U.S. Sets Money-Market Plan

Regulators are completing a controversial proposal to shore up the $2.7 trillion money-market fund industry, more than three years after the collapse of Lehman Brothers Holdings Inc. sparked a panic that threatened the savings of millions of investors and forced the federal government to intervene.

The SECurities and Exchange Commission in the coming weeks will unveil a two-part plan to stabilize money funds, which invest in short-term debt instruments and are designed to be safe and readily accessible to investors, according to people familiar with the matter. At least three of five SEC commissioners would need to approve the proposals to submit them for public comment.

Reuters

SEC Chairman Mary Schapiro

The SEC's aim is to minimize any losses for shareholders in the event of another financial panic. Investors for months have fretted over how a Greek government-bond default might affect U.S. money-market funds. In recent months, these funds have moved to reduce their exposure to European banks, especially French ones, amid fears over their financial health.

But fund-industry executives say the rules could damp returns for millions of investors, prevent them from getting all their money out during a crisis and reduce confidence instead of bolstering it.

Money-market funds are an important source of credit for companies and tighter rules on their capital and liquidity might affect the funds' ability to lend to corporations, critics warn.

The proposal, which is set to draw stiff opposition from financial groups and could create internal tensions at the SEC, would affect both fund firms and investors. Firms would have to set aside capital reserves using one of three new methods. Investors who wish to sell all of their holdings at once would be able to get only about 95% of their money back immediately, with the remaining 5% returned to them after 30 days.

"Money-market funds remain susceptible to runs and to a sudden deterioration in quality of holdings, and we need to move forward with some concrete ideas for proposals to address these structural risks," SEC Chairman Mary Schapiro said in an interview last week.

J. Christopher Donahue, president and chief executive of Pittsburgh-based Federated Investors Inc., which manages $255.9 billion of money-fund assets, said he plans to sue the SEC if the new regulation interferes with his firm's ability to do business.

"We're going to do everything in our power to attack it," Mr. Donahue said of the possible regulations.

Unlike U.S. bank deposits, money-market funds, which invest in short-term debt instruments, aren't guaranteed by the government.

When Lehman collapsed in September 2008, it triggered losses in a money-market fund called Reserve Primary, which held Lehman debt. When investors learned that the fund had "broken the buck" by falling under the $1 per share value it sought to maintain, investors fled Reserve Primary and other funds. The panic eased only after the U.S. government and Federal Reserve vowed to backstop the funds.

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The SEC implemented sweeping changes in 2010 designed to make the industry more resilient, including tighter standards on the kinds of securities funds could hold and a new requirement that funds keep enough cash on hand to meet "reasonably foreseeable redemption requests."

Ms. Schapiro, joined by Federal Reserve and Treasury Department officials, repeatedly has warned that additional reforms are needed, despite hesitation from some SEC commissioners and stiff resistance from the money-fund industry.

Under the proposal, funds could boost their capital in one of three ways: by injecting more cash from corporate coffers; issuing stock or debt securities; or collecting more money from shareholders.

The SEC also plans to propose scrapping money funds' fixed $1 net-asset value and make it floatable like other mutual funds. However, the industry remains staunchly opposed to the idea. The bulk of the SEC's energies are devoted to developing a workable capital buffer, people familiar with the matter said.

Industry experts warned that the capital plan would be onerous for many funds. Investors have been exiting money funds since 2008, in part because of the Reserve Primary panic and in part because returns have plummeted along with short-term interest rates. With profits being squeezed, experts say, some funds might have no choice but to collect the capital from shareholders, in the form of an upfront fee. That could dent returns more, they say.

"The generosity of giving you the choice of which way to die is really not much of a choice," said Mr. Donahue of Federated.

The 30-day rule, referred to as a "liquidity fee," is just as controversial.

Holding a percentage of clients' accounts for 30 days would make it challenging for investors to make trades, said Marie Chandoha, president of Charles Schwab Investment Management, a subsidiary of Charles Schwab Corp., which manages about $160 billion of money-market fund assets. "The clients are doing trades in their accounts and sweeping money in and out continuously, so you can imagine what those kind of computations look like," she said.

Regulators say holding back a small amount of customer cash would decrease the amount of capital that firms would have to hold in reserve and compare the idea to a minimum account balance required by banks.

Paul Schott Stevens, president of the Investment Company Institute, an industry group, said the ideas under consideration by the SEC could "force an enormous number of sponsors out of the business and leave those that remain with a product that nobody will want to invest in or make available to investors."

Three out of five of Ms. Schapiro's fellow commissioners have expressed reluctance to support additional reforms for money-market funds. Those commissioners haven't yet had a chance to carefully look at the staff's approach, she said.

"I understand why very few in the industry support changing the current structure," Ms. Schapiro said. "At the end of the day, the taxpayer simply can't be on the hook for failure, and the tools to ameliorate a run that existed in 2008 when Reserve broke the buck don't exist anymore."

Write to Andrew Ackerman at Andrew.Ackerman@dowjones.com and Kirsten Grind at Kirsten.Grind@wsj.com

Lehman Brothers Holdings Inc., SEC, SEC, Federal Reserve, Mary Schapiro, money funds, money funds, Federated Investors Inc., Christopher Donahue, mutual funds, Charles Schwab Investment Management, Charles Schwab Corp.

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