April 18, 2021

High & Low Finance: Money Funds Are Circling the Wagons on Rules

That group is the money market funds, which function as banks but historically have had the best of all regulatory worlds: no capital requirements, no reserves, no fees for deposit insurance and a belief by their customers that they were at least as safe as banks.

This week the comment period closed on proposed money market rules set forth by the Securities and Exchange Commission. The rules are pitifully weak and inadequate. They could even make the system more vulnerable in a crisis, as the presidents of all 12 Federal Reserve banks pointed out in a letter to the S.E.C.

But that has not stopped the mutual fund industry from trying to weaken them even more.

By coincidence, the deadline for comments was on Thursday, just five days after the fifth anniversary of the collapse of Lehman Brothers. It was that collapse that revealed to all just how shaky the money market industry was.

The answer is — or ought to be — remarkably simple:

“They either have to be banks or mutual funds,” Paul A. Volcker, the former Federal Reserve chairman, told me in an interview. “If they are banks, promising to pay at par on demand, they should be regulated like banks. If they are mutual funds, they should be regulated like mutual funds.”

But such a sensible proposal would outrage the money market fund industry, which has lobbied politicians intensely.

It was perhaps the biggest embarrassment of Mary Schapiro’s tenure as chairwoman of the S.E.C. that she was unable to persuade a majority of commissioners to propose any reform of the industry. So her successor, Mary Jo White, was praised when she managed to get the commission to unanimously put out the two rules for comment. Surely, something was better than nothing.

Well, in this case, perhaps not.

One proposed rule calls for allowing the net asset value of money market funds to fluctuate. Currently, funds price their shares at $1, rounded to the nearest penny, and promise they will remain there. In practice, that means that as long as the value remains at or above 99.5 cents, the fund will not break the buck.

The S.E.C. proposal would stretch that rounding out to the nearest hundredth of a penny.

But the S.E.C. proposal would not actually do very much. Funds that invest primarily in government securities would not face a floating net asset value. Nor would so-called retail money market funds, which allow investors to withdraw no more than $1 million at a time. Even those few funds that would be subject to the rule would be able to use an existing S.E.C. rule that usually lets them assume market prices are equal to par value for any security that will mature within 60 days.

The fact that the proposal would do little has not stopped the industry from complaining. Fund companies want to change the definition of “retail” fund. Some suggest raising the limit to $5 million. Others say that as long as the investor has a Social Security number, the fund should be deemed retail.

The other S.E.C. proposal sets up an elaborate procedure that would allow — but not require — money market funds that have experienced a lot of redemptions to either impose a fee on redemptions or to simply suspend such payments for 30 days. This is called the “gating” proposal because it erects gates to protect funds.

And what is the virtue of that? Well, it would prevent, or at least delay, a run on any fund that got in trouble. If protecting the fund, and not its investors, is the top priority, maybe that makes sense.

But in reality, it probably would do more harm than good. As Eric S. Rosengren, the president of the Federal Reserve Bank of Boston wrote in a letter signed by all the other regional Fed presidents, a fund could run low on liquidity — and thus initiate the gating proposal — if a couple of large investors in the fund withdrew their money for any reason. That could scare investors in other funds that seemed similar in some way, producing more runs and more gates. “As this represents a new run mechanism that does not exist under the status quo, the fees-and-gates alternative may actually increase run risk relative to not enacting further reform,” Mr. Rosengren wrote.

To much of the industry, there is no problem at all. What happened in a 2008 was a “once-in-a-generation scenario” that is unlikely to recur, as a lawyer for one money-market fund group, Federated Investors, put it in a comment letter. Any further reform, he added, “should be designed to preserve the utility” of money market funds.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/09/20/business/money-market-funds-circle-the-wagons.html?partner=rss&emc=rss

High & Low Finance: A Regulator, a Lawmaker and a Quandary

Had the small investors not been frozen out, the remaining shareholders, including the executives and directors who made the decision to eliminate the small investors, would have received only pennies per share less in the eventual merger, which was approved by the remaining shareholders in late June.

The S.E.C., in keeping with its normal policy, declined to comment on whether it had looked into the company, DEI Holdings, but there has been no indication that it is doing so.

Just starting an investigation could pose substantial political risks for the agency. The founder of the company, who remained a director and substantial shareholder even after he stepped down from management, is Representative Darrell E. Issa, a California Republican who is chairman of the House Committee on Oversight and Government Reform and has been a harsh critic of the S.E.C.

He has cited his experience as a director in criticizing what he sees as burdensome S.E.C. regulations. He says he thinks rules should be changed to make it easier for companies to raise money from American investors — particularly relatively wealthy ones — without having to comply with S.E.C. disclosure rules.

“As a member of the board of a small public company, I am well aware of the cost and difficulties of being public,” he told Mary Schapiro, the S.E.C. chairwoman, at a hearing of his committee in May, several months after the company froze out small shareholders and more than two years after the company deregistered its shares and stopped being subject to S.E.C. rules.

Neither Representative Issa nor James E. Minarik, the chairman and chief executive of the company, which makes electronic equipment for autos, responded to requests for interviews.

The tale of DEI Holdings as a public company was an unfortunate one for nearly everyone involved, but most particularly for individual investors who invested in it. It is a story that involves the way current rules allow companies to raise money from investors who believe they have the protection of American securities law, and then to withdraw much of that protection.

The company went public in December 2005 in an offering that was relatively small — it raised $150 million — but nonetheless had a prominent list of underwriters. Goldman Sachs was the lead underwriter, with J. P. Morgan Securities, CIBC World Markets, Wachovia and Citigroup also listed on the cover of the prospectus.

A large part of the money went to selling shareholders, including Representative Issa’s family foundation, which received $3.8 million, and most of the rest went to pay off debts. None of the offering proceeds were to be invested in company operations.

In 2005, Goldman served as a lead underwriter of 20 American initial offerings. DEI, then known as Directed Electronics, sought less money than any of the other 19, although one of the other issues raised less after Goldman cut both the size of the offering and the price in response to weak investor demand.

DEI was priced at $16, in the middle of the indicated range, when the company filed to go public, but the underwriters did not do a good job of estimating investor interest. The price fell 12.5 percent, to $14, in the first day of trading. It was the worst first-day performance of any Goldman I.P.O. that year.

The stock held its own for more than a year, but by late 2007 was trading below $2. Goldman, which had never had a buy recommendation on DEI, stopped writing research on it on Dec. 13 of that year.

Early in 2009, facing the loss of its Nasdaq listing because of its low share price, DEI chose to not only leave Nasdaq but also to “go dark,” as Wall Street jargon refers to a decision by a company to withdraw its S.E.C. registration. It could do that under a rule allowing such an action by a company with fewer than 300 shareholders of record. DEI said it had 284.

The phrase “shareholders of record” is a term of art in securities law. Shares held by a brokerage firm are all counted as being held by the same owner, even if they are actually owned by dozens or thousands of investors.

Article source: http://feeds.nytimes.com/click.phdo?i=a66cc2064715602d525d846de4bbdef7

DealBook: Trader Pleads Guilty to Threatening Financial Regulators

Mary L. Schapiro, the S.E.C.'s chairwoman, and Gary Gensler, the C.F.T.C.'s chairman.Andrew Harrer/Bloomberg NewsMary L. Schapiro, the S.E.C.’s chairwoman, and Gary Gensler, the C.F.T.C.’s chairman.

Vincent McCrudden, a former trader, pleaded guilty to charges that he threatened to kill more than 40 current and former regulatory officials, including Mary Schapiro of the Securities and Exchange Commission and Gary Gensler of the Commodity Futures Trading Commission.

Mr. McCrudden, 50, admitted on Monday to using e-mails and Internet posts to threaten various officials.

“This defendant crossed the line when he directly threatened to kill public officials who were working to keep our financial markets fair and open, and invited others to join him,” Loretta E. Lynch, United States Attorney for the Eastern District of New York, said in a statement. “He thought he could hide in the shadows of the Internet and disseminate his threats and instructions. He was wrong.”

He sent one email to the vice president and chief operating officer at the National Futures Association, with the subject line “You’re a Dead Man,” according to the release by the Justice Department. On a website operated by Mr. McCrudden, he implored others to join the cause, telling them to go “buy a gun.” The website also included an “execution list” with more than 40 current and former officials at the S.E.C., the C.F.T.C., the N.F.A., and the Financial Industry Regulatory Authority, the Justice Department release said.

“The conduct of McCrudden was way beyond mere speech. By his admission, he not only directly threatened to kill government and regulatory officials, but he also listed dozens of officials and offered a reward to others to kill them,” Assistant Director-in-Charge at the Federal Bureau of Investigation Janice K. Fedarcyk said in a statement. “This outrageous conduct is not only dangerous, but an affront to civil society.”

Mr. McCrudden, who will be sentenced by United States District Judge Denis R. Hurley, faces a maximum prison term of 10 years.

Article source: http://dealbook.nytimes.com/2011/07/18/trader-pleads-guilty-to-threatening-to-kill-financial-regulators/?partner=rss&emc=rss