WASHINGTON, May 30 (Reuters) - The U.S. Securities and Exchange Commission is taking steps to help spot if money starts flowing to alternative investments as the SEC cracks down on money market funds.
The SEC is due to meet next week to propose new rules for the roughly $2.6 trillion money market fund industry, in the hope extra safeguards will prevent the type of runs on money funds that happened during the financial crisis.
At the same meeting, the SEC plans to propose a reform that would require less-regulated private liquidity funds to make additional disclosures to the SEC.
The proposal was included at the request of SEC Democratic Commissioner Luis Aguilar. It is designed as a way to detect potential outflows from money market funds into the less-regulated funds, according to a person familiar with the matter.
For months, the money market fund industry has lobbied heavily against new reforms for their funds, warning that a crackdown could trigger investors to seek new places to put their cash.
Liquidity funds generally have some of the same attributes as money market funds, such as maintaining a stable net asset value. However, they are not required to register with the SEC as a mutual fund, and therefore are not as strictly regulated.
The 2010 Dodd-Frank financial reform law did add some additional transparency to liquidity funds, forcing advisers with at least $1 billion in assets under management to file a “Form PF” with the SEC.
About 80 liquidity fund managers were subject to that rule. It is not clear exactly the size of overall assets in the industry.
The forms must include the types of assets in their portfolios, provide information about their risk profiles, and give an explanation about whether they comply with some of the rules for registered money funds.
The new SEC proposal to be considered on June 5 would force the funds to hand over more information on these Form PFs.
Details about the additional requirements were not immediately available.
A move into more opaque markets has been an ongoing concern of Aguilar’s since last year, after then-SEC Chairman Mary Schapiro started pushing for more reforms to the money market fund industry.
Schapiro had advocated for capital buffers and redemption holdbacks, or alternatively, a switch from a stable $1 per share net asset value to a floating NAV.
Aguilar had originally joined the SEC’s two Republican commissioners in expressing concern about whether additional money fund reforms were needed after new industry rules were put in place in 2010.
The three called for an economic study to explore whether the 2010 reforms were enough to prevent runs. After agency economists completed it, they warmed to the idea of more safeguards.
Wednesday’s money market fund proposal, which is close to 700 pages, reflects a less strict approach to regulating money funds compared with Schapiro’s initial plan.
A move from a stable to a floating net asset value is contemplated in the plan, but capital buffers are no longer considered to be a leading option.
Wednesday’s plan is widely expected to primarily target prime funds used by institutional investors, who are considered most likely to incite runs on money funds.
However, the proposal is also expected to raise questions about whether prime funds used by retail investors should also be covered by the new rules.
However, the proposal is also expected to ask questions about whether prime funds used by retail investors should also be covered by the new rules as well.
Some prominent funds in the industry have previously said they could live with regulatory changes for prime funds for institutional investors.
But they say changes to other kinds of money market funds that are less likely to be subject to runs are not needed.
“Market data shows how Treasury, government, municipal and retail general purpose/prime money market mutual funds have not demonstrated any need for further reform,” Fidelity said in a statement posted online on Wednesday.