(Adds dropped letters to “examine” instead of “exam” in paragraph 10)
By Sarah N. Lynch
WASHINGTON, Jan 12 (Reuters) - Money market mutual fund operators can expect a visit this year from federal securities regulators, who announced on Thursday they plan to conduct exams to ensure funds are complying with sweeping new rules that took effect in October.
The Securities and Exchange Commission announced its intention to scrutinize money funds, as part of its annual list of top compliance examination priorities for the coming year.
The priorities were announced by outgoing SEC Chair Mary Jo White, who is slated to depart after President-elect Donald Trump takes office. It is unclear whether Trump’s pick to replace her, attorney Jay Clayton, would seek to make any changes to the priorities.
Money market mutual funds were the target of major structural reforms in 2014, in an effort by regulators to reduce the risk of runs on the funds by panicked investors in the event of a market crisis.
The final rules required “prime” money funds used by institutional investors to float their values, instead of letting them maintain a stable value at $1 per share.
The rules were a direct response to the 2008 financial crisis, when the Reserve Primary Fund’s exposure to Lehman Brothers prompted panicked investors to withdraw their money in a run that led the fund to “break the buck” and see its net asset value fall below $1 a share.
The rules adopted in 2014 also gave fund boards discretion to lower “gates” on redemptions, or charge fees of up to 2 percent if market stress causes a fund’s weekly liquid assets to fall below 30 percent.
They additionally imposed other requirements, including enhancing stress testing and increasing portfolio diversification.
The SEC said on Thursday its exams in 2017 will focus on a few key themes: retail investors, senior investors and retirees, cyber security, market-wide risks and a closer look at how the Financial Industry Regulatory Authority (FINRA) is carrying out its duties as Wall Street’s self-funded regulator.
In addition to money funds, the SEC said it will examine brokerages for compliance with “best execution” rules, or rules requiring firms to give their customers the best price in the shortest possible time.
Others that will be reviewed also include advisers to government pension plans, with a focus on ensuring they are managing conflicts of interest, upholding their fiduciary duty and complying with “pay to play” rules which limit advisers from making political contributions in exchange for business.
Reporting by Sarah N. Lynch; Editing by Tom Brown