(Adds that shares of several big money market fund managers slipped Tuesday on the report of the SEC's proposed industry changes.)BOSTON ( TheStreet) -- The Securities and Exchange Commission is floating several ideas about how to protect money market fund investors in the event of a financial panic. What has been proposed so far has the $2.7 trillion money market fund industry in a lather. The SEC's proposals, still in the early stages, are seen hurting fund investor returns and likely precipitating big withdrawals, say fund industry representatives. And they add that regulatory changes made in 2010 have proven enough to protect investors making more rules unnecessary. Money-market funds, which invest in short-term debt instruments and pay higher rates than traditional savings accounts, aren't guaranteed by the government, and so investors could potentially lose capital in the event of a run on such funds. The proposed changes, part of a two-part plan expected to be made public within a few weeks, come three years after the collapse of Lehman Brothers. That event precipitated a run on one of the firm's money market funds and that spread, resuting in mass redemptions of other firms' money markets by panicked investors. The government had to step in and back-stop funds that had fallen below their traditional benchmark, the $1 net asset value, in order to ease investor fears. So now the SEC apparently wants to add further protections for investors by raising the capital that funds are required to hold, among other proposals. Perhaps most controversially, at least from an investor's standpoint, one proposal would limit investors who want to redeem all of their holdings immediately, as they can now, to 95% of their balance, with the remaining 5% to be returned to them after 30 days, according to a story in Tuesday's Wall Street Journal. The other proposals come down on the fund company side, but would likely result in higher fees for investors, which means lower returns for them. Under one proposal, fund companies would be required to boost their capital base in their funds either by putting more of their own money into them, or by issuing stock or debt to increase the fund's capital, or by collecting more money from shareholders.
The other proposal calls for ending the requirement that funds be required to have a fixed $1 net asset value and make share values "floatable," like other mutual funds, said the news report, which could potentially result in losses for investors. Fidelity Investments, the largest manager of money market funds, with $433 billion under management, sent a letter to the SEC Friday, along with the results of a survey it conducted of its retail and institutional money market customers that asked for their take on the proposals. In a copy of that letter and the survey that it shared with TheStreet, Fidelity warns that "adopting rules requiring money market mutual funds to float their net asset values (NAV) or impose liquidity restrictions on shareholders -- two ideas that are currently under consideration -- could spark retail and institutional investors to pull significant amounts of assets out of money market mutual funds, leading to unintended consequences for the financial markets and the U.S. economy." Boston-based Fidelity said it "has serious questions about the need for more regulation, especially since there is compelling evidence to suggest that the 2010 reforms have significantly improved the overall soundness of money market mutual funds and made them more resilient to market stress." The Investment Company Institute, an industry group, is even more direct in stating its dislike for the SEC's proposals. In a commentary it released Tuesday, a spokesman said that the SEC "continues to pursue regulatory changes for money market funds that will harm investors, damage financing for businesses and state and local governments, and jeopardize a still-fragile economic recovery. Quite a regulatory hat trick." Paul Schott Stevens, president of ICI, said in the statement that the regulations enacted in 2010 have been tested by the "ongoing European debt calamity, the showdown over the U.S. debt ceiling and subsequent downgrade of government securities, and the long-running punishment of near-zero interest rates, compounded by unlimited insurance for non-interest-bearing checking deposits and payment of interest on business checking for the first time in 80 years," and have proven worthy. "In light of the success of the 2010 reforms, we see no need for further regulatory changes."
Peter Rizzo, a senior director in the fund ratings group of Standard & Poor's, said it's still unclear where the SEC is headed with these proposals and that they are likely still talking points. "It seems that no one's sure what the final proposal is going to be. I think they're trying to give the fund companies options, at this point." At least three of five SEC commissioners would need to approve the proposals to submit them for public comment. Shares of several big money market fund managers, including Federated Investors ( FII), Charles Schwab ( SCHW)and Legg Mason ( LM), all slipped Tuesday on news of the SEC's proposed changes. Shares of Federated fell the most, losing 5.2% and they were off slightly again this morning, while the other two recovered their losses today.
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