Money fund managers seek broader exemption from SEC proposal


By Sarah N. Lynch

WASHINGTON, Oct 31 (Reuters) - Nine fund managers are urgingU.S. regulators to expand the number of retail money marketfunds that would be exempted from a proposal that aims to reducethe risk of runs by changing how money funds are priced.

In a joint letter to the U.S. Securities and ExchangeCommission on Thursday, managers including Blackrock,Fidelity, Vanguard and Wells Fargo, told the agency ithad erred in the way its proposal defined which funds qualify as"retail" and proposed an alternative definition.

The SEC's proposal, released in June, would require onlyprime institutional money market funds used by institutionalinvestors to move from the current $1 per share stable net assetvalue to a floating one.

The measure is designed to address concerns highlighted bythe 2007-2009 financial crisis, in which the Reserve PrimaryFund suffered losses on Lehman Brothers debt and "broke thebuck" when its net asset value fell below $1.

The incident prompted a large run by investors, cutting offa major source of overnight funding for companies and forcingthe federal government to step in to guarantee the funds.

The SEC's proposal is very scaled back compared to what wasonce envisioned by former SEC Chairwoman Mary Schapiro.

Schapiro and the country's banking regulators had pushed fora tougher rule that captured more funds and also contemplatedpotentially imposing capital buffers.

However, the industry fought back fiercely, arguing amongother things that retail funds should be allowed to maintain astable net asset value because ordinary investors do not tend toyank their money out during times of financial stress.

Under the leadership of its current chief, Mary Jo White,the SEC ultimately heeded that suggestion and included anexemption for retail funds in its June proposal.

Under the SEC's plan, a fund would be considered retail ifit prohibits a shareholder from redeeming more than $1 millionper business day.

But fund managers are concerned that this definition wouldnot properly capture the universe of retail money market funds.

In their letter Thursday, fund managers said the SEC shouldinstead define retail funds as a fund that "limits beneficialownership interest to natural persons" such as individuals whoare investing in money funds through individual accounts,retirement accounts, health or college savings plans, andordinary trusts.

The SEC's proposed definition, they said, "would beburdensome to implement for both funds and third partyintermediaries, resulting in significant costs and operationalcomplexity."

Other firms who signed the letter included Invesco, T.RowePrice, Legg Mason, Western Asset and Northern Trust.


The letter from the nine money market fund managers comesone day before many of the same firms are expected to submitanother round of comment letters responding to a U.S. Treasuryresearch report that could lead to other costly new regulationsfor large asset managers.

The report, issued last month by the Office of FinancialResearch, concluded that large asset managers could posesystemic risks to the broader marketplace.

The findings sent shockwaves through the industry because itmay encourage regulators who sit on the Financial StabilityOversight Council (FSOC) to designate big asset managers as"systemic" - a tag that brings tougher capital requirements andsupervision by the Federal Reserve.

FSOC on Thursday held "an initial discussion" on the report,according to a brief readout of the meeting.

So far, the industry has reacted negatively to the newreport, saying it is flawed and riddled with errors.

Earlier this month, Reuters reported that some within theSEC were also unhappy with its findings, and decided to seekinput from the industry.

Comments are due by Friday, and on Thursday some alreadystarted to roll in.

In one harshly worded letter, the U.S. Chamber of Commercetold the SEC it fears the report "lacks information fundamentalto the asset management industry" and "makes general assertionsthat are not grounded in facts."

The Chamber went so far as to ask the SEC to request for thereport to be withdrawn, noting that it does not provide a"reasonable basis" for the FSOC to consider whether to designateasset managers as systemic.

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