Mutual funds face new SEC regulations, falling assets
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Total U.S. money market聽mutual聽fund聽assets fell $2.18 billion to $2.56 trillion for the week that ended Wednesday, according to the Investment Company Institute.
Assets in the nation's retail money market聽mutual聽funds聽fell $2.84 billion to $896.27 billion, the Washington-based聽mutual聽fund聽trade group said Thursday. Assets of taxable money market聽funds聽in the retail category rose $2.97 billion to $710.27 billion. Tax-exempt retailfund聽assets fell $140 million to $186 billion.
Assets in institutional money market聽funds聽fell $5.03 billion to $1.67 trillion. Among institutional聽funds, taxable money market聽fund聽assets fell $4.22 billion to $1.6 trillion. Assets of tax-exempt聽funds聽decreased $810 million to $71.18 billion.
The seven-day average yield on money market聽mutual聽funds聽was unchanged at 0.01 percent from the previous week, according to Money聽Fund聽Report, a service of iMoneyNet Inc. in Westborough, Massachusetts. The seven-day compounded yield was flat at 0.01 percent.
The 30-day yield and the 30-day compounded yield were both unchanged at 0.01 percent, Money聽Fund聽Report said Wednesday.
The average maturity of portfolios held by money market聽mutual聽funds聽was unchanged at 44 days.
The online service Bankrate.com said its survey of 100 leading commercial banks, savings and loan associations and savings banks in the nation's 10 largest markets showed the annual percentage yield available on money market accounts was unchanged from the week before at 0.11 percent.
The North Palm Beach, Florida-based unit of Bankrate Inc. said Wednesday that the annual percentage yield available on interest-bearing checking accounts was unchanged from the week before at 0.06 percent.
Bankrate.com said the annual percentage yield on six-month certificates of deposit was unchanged from a week earlier at 0.15 percent. One-year CD yields were unchanged at 0.23 percent, two-year CD yields were flat at 0.36 percent and the five-year yield was unchanged at 0.79 percent.
Meanwhile, regulators have voted by a narrow margin to end a longtime staple of the investment industry 鈥 the fixed $1 share price for money-market聽mutual聽funds聽鈥 at least for some money聽funds聽used by big investors.
The idea is to minimize the risk of a mass withdrawal from the聽funds聽during a financial panic.
The Securities and Exchange Commission also is letting all money聽funds聽block withdrawals when their assets fall below certain levels or impose fees for withdrawals.
The new rules were adopted Wednesday on a 3-2 vote, culminating several years of regulatory haggling and false starts. They were opposed by one Democratic and one Republican commissioner.
The聽fund聽industry will have two years to comply, a shorter period than the industry had sought. The share prices of the聽funds聽involved will be required to "float," as with other聽mutual聽funds, reflecting the market value of a聽fund's聽holdings at a given time. Big institutional investors could lose principal if the value of the shares falls below $1. Individual investors likely won't be affected.
The floating-price requirement applies only to prime institutional聽funds, which are considered riskier. They represent about a third of money-market聽funds, according to the SEC. Those聽funds聽attract mainly big institutional investors and are considered more risk-prone because they invest in short-term corporate debt.
The idea behind adopting floating prices for a portion of the $2.6 trillion money-market聽fund聽industry is to remind investors that while thefunds聽are safer than stocks and many other investments, they still carry some risk. Regulators say greater awareness of the risk would reduce the potential for crippling runs on money聽funds聽because investors would have acclimated themselves to fluctuating prices.
The SEC action will also "provide important new tools that will help further protect investors and the financial system in a crisis," SEC Chair Mary Jo White said at a public meeting of the five-member commission.
The Financial Stability Oversight Council, a group of high-level regulators that includes the heads of the Federal Reserve and the Treasury Department, has identified money-market聽funds聽as a potential risk to the global system. The council pressed the SEC in 2012 to require a floating rate for all money-market聽funds, and it wasn't immediately clear whether it considered the new rules satisfactory. The FSOC, which is led by Treasury Secretary Jack Lew, issued a statement Wednesday saying it would examine them. Money-market聽fundsare on its agenda for a closed meeting on July 31.
The聽fund聽industry had lobbied against the requirement for floating share prices. Its leading trade group, the Investment Company Institute, said that while it questions parts of the SEC action, the agency appears to have found a balance between bolstering moneyfunds聽against financial stress and maintaining their value to investors.
A run on a money-market聽fund聽during the financial crisis showed how risky the聽funds聽could be. The Lehman Brothers collapse in the fall of 2008 triggered the failure of the Reserve Primary聽Fund, one of the biggest money-market聽funds, which held Lehman debt. The Reserve Primary聽Fund聽lost so much money that it "broke the buck," as its value fell to 97 cents a share.
The decline escalated fears over the safety of money聽funds聽and inflamed the crisis. The next week, investors pulled around $300 billion from so-called "prime" money聽funds, representing 14 percent of the assets in those聽funds. Short-term lending, relied on by companies to pay suppliers and make payroll, froze up as investors abandoned the聽funds. The Fed stepped in to temporarily guarantee assets of all money聽funds聽so investors could be assured that they would be protected from losses.
Sheila Bair, who headed the Federal Deposit Insurance Corp. during the financial crisis, said the SEC's action "marks an important step forward." However, she said, it would have been "better and simpler" to require floating share values for all money-market聽funds.
Two groups that advocate strict financial regulation say the SEC plan doesn't go far enough and that all money聽funds聽should be required to have floating prices to reduce the risk to the system.
"It's grossly inadequate," said Dennis Kelleher, president of Better Markets, a nonprofit group.
Limiting floating prices to the聽funds聽favored by big investors could lead those investors to exit quickly at a time of stress and leave "retail investors holding the bag" in other聽funds聽that could be damaged, Kelleher said.
The previous SEC chair, Mary Schapiro, pushed unsuccessfully in 2012 for floating share prices for all money-market聽funds聽and a requirement that聽funds聽hold capital reserves of 1 percent of their assets. But three of the five SEC commissioners at the time opposed those changes, and her proposal was never brought to a vote.
Then the FSOC, which included Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner at the time, prodded the SEC to act. The SEC proposed the changes in June 2013, opening them to public comment.