Tougher regulations for the $2.6 trillion money market fund industry are dead for the time being, and prospects for addressing what one regulator termed "unfinished business from the financial crisis" could be dimmed even more by the outcome of the November elections.
Opponents of changes under consideration by the Securities and Exchange Commission for nearly two years were jubilant Thursday after SEC chairwoman Mary Schapiro acknowledged she did not have enough votes from the agency's five-member board to put the proposals out for public comment.
"This probably puts it to rest at least through this cycle," said Brian Kalish of the Association for Financial Professionals, a Bethesda, Md., group that represents corporate treasurers and investment firms. The association opposed the measures.
Mr. Kalish said if Republicans win the White House and control appointments to the SEC and other regulatory agencies with authority over money funds, "it is very unlikely this will see the light of day again."
J. Christopher Donahue, president and CEO of Federated Investors, was pleased with the development, but expects other federal regulators will continue looking at the industry.
"The eighth wonder of the world, money funds, gets to survive another day," he said.
Money funds account for $265.5 billion of the $355.9 billion the Pittsburgh investment firm manages. Federated shares were invigorated by the news, closing Thursday at $21.51, up 89 cents or 4 percent.
Ms. Schapiro said she and other regulators and elected officials view the risks posed by money funds as "one of the pieces of unfinished business from the financial crisis."
"This issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away," she said in a statement issued late Wednesday. "There is no 'back-up plan' in place if we experience another run on money market funds because money market funds effectively are operating without a net."
Retail investors like money market funds because they offer immediate access to their funds and are lower risk and provide higher returns than many alternatives. On all but rare occasions, investors have received $1 back for every $1 in principal they invested.
But retail investors account for only a third of the industry's customers. Corporate treasurers use money markets to raise short-term funding and as a stable place to park spare cash until it is needed. Retirement plan operators use the funds to provide a low-risk investment option.
The safety of the funds was challenged during the financial crisis of 2008, when news that one money fund that had invested in debt of bankrupt Lehman Bros. prompted a run on that fund. Eventually, skittish investors pulled more than $300 billion out of money funds. Federal regulators stepped in, providing a taxpayer-supported guarantee to the funds similar to what bank customers receive from the Federal Deposit Insurance Corp. The guarantee expired in September 2009.
SEC regulations enacted a year later were designed to help the funds withstand large, sudden redemptions and limited the amount of lower-quality securities money funds could own.
Ms. Schapiro, with the backing of U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, argued that additional measures were needed. The money fund industry and its customers mounted an intense lobbying campaign to thwart the initiative. One of the leaders of the effort was Mr. Donahue, who said three proposals the SEC was considering amounted to "death by bullet, death by poisoning and death by hanging."
In her statement, Ms. Schapiro disclosed the proposal would have required money funds to base the value of their shares on the daily value of the securities in the fund's portfolio instead of pricing them at a steady $1 per share. That would mean investors could receive more or less than $1 for their shares. The proposal also would have required funds to hold a buffer of less than 1 percent of a fund's assets and to put a 30-day hold on 3 percent of the money an investor wanted to withdraw.
Mr. Donahue said the proposals would have caused clients to "depart massively."
He said knowing that they can have immediate access to all of their cash on a dollar-for-dollar basis is what makes the funds appealing to corporations and other large investors.
"Daily liquidity means all of your liquidity, not 97 percent," Mr. Donahue said.
Moreover, allowing the share value to fluctuate and delaying redemptions would have created accounting, tax and other issues that would have required installing expensive accounting systems to keep track of fund purchases and sales. That would have caused investors to flee to alternatives, he said.
"Even though money funds are loved, I don't think they're loved that much," Mr. Donahue said.
Assets in money market funds have shrunk by about 30 percent since the financial crisis. Record low interest rates are one reason for that.
Rates are usually high enough for funds to charge investors fees to manage and administer the accounts and still deliver positive returns. But the protracted period of low interest rates has forced funds to forgo the fees so that investors break even or earn nominal returns. Money fund operators waived an estimated $5.2 billion in fees last year, according to the Investment Company Institute, a Washington, D.C.-based industry group.
Industry officials believe the measures enacted in 2010 are protection enough.
"We don't think the changes would do anything to alleviate the concerns. We really had a hard time seeing what the benefits would be," Mr. Kalish said.
One industry analyst said there will be renewed efforts to further regulate the industry, but that whatever is enacted depends on the outcome of the elections.
"It eliminates at least one regulatory agency from breathing down their necks," said Morningstar analyst Greggory Warren. "I don't think this is the end of calls for money market reform."
Mr. Donahue and other observers expect the matter to be taken up by the Financial Stability Oversight Council, an inter-agency panel created by the Dodd--Frank Wall Street Reform and Consumer Protection Act that is charged with stabilizing the nation's financial system.
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