WASHINGTON — The Investment Company Institute is pushing a series of regulatory changes to make money market funds more liquid and transparent.
In a 228-page report released Wednesday, the ICI called on the Securities and Exchange Commission to add provisions to its Rule 2a-7 that would require all money market funds to be able to sell at least 20% of their assets within seven days, if necessary, to maintain liquidity. Taxable funds would be required to be able to sell at least 5% of their assets within one day.
The report also recommends that the Treasury Department extend until Sept. 18 a $50 billion guarantee program for money market funds. The program was hastily put together last fall to stop investors from pulling investments out of their money market funds amid the market turmoil immediately following the collapse of Lehman Brothers and a run on the Reserve Primary Fund, a taxable money market fund that had exposure to the firm's debt.
John J. Brennan, the chairman of Vanguard Group and of the ICI's Money Market Working Group, which wrote the report, said, "The recommendations respond directly to weaknesses in current money market fund regulation, identify additional reforms that will improve the safety and oversight of money market funds and will position responsible government agencies to oversee the orderly functioning of the money market more effectively."
The ICI also recommended the SEC authorize an internal fund "circuit breaker" allowing funds to temporarily suspend redemptions and purchases of fund shares for up to five business days in the event that a fund has either broken, or "reasonably believes" it is about to break, a net asset value of $1 per share — otherwise known as breaking the buck.
The ICI also asked the SEC to amend 2a-7 to reduce the weighted average maturity limitation to 75 from 90 days. The stricter limitation is designed to ensure that a money market fund's overall sensitivity to changing interest rates does not jeopardize its ability to maintain a stable net asset value. In addition, the fund group proposed a new "spread WAM" that does not exceed 120 days.
The ICI report opposed floating NAVs as well as banklike regulation for the industry — two of the recent recommendations made in a report written by former Federal Reserve Board Chairman Paul Volcker for the Group of 30 economic council. Volcker also chairs President Obama's Economic Recovery Advisory Board.
But the ICI said those recommendations would not reduce systemic risk and could scare off investors in money market funds.
"Fundamentally, changing the nature of money market funds (and in the process eviscerating a product that has been so successful for both investors and the U.S. money market), goes too far and will create new risks," the group said in the report in response to the idea of a floating NAV, warning that "because of the very real and well-ingrained institutional and legal motivations driving the demand for a stable NAV product, investors will continue to seek such a product."
SEC spokesman John Nester said the report would "help inform the SEC's anticipated rule proposals to strengthen the money market fund regulatory regime."