SEC efforts to tighten rules on the $2.56 trillion money market fund industry are on indefinite hold. Trade organizations representing the retirement plan and asset management industries wrote a joint letter to SEC Aug. 21 criticizing money market reforms on which the commission was slated to vote Aug. 29. The letter urged SEC not to pursue the changes, which were outlined in an October 2010 document called Report of the President’s Working Group on Financial Markets/Money Market Fund Reform Options. But the final straw was that SEC Chairman Mary Schapiro, who has championed the reforms, lacked the three votes she needed from the five-member commission. So she tabled the vote.
Effect on Retirement Plans
The Aug. 21 letter said the “structural nature of these changes raises serious concerns in the retirement saving context.” The proposal under consideration — as the authors understand it — would require that the shares held back or restricted would continue to be considered plan assets under ERISA. “It is not clear that an ERISA fiduciary could allow the plan’s assets to be invested under these conditions consistent with regulatory requirements associated with the management of plan assets under ERISA,” the letter asserted.
The letter warned that to implement floating values or redemption restrictions on money market funds, “intermediaries would need to change thousands of systems that support broker-dealers, banks, insurance companies, trusts, 401(k) recordkeepers or other institutions tasked with processing money market fund transactions for their clients.” For example, the letter said, if redemption restrictions or holdbacks were implemented, retirement plan administrators might have to process two separate checks “with attendant processing, mailing and tax reporting associated with a plan distribution.”
Schapiro has been pushing for money market reforms since she joined the commission in 2009. The Reserve Primary Fund “broke the buck” — that is, its net asset value fell below $1 per share — in 2008, giving rise to concerns over the stability of money market funds. One option in the plan Schapiro has been pushing is a requirement that money market funds buy and sell their shares based on the market value of the funds’ assets, that is, use “floating” net assets values. “Such a proposal would allow for public comment on whether requiring money market funds to use floating NAV would cause shareholders to become accustomed to fluctuations in the funds’ share prices, and thus less likely to redeem en masse if they fear a loss is imminent, as they do today,” Schapiro said to the Senate Committee on Banking June 21. Another option would be to require money market funds to hold back a percentage of an investor’s shares upon redemption in order to maintain a capital buffer to support the funds’ stable values.
FSOC Says MMFs Still ‘Susceptible’
In its 2012 annual report, the Financial Stability Oversight Council said money market funds remain susceptible to destabilizing runs without capital buffers and because of the industry’s commitment to a stable NAV. The FSOC, set up by the Dodd-Frank Act to identify and address systemic threats to the economy, endorsed Schapiro’s approach to reform. Following Schapiro’s decision to abandon the Aug. 29 vote, speculation began surfacing in the business press about what action the FSOC might take, including designating money market funds a systemically important financial institution, or SIFI. Industry members had already been lobbying the FSOC not to subject money market funds to heightened supervision. In February 2011, ICI wrote to the FSOC saying SIFI designation was “not appropriate” for money market funds, citing public comments that had been filed with the FSOC urging it to use its powers under the Dodd-Frank Act to subject money market funds to heightened supervision, up to and including possible designation as a SIFI. The ICI’s 2011 letter cited “significant enhancements” to money market regulation when it put tighter liquidity and credit standards in place.
ICI President and CEO Paul Schott Stevens said the results of SEC’s 2010 reforms undercut the case for further money market reforms. “We have seen that the far-reaching changes to money market funds adopted by the SEC more than two years ago have profoundly changed money market funds and helped them to weather subsequent crises, such as the U.S. debt ceiling impasse and the deteriorating conditions in the European debt markets,” he wrote July 25 to U.S. Treasury Secretary Timothy Geithner, who heads the FSOC.
For additional information about retirement investment accounts, see Thompson’s employee benefits library, including the Money Manager’s Compliance Guide and the 401 (k) Handbook.