2024

Effort to Overhaul Money Market Funds Gains an Ally

A type of mutual fund could lose its trademark stable value of $1 a share after a crucial government official voiced his support for controversial efforts to overhaul the $2.6 trillion money market fund industry.

An array of regulators have been pushing to change the structure of money market funds so they are no longer vulnerable to the type of panic that hit one of the most prominent funds in 2008 in a major turning point of the financial crisis.

The desire for changes had run up against the opposition of Luis A. Aguilar, one of five members of the Securities and Exchange Commission, and the decisive vote on the issue. But Mr. Aguilar said this week that he had changed his views on the matter and was open to new rules that would force money funds to revalue the price of their shares daily, which would result in a so-called floating net asset value, or N.A.V.

Mary L. Schapiro, the commission’s chairwoman, had proposed the floating value as one of a few options for putting tighter controls on the industry. All of them have faced fierce opposition from the sector. John Nester, a spokesman for Ms. Schapiro, welcomed Mr. Aguilar’s comments and said that the chairwoman “has never wavered from her belief that a floating N.A.V is the most principled reform approach.”

There still are a number of potential obstacles. Ms. Schapiro, who has been one of the most vigorous supporters of an overhaul of money market funds, is stepping down from her position atop the S.E.C. next week, leaving the commission with only four members to vote on any new rules. That means that for a proposal to win a majority vote it would need the backing of one of the commission’s two Republican members. Mr. Aguilar is a Democrat, as is Elisse B. Walter, who is stepping in to replace Ms. Schapiro as chairwoman.

Both Republican commissioners, Daniel M. Gallagher and Troy A. Paredes, opposed Ms. Schapiro’s suggestions. But Mr. Gallagher recently said in an interview with Bloomberg News that he, too, would be open to a floating net asset value, though he said other changes would have to be made. Those caveats could prove crucial.

Mr. Aguilar’s shift is the latest turn in a drama that has attracted the interest of regulators and led to a heated battle with the largest mutual fund managers.

After Mr. Aguilar expressed his opposition to Ms. Schapiro’s proposal at the end of the summer, the Financial Stability Oversight Council said it would take the supervision of money market funds away from the S.E.C. if the agency did not move ahead with some new rules. The council presented the floating net asset value as one of three changes it could support.

Treasury Secretary Timothy F. Geithner and the chairman of the Federal Reserve, Ben S. Bernanke, have said that money market funds, in their current form, represent a systemic risk to the American financial system, in part because investors use them like bank accounts even though they lack the insurance carried by banks.

The funds promise to pay investors $1 for every $1 they put in, and regulators say that the fixed value leads investors to believe, incorrectly, that the value of their investment cannot go down. Regulators believe that a floating share value would provide a more honest picture of the investments and head off sudden panics.

In 2008, investors withdrew billions from the funds, requiring the Treasury Department and the Fed to step in with guarantees, after a leading fund’s share value dropped below $1, an occurrence known as breaking the buck.

The fund industry has waged a costly lobbying campaign against any changes, at one point buying an ad over the subway entrance used by S.E.C. employees. Industry executives have said that rules put in place in 2010 were adequate to shore up any weaknesses in the funds; regulators have said those rules did not go far enough.

Mr. Aguilar said in a statement this week that he was growing more comfortable with change after the commission’s staff released a report on Nov. 30 answering some of his earlier concerns about new rules. On Friday, he told Reuters that the report put him and his colleagues “in a much better position to allow us to vote on a proposal.”

Ianthe Zabel, a spokeswoman for an industry group, the Investment Company Institute, said Friday that “there’s little evidence” that moving to a floating net asset value “would enhance financial stability.”

Investors could change the way they use the funds if the shares no longer had a stable value of $1. Big institutional investors have said the change could cause an accounting headache because they would have to revalue holdings on a daily basis. Retail investors could begin to view the funds as a more risky investment.


Article source: http://www.nytimes.com/2012/12/08/business/effort-to-overhaul-money-market-funds-gains-an-ally.html?partner=rss&emc=rss

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