WASHINGTON (CN) - The Securities and Exchange Commission has issued a regulation to make money market funds less susceptible to redemption in times of economic stress.
When the recent financial crisis had banks and other investors pulling out of money market funds, short-term financing froze, impairing access to credit that would keep businesses functioning. The SEC's new regulation, issued Wednesday, is meant to stem such redemptions and make other changes that are intended to keep businesses rolling, according to the new regulation.
One change requires institutional, or non-government, money market funds (whose investors have made the heaviest redemptions in times of stress) to sell and redeem shares using the current market-based value of the securities in their underlying portfolios, instead of allowing the artificial stability government and retail money market funds enjoy, according to the action.
Another change allows money market funds' boards of directors to curb heavy redemptions by imposing a liquidity fee of up to 2% if a fund's weekly liquid assets fall below 30% of its total assets. Under the same circumstances, the board could suspend redemptions temporarily, for 10 days out of 90, according to the regulation. The fee allocates the fund's liquidity costs to the shareholders who cause them, it states.
Additionally, under the new rules, a money market fund must impose a liquidity fee of 1% on all redemptions if its weekly liquid assets fall below 10% of its total assets, unless the board determines that the fee would not be in the best interests of the fund. Funds also will be required to disclose to investors that there may be fees or a halt in trading if a fund's liquidity is impaired.
Other changes are meant to make money market funds more resilient by increasing the diversification of their portfolios, enhancing their stress testing, and improving transparency by requiring money market funds to report additional information to the SEC and to investors, the action states.
The new regulation should help further lessen money market funds' susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from high levels of redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds, according to the regulators.
"Today's reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system," SEC Chair Mary Jo White was quoted as saying, in an SEC statement, Wednesday.
"[The Securities Industry and Financial Markets Association] commends Chair White's leadership in navigating the rule to completion and acknowledges the balanced, inclusive and transparent approach taken by the SEC in developing this regulation. Today's final rule will provide the marketplace with a degree of certainty regarding the future of these funds," Kenneth E. Bentsen, Jr., SIFMA president and CEO said in a statement.
Although the regulation is effective 60 days after their publication in the Federal Register, the SEC has provided a two-year transition period for funds and investors time to fully adjust their systems, operations and investing practices, the action states.
In a related development, the Department of the Treasury and the Internal Revenue Service plan to make regulatory changes that should remove the most significant tax-related impediments associated with the requirement that institutional funds using the current market-based value of the fund's securities to sell and redeem shares, according to the action.
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