SEC Ready to Curb Money Funds; ‘Prime’ Investment Vehicles Would Have to Relinquish Fixed $1 Share Price Under Proposed Rule

Updated June 4, 2013, 9:33 p.m. ET

SEC Ready to Curb Money Funds

‘Prime’ Investment Vehicles Would Have to Relinquish Fixed $1 Share Price Under Proposed Rule



WASHINGTON—U.S. securities regulators are expected to take a significant step toward reining in money-market-mutual funds on Wednesday, resurrecting an effort that appeared to be on life support late last year.

The Securities and Exchange Commission is set to propose a rule aimed at fixing structural problems that make money funds susceptible to investor runs, as was the case during the 2008 financial crisis. The proposal, fleshed out over several months, would require “prime” funds whose shares are held by corporations and other institutional investors to abandon their fixed $1 share price and allow their values to float like other mutual funds. Prime funds invest in short-term corporate debt.The renewed action was triggered by heavy pressure from fellow financial regulators—including Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Timothy Geithner—who threatened to override the SEC if it failed to act. In November, the Financial Stability Oversight Council issued its own recommendations to overhaul money funds after the SEC, beset by internal disagreements and industry lobbying, failed to agree on a plan.

The mutual-fund industry, which had campaigned against tougher SEC rules over concerns they would harm its business, tamped down its opposition to SEC action after it became clear the FSOC intended to wield its regulatory club, in part because it believed the agency was better positioned to craft mutual-fund rules.

SEC commissioner Daniel Gallagher, a Republican, said the SEC didn’t act to “stave off FSOC” but said the council’s involvement likely forced the industry to soften its opposition. “Clearly the specter of FSOC was there for the industry,” he said.

Some regulators say unanimous support for the new proposal among the SEC’s five commissioners was helped along by the departure of former Chairman Mary Schapiro, whose money- fund proposal last year was blocked by three commissioners who maintained it was based on insufficient data. Ms. Schapiro has argued she kept the issue alive by asking the FSOC to act.


The scaled-down proposal now under consideration advanced after Elisse Walter, a Democratic commissioner, was briefly elevated to chairman late last year. Ms. Walter encouraged discussions between the commissioners and staff that laid the groundwork for the current proposal, according to a person familiar with the matter. Ms. Walter declined to comment.

Before agreeing to a proposal, Mr. Gallagher and two other commissioners asked for more data on restrictions the SEC imposed on the industry in 2010, when it tightened the securities that funds can hold and improved their ability to meet shareholder redemptions. Those moves stemmed from the situation that unfolded in 2008 when one fund, Reserve Primary, “broke the buck” by falling below the $1-a-share value that the funds seek to maintain. Investors fled the funds, and the U.S. Treasury Department and Federal Reserve intervened to backstop the industry.

Mr. Gallagher said the SEC study, which he and fellow commissioners Troy Paredes and Luis Aguilar asked for, set in motion dialogue among commissioners and staff that led to Wednesday’s proposal.

He said the analysis also helped deflect industry arguments that the 2010 measures were sufficient to prevent runs. “You finally had a real analysis to point to,” he said.

The SEC study, released in December, showed tighter restrictions made the funds more resilient but wouldn’t have prevented funds that withstood similar losses as the Reserve Primary from breaking the buck. The study and the warnings from FSOC were enough to overpower intense industry lobbying against added measures.

“A money-market-fund proposal didn’t take off last year because the regulatory process was flawed,” said Alice Joe, executive director of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, which opposes additional money-fund rules.

“Instead of analyzing the impact of the 2010 reforms and defining the issue to be addressed, the SEC shot out of the gate with purported solutions first and then tried to retrofit the data,” she said.

To get consensus, SEC staff is expected to propose a compromise that would target about 35% of the $2.45 trillion industry, according to people familiar with the proposal.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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