SEC money fund reform won't placate everyone

Kam Tai

Players in the $2.7 trillion money market fund industry are cautioning that even if the SEC moves ahead on its money market reform plan, not everyone will be satisfied. One big sticking point is a proposal that could leave in limbo the opaque accounts used by brokerage firms and retirement plans with retail clients.

“The devil's in the details on that issue,” said David T. Bellaire, executive vice president and general counsel for the Financial Services Institute Inc., a lobbying group for independent broker-dealers.

The Securities and Exchange Commission this year is expected to act on reforms of money market mutual funds, with the possibility of imposing a proposal that requires fluctuating share prices, or net asset values, for institutional share classes. Industry representatives, however, expect the regulator to leave largely intact a legal regime that allows retail customers to rely on the consistent pricing of the products at $1 per share — a hallmark of money market funds.

At stake is the definition of what exactly qualifies as an institutional fund, including the status of an unknown number of accounts processed internally by firms such as broker-dealers, rather than fund companies, according to several observers of fund industry regulation.

Many funds have a half dozen share classes in the gray area between institutional and retail, according to Peter G. Crane, founder of research firm Crane Data.

“Everything in between possibly could come under an intermediary that may be eligible for look-through treatment,” Mr. Crane said. “The real question is going to be: How are those details written, and how liberal are they, and how easily could brokerages or intermediaries take advantage of those loopholes?”

(See also: SEC's Piwowar talks fiduciary, money fund reform.)

RETAIL VS. INSTITUTIONAL

The retail-fund industry has argued that retail investors have been less likely than their institutional counterparts to withdraw assets quickly when markets are stressed, as was the case in 2008 when there was a run on money market funds. And in its latest reform effort, the SEC has suggested leaving retail accounts largely untouched by a potential “floating-NAV proposal.”

The structure of that proposal, which would require funds to impose a $1 million daily redemption limit to qualify as retail, drew criticism from large fund companies that administer retail money market funds. In letters to the agency, fund companies argued the redemption limit was either too low or presented practical challenges to operating the funds, in part because of the difficulty of closely scrutinizing trading activity in “omnibus” accounts.

Precise data are impossible to obtain about the so-called omnibus accounts, even for the fund sponsors that supply them. But a 2008 survey by financial services consultancy KDS Partners found that about half of U.S. investor acc