The SEC has announced that it is close to proposing new regulations in an attempt to prevent a meltdown in future financial crises. This has two parts, one requires money-market-fund firms to set aside capital in reserve and the other part puts restrictions on investors who wish to withdraw all their money at once.
Feb. 7, 2012, 12:16 p.m. EST
By Greg Morcroft and Ronald D. Orol
NEW YORK (MarketWatch) — U.S. financial firms with a big business in money-market funds fell Tuesday after a report said that the Securities and Exchange Commission is close to proposing new regulations it hopes will prevent a meltdown in future financial crises.
The SEC is close to rolling out its long-awaited proposal to firm up the $2.7 trillion money-market-fund industry in its effort to avoid losses from any future financial panics, the Wall Street Journal reported Tuesday.
The paper said the proposal will emerge as a two-part plan. One part would require money-market-fund firms to set aside capital in reserve, while the other would put some restrictions on investors who wish to withdraw all their money at one time, the report, citing people familiar with the matter, said.
John Hawke, a partner at Arnold & Porter LLC in Washington, said the provisions under consideration taken together would “really destroy” the industry.
“It would be utterly transformational,” Hawke said.
The moves arrive more than three years after the Lehman Brothers collapse, which wreaked havoc across the money-market industry.
Federated Investors Inc. FII -3.97% a Pittsburgh-based money market player, saw its shares fall more than 4% in early trading, making it the S&P 500’s biggest decliner.
Charles Schwab Corp. SCHW -2.12% fell 2.4% and Legg Mason Inc. LM -0.18% shed 1.4%.
Under the proposed rules, investors who wished to withdraw all their money at once from money-market funds would be required to take only 95%, then wait 30 days to withdraw the balance.
Hawke, who was U.S. Comptroller of the Currency between 1998 and 2004, said the SEC is not seriously considering the millions of investors who rely on liquidity of money-market funds as an effective cash management tool.
He noted that both retail investors and corporations rely on the funds and added costs would hurt their financial flexibility. For example, Hawke said, money-market funds are the principal provider of short-term debt known as commercial paper to corporations. Large U.S. companies rely on commercial paper to fund their payrolls, inventory and other operations.
“If when a corporate treasurer wants to pull money out of money-market funds to write payroll checks, and 5% of what you want to pay out is held back, it complicates your life significantly,” Hawke said.
In the Wall Street Journal report, J. Christopher Donahue, Federated’s CEO, told the paper his firm will sue if the rules are enacted. See full story at WSJ.com
He told the paper, “We’re going to do everything in our power to attack it.”
Federated manages $255.9 billion of money-fund assets, according to the report.
Money-market funds are not insured by the government. They have traditionally invested in very short-term debt instruments in an effort to provide better returns than insured bank deposits without adding a tremendous amount of risk.
During the boom that preceded the most recent financial crises, many of the funds extended the maturities of the funds’ instruments, driving the risk way past traditional levels.
When the bust came, the value of several of the funds fell below a dollar a share, the so-called “breaking the buck” that rattled confidence in the asset class and dried up a lot of the market’s short-term funding.
The Wall Street Journal report said one of the SEC’s proposals is to eliminate the funds’ fixed $1 net asset value, freeing it up to float like other fund types.
In the broader financial sector Tuesday, the Financial Select Sector SPDR ETF XLF +0.13% fell 0.03% to $14.66. The fund tracks the financial stocks in the S&P 500.
Amogn the Dow financials, Bank of America Corp. BAC -0.69% fell 0.3%, J.P. Morgan Chase & Co. JPM -0.24% lost 0.5%, American Express Co. AXP +0.85% added 0.9% and Travelers Cos. Inc. TRV +0.79% was up 0.9%.
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