Forcing money funds to hold capital against losses wasn’t popular with some securities regulators, who thought it would impose costly, bank-like rules on an investment product.
Buffer Opposed
Walter shared that concern, although she didn’t say so publicly, as the commission struggled with the rule in early 2012. Her doubts were supported by SEC economists, whose work showed that many prime funds couldn’t raise capital without reducing the returns they promise to investors or reducing their holdings of commercial debt.
“The capital buffer was very different because it was adding a feature that doesn’t exist in this space,” she said. “Frankly, I had always worried, and then when I heard from the economists, I was more worried that capital buffers would really be too expensive to work.”
Federal Reserve Chairman Ben S. Bernanke said in June that, by including a floating share price in its proposal, the SEC was “moving in the right direction, and I’m hopeful that what comes out will be something that’s sufficient to meet the very important need of stabilizing the money-market funds.”
The Treasury Department, whose secretary chairs FSOC, shares that view, according to a person familiar with the matter who asked not to be named. Treasury officials believe the SEC’s plan is largely consistent with FSOC’s recommendations issued in November, the person said.
Industry Resistance
“The Fed and Treasury will declare victory if there is either a floating NAV or a redemption limit,” Jaret Seiberg, senior policy analyst at Guggenheim Securities LLC’s Washington Research Group, said in a phone interview. “If the SEC can’t get this across the finish line, FSOC will wade back in.”
The Investment Company Institute and many fund companies still oppose a floating-share price for institutional prime funds. Boston-based Fidelity Investments wants the SEC, at a minimum, to exempt funds that buy municipal debt from the proposal, said Nancy Prior, head of money funds at Fidelity.
Plaze, who became a law partner at Stroock & Stroock & Lavan LLP, has criticized the agency’s decision to include ICI’s proposal for redemption gates. In an interview, Plaze said investors might flee a struggling fund if they thought it was preparing to suspend withdrawals.