Sec staff floats draft proposal on money funds

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Top officials at the U.S. Securities and Exchange Commission are reviewing a draft proposal for controversial new reforms for the $2.6 trillion money market fund industry, according to people familiar with the matter. The draft proposal, which was formally circulated among commissioners late on Monday, outlines SEC Chairman Mary Schapiro's vision for adding safeguards to the money market funds, one of those people said. Schapiro contends those funds are still susceptible to runs, despite some reforms already put in place after the 2007-2009 financial crisis. John Nester, an SEC spokesman, declined to comment on whether a draft rule is circulating among the commissioners. "The chairman believes that reforms are necessary because money market funds remain susceptible to destabilizing runs," he said. The new safeguards are strongly opposed by the fund industry and the Chamber of Commerce. Three of the SEC's five commissioners have also publicly expressed skepticism about the need to adopt additional money market reforms beyond the ones enacted in 2010. The draft proposal is largely similar to what has already been publicly discussed by Schapiro in speeches to the industry and in testimony before Congress.

The proposal contains two potential plans. One involves the combination of a capital buffer coupled with a holdback on redemption requests by investors. The other, meanwhile, consists of a floating net asset value - a move that aims to curb investor complacency over the stable $1-per-share value that funds currently quote. The commissioners are being given 30 days to review the draft proposal, those people said, but it is unclear whether Schapiro may call a vote on the plan because she is still trying to gain support for it. She will need three votes from the five-member commission if she hopes to put it out for public comment.

A money market fund is a type of mutual fund that is required to invest in low-risk securities. While money market funds are generally considered safer than other mutual funds that pay dividends, they are not federally insured, which critics believe can cause a false sense of security. Confidence in the money fund industry was shaken in 2008 when the Reserve Primary Fund, one of the oldest and biggest money funds, broke the buck, or its per-share value fell below $1. That happened because of the fund's heavy losses on debt holdings in Lehman Brothers, which had collapsed a few days earlier.

The SEC enacted money market reforms in 2010 that tightened credit quality standards, shortened weighted average maturities and imposed a liquidity requirement on money market funds. But Schapiro is not convinced these rules go far enough."It is essential we address this risk now rather than waiting until the middle of the next crisis," she told the Senate Banking Committee last week. Other federal regulators, including those at the Federal Reserve, have also been vocal in calling for additional regulations for money market funds.