Protect Money Funds, Hurt Commercial Paper?

SEC proposals to safeguard money-market mutual funds could hamper investment in short-term corporate debt, treasurers say.

Securities and Exchange Commission proposals to ease the risk of investing in money-market mutual funds could also make it harder for companies to raise capital by issuing commercial paper, some treasurers fear.

The very idea that money funds can be risky is still new. With the $1-per-share net value they rigidly maintained, they were thought to offer safety and accessibility on par with bank savings accounts, while paying modestly better returns. Treasurers routinely parked idle cash in them. But last fall, investors were exposed to losses after some major funds that held Lehman Brothers debt “broke the buck,” or declined in value below $1 a share, after the big investment bank went bankrupt.

Aiming to reduce the risk of runs on the funds and increase their resilience to economic stresses, the SEC in June proposed prohibiting money-market mutual funds from investing in so-called “second-tier” securities. That means companies that issue second-tier commercial paper would lose a key source of investment in the instruments. (Such companies include FedEx, Kraft, Kroger, and Safeway, according to the Association for Finance Professionals.) Currently, most money funds can invest up to 5% of their assets in second-tier securities.

The proposed rule changes, for which a 60-day public comment period is currently in effect, also would require the funds to keep a portion of their portfolios in highly liquid investments and shrink their exposure to long-term debt.

Taken together, the changes would heighten the appeal of the money funds — even as they likely lower yields — to institutional and other investors, notes Thomas Deas, vice president and treasurer at FMC Corp. and a board member of the National Association of Corporate Treasurers. As a result, he claims, “the funds could suck capital away from commercial paper.”

To the extent companies were able to raise less capital from commercial paper, Deas says, they would have to turn to banks for expensive and hard-to-get backstop loans.

Many of the proposals were widely expected, according to Jay Baris, financial services partner at Kramer Levin. But, he notes, the SEC “side-stepped making recommendations on the more knotty issues.” One of the knottiest is whether the price of share funds should float, rather than be targeted at a stable net asset value of $1 a share. The SEC sought comment on that without taking a position.

Also last month, as part of its plan for overhauling financial regulation, the Obama administration called for several government agencies — including the Treasury Department and the Federal Reserve — to study whether money-market funds should adopt a floating NAV.

According to Jeff Glenzer, managing director of the Association for Financial Professionals, such a change would effectively kill the money-fund industry. “These funds have historically been managed with so little fluctuation — the change would cause our members to go with Treasuries or bank deposits,” Glenzer says.

But assuming the NAV remains stable, the safety net provided by the SEC proposals, say Glenzer and Deas, would in effect make permanent a temporary, FDIC-like insurance guarantee that the government offered last fall for investments in some money-market funds. “It was never intended to be permanent,” Glenzer says.

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