Who will gather client data?

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The mutual fund industry is urging regulators to require broker-dealers to share information about their money market fund clients.   This request is based on concern about the stability of money market funds that was questioned during the 2008 financial crisis when investors withdrew billions of dollars from their accounts in a matter of days.   

In September 2008, the Reserve Primary Fund from Reserve Management Co. Inc. “broke the buck” when its net asset value fell to 97 cents a share.   As the result, the U.S. government was forced to provide backstop for reeling funds.

To prevent similar panic in the future, the Securities and Exchange Commission (SEC) last year passed rule requiring $28 trillion money market fund industry to meet daily and weekly liquidity requirements.     It required money fund operators to adopt policies and procedures designed to assure that appropriate efforts are undertaken to identify risk characteristics of shareholders.   Specifically, the SEC instructed the fund boards to make sure that the adviser is monitoring and planning for immediate withdrawal of money by clients from the funds.   

However, according to some industry experts getting this information is quite burdensome and costly for funds.     Thus, shifting the information-gathering burden to broker-dealers would spare the fund managers those costs.

Further, some experts argue that by imposing an affirmative legal requirement on intermediaries, the SEC can significantly mitigate these burdens, especially at a time when money market funds are not well-positioned to absorb additional costs.

Another consideration is that institutional clients often buy money market funds through electronic portals and omnibus accounts, making it impossible for money fund providers to know who their clients are.  

In its comment letter, it was suggested that money fund managers receive an analysis and profile (not the identity) of the largest shareholders investing through each omnibus account and portal.     As the result, broker-dealers wouldn’t have to give up the identities of their clients.   Instead, they would be required to disclose only key characteristics, such as the size of investors’ accounts, their cash flows and redemption activity.

These requests were supported by a number of fund companies’ comment letters, including those written by BlackRock Inc. and J.P. Morgan Asset Management, which runs the largest money market fund, the $133 billion JPMorgan Prime Money Market Fund.

However, some industry analysts expect that the broker-dealer community will oppose this proposal that forces them to identify their clients.   The reason for this opposition is that broker-dealers who run these portals don’t want to lose control of those relationships with the customers.    In addition, this could mean substantial operational updates if brokers are forced to provide this information on a periodic basis.   

The SEC will consider the public comments it received from both sides.    Considering that so many fund companies are asking the regulators to look at this issue, it is very likely that additional money fund rules will include some kind of requirement that broker-dealers provide client information to money funds.    Most likely, the complexity of this request will come down to details as to what specifically the broker-dealers will have to provide the funds.

Anna Timone (195 Posts)


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