SEC Prepares Money-Fund Rules, Will Review Alternative Mutual Funds

Sources tell The Wall Street Journal that the U.S. Securities and Exchange Commission is getting ready to vote on rules that are supposed to stop investors from bailing out of money-market mutual funds, which is the reason that corporate lending became imperiled during the 2008 financial meltdown. Under the plan, certain money funds that cater to big institutional investors would have to lose the fixed price of $1/share an float in value the way other mutual funds do.

Municipalities, businesses, and individuals use money funds. Under the new rules, money funds would be allowed to place a temporary block on investors to keep them from taking their money out during stressful times. They would also be allowed to ask for a fee for share redemption.

The rules are set to make the money-fund industry less at risk of investor runs when the market is tumultuous. They would get investors accustomed to value fluctuations in their investments while making sure that funds are able to stop any outflows from turning into a flood.

The rules provide a floating share price for prime institutional funds. There would also be redemption “gates” and fees. Most of the SEC’s commissioners are expected to back the plan.

In 2008, Reserve Primary, a fund valued at $62 billion “broke the buck” when it fell below the $1 share/price that money funds try to keep up. The fund’s exposure to Lehman Brother Holdings Inc.’s debt after the latter filed for bankruptcy had caused the fund to suffer losses. The bankruptcy also led to a run on other money funds that only abated when the U.S. government got involved.

The U.S. Treasury Department and the SEC are also reportedly close to a deal that would ease tax rules on the smaller loses and gains sustained by floating-rate funds investors.

In 2010, the SEC put into place widespread changes to give the industry a stronger constitution. These included stricter rules on the types of securities funds could contain. However, critics said that there remained structural features that could compel investors to flee during early warnings of trouble.

In other SEC news, SEC’s Division of Investment Management Director Norm Champ says that the Commission will examine fund companies to take a closer look at alternative mutual funds’ liquidity, leverage, and other matters. The sweep will also assess whether the funds are in compliance with the industry’s regulations and laws. Champ spoke at an attorneys’ seminar early this month. Issues to be examined include whether the funds are properly assessing securities’ worth and if investors were properly apprised of the risks.

Alternative mutual funds usually use investment strategies similar to those of hedge funds. The probe is to take place just as retail investors, hungry for yield, rush to alternative funds.

Some 15 to 20 fund families will be examined. Areas of assessment are expected to include question of compliance when determining the value of assets, such as illiquid assets, derivatives, and private start-up company shares. The agency expects alternative funds to abide by a regulation that usually mandates that mutual funds pay investors within seven days after shares are redeemed. Fund governance will also be examined.

The SSEK Partners Group is a securities fraud law firm. We represent high net worth individual investors and institutional investors.

U.S. SEC review of alternative mutual funds is imminent-official, Reuters, July 8, 2014

Prime Money Funds Said to Float $1 Price Under SEC Plan, Bloomberg, July 10, 2014

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