WASHINGTON — Regulators are expected to vote Wednesday to end a longtime staple of the investment industry — the fixed $1 share price for money-market mutual funds — at least for some money funds used by big investors.
The idea is to minimize the risk of a mass withdrawal from the funds during a financial panic. The Securities and Exchange Commission may also vote to let money funds block withdrawals during periods of stress or impose new fees for withdrawals.
The “breaking of the buck” by a large money fund during the 2008 crisis stoked a run on some other funds and forced the government to intervene to restore confidence.
Under the new rules, the share prices of the funds involved will be required to “float,” just as with other mutual funds. Big institutional investors could lose principal if the value of the shares falls below $1. Individual investors likely won’t be affected.
The idea behind adopting floating prices for a portion of the $2.6 trillion money-market fund industry is to stress that while the funds are safer than stocks and many other investments, they still carry some risk. Regulators say greater awareness of the risk would reduce the potential for crippling runs on money funds because investors would have acclimated themselves to fluctuating prices.
The Financial Stability Oversight Council, a group of high-level regulators that includes the heads of the Federal Reserve and the Treasury Department, has identified money-market funds as a potential risk to the global system.
A run on a money-market fund during the financial crisis showed how risky the funds could be. The Lehman Brothers collapse in the fall of 2008 triggered the failure of the Reserve Primary Fund, one of the biggest money-market funds, which held Lehman debt. The Reserve Primary Fund lost so much money that it “broke the buck,” as its value fell to 97 cents a share.
The decline escalated fears over the safety of money funds and inflamed the crisis. The next week, investors pulled around $300 billion from so-called “prime” money funds, representing 14 percent of the assets in those funds. Short-term lending, relied on by companies to pay suppliers and make payroll, froze up as investors abandoned the funds. The Fed stepped in to temporarily guarantee assets of all money funds so investors could be assured that they would be protected from losses.
The new floating-price requirement applies only to prime institutional funds, which are considered riskier. They represent about 35 percent of money-market funds, according to the Investment Company Institute, the fund industry’s trade group. Those funds attract mainly big institutional investors and are considered more risk-prone because they invest in short-term corporate debt.
The industry has lobbied against the requirement for floating share prices, saying it would make money funds unattractive.
Verett Mims, the assistant treasurer at Boeing Co., said the aircraft maker usually has about $2 billion to $3 billion in money-market funds, mostly in prime institutional funds. They offer Boeing the best quick access to cash and flexibility while preserving principal, Mims said in a conference call Tuesday organized by the U.S. Chamber of Commerce.
The cost and complexity of floating fund prices are “not worth it,” she said, and Boeing likely would have to move money out of the funds under the SEC changes.
But two groups that advocate strict financial regulation say the SEC plan doesn’t go far enough and that all money funds should be required to have floating prices to reduce the risk to the system.
“It’s grossly inadequate,” said Dennis Kelleher, president of Better Markets, a nonprofit group.
Limiting floating prices to the funds favored by big investors could lead those investors to exit quickly at a time of stress and leave “retail investors holding the bag” in other funds that could be damaged, Kelleher said.
The previous SEC chairman, Mary Schapiro, pushed unsuccessfully in 2012 for floating share prices for all money-market funds and a requirement that funds hold capital reserves of 1 percent of their assets. But three of the five SEC commissioners at the time opposed those changes, and her proposal was never brought to a vote.
Then the Financial Stability Oversight Council, which included Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner at the time, prodded the SEC to act. The SEC proposed the changes in June 2013, opening them to public comment.