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Central bankers, brokers snap at SEC's money-market proposals

A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June
A sign for the Securities and Exchange Commission (SEC) is pictured in the foyer of the Fort Worth Regional Office in Fort Worth, Texas June

By Jonathan Spicer and Jed Horowitz

NEW YORK (Reuters) - Heads of the 12 U.S. Federal Reserve regional banks on Thursday strongly criticized a component of a U.S. Securities and Exchange Commission proposal aimed at preventing runs on money-market funds, saying it did little to change current rules.

The measure, part of a series of proposed SEC changes to reduce risks in the $2.5 trillion money-market industry, would let funds ban withdrawals and charge fees for them in times of stress like the 2008 credit crisis.

The Fed group warned that allowing money funds to restrict investor withdrawals could accelerate those by sophisticated investors before triggers were breached, leaving other shareholders in the lurch.

The policymakers, however, endorsed another alternative in the SEC's plan that would require prime institutional money-market funds to let the value of those shares float, reporting on a daily basis the value of their shares rather than continue the current scheme of assuming they are always worth $1 a share.

The central bankers and some financial firms commented on the SEC proposals on Thursday in response to a request by the commission for feedback on its plan. The SEC is still probably months from any formal rulemakings on the issue.

"We continue to believe that the liquidity fees and temporary redemption gates alternative does not constitute meaningful reform and that this alternative bears many similarities to the status quo," said the letter from policymakers, sent on behalf of the 12 Fed officials by Boston Fed President Eric Rosengren.

While the SEC is tasked with protecting investors and ensuring fair markets, the central bank's regulatory goal is ensuring overall financial-market stability.

The Fed officials, some of whom have been outspoken about the lingering dangers of money funds, said the SEC proposal to require funds to adopt a floating net asset value, or NAV, was a far better option from a financial stability perspective.

The letter from central bank officials came as large fund companies and brokerage firms released their own views on how money-market rules should be reformed.

SCHWAB PITCHES FOR MUNI FUNDS, RETIREMENT

Charles Schwab Corp. in a letter, applauded the SEC's efforts to preserve the economic benefits of money-market funds. It warned, however, that the proposed rule changes have "significant flaws" and costs of implementing them could "outweigh the benefits" for financial firms and the "larger financial system."

Schwab, which manages about $168 billion in money-market accounts primarily for retail investors, asked the SEC to combine its two proposals so that institutional prime funds would both report floating values and be able to impose redemption gates and liquidity fees in times of stress.

The brokerage firm took issue with a provision that would limit investors to $1 million of withdrawals a day from money-market funds that invest in corporate debt. It wants the limit raised to $5 million and apply to each customer account rather than each customer.

Retail investors often need to make large money-fund withdrawals and could easily cross the $1 million threshold, the letter said.

Schwab also wants the SEC to exempt 401(k)s, IRAs and other retirement accounts from new restrictions aimed at institutional money-market funds since the vehicles are used "exclusively" by individual investors.

The operational complexity of setting withdrawal limits and reporting floating net asset values on such accounts "would be so great that the effect would be to make it nearly impossible to use money market funds in these types of accounts," the letter said.

The firm, which last year waived $587 million of money-market fees for clients to ensure they did not have negative returns, also wants exemptions for municipal money-market funds.

Schwab lambasted the SEC for "vastly" underestimating the costs of its rule proposals. For example, expenses for developing a system to calculate floating net asset values for institutional prime money funds will exceed $10 million, Schwab said, compared with the SEC's estimate of no more than $2.3 million.

A day earlier, Fidelity Investments told SEC officials that its money fund proposals could increase the borrowing costs of U.S. municipalities by as much as $13 billion.

(with additional reporting by Ross Kerber and Sarah N. Lynch; editing by Linda Stern and Andrew Hay)

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