Basically it is saying that it could suspend the ability of companies and individuals to get their money out of money market funds in a panic... Read through this to about the middle
Dow Jones) -- WASHINGTON -- The Securities and Exchange Commission issued a
raft of proposals Wednesday including measures aimed at shoring up
money-market funds and curbing executives' ability to trade their own
companies' stock.
The proposals, some of which surprised Wall Street executives with their
scope, indicate that Chairman Gary Gensler is moving quickly to enact a policy
agenda that observers have called the SEC's most ambitious in decades. That
stands in contrast to other financial regulators, for which President Biden
has yet to fill key positions, and saw a nominee withdraw amid Senate
skepticism during confirmation.
With a thin majority in Congress, Democrats are leaning on Mr. Gensler to
advance progressive priorities such as fighting climate change and curbing the
power of big business. The SEC's authority to write rules for asset managers,
publicly traded companies and the stock market provides powerful, if sometimes
roundabout, tools for achieving such goals.
The proposals "will go a long way toward increasing corporate transparency and
accountability," Sen. Sherrod Brown (D., Ohio), chairman of the Senate Banking
Committee, said, praising enhanced disclosures around stock buybacks. "The
first step to workers getting their fair share is learning just how much
corporate executives are spending on themselves."
Mr. Gensler's agenda reflects political divisions. Three of the four proposals
garnered party-line votes from the SEC's five commissioners. Republicans
Hester Peirce and Elad Roisman supported only a plan to tighten rules on how
and when corporate insiders can sell their companies' stocks. The agency is
independent of the Biden administration.
The other proposals "are a partisan overreach that will likely diminish
investment opportunities, economic growth and capital formation," Sen. Pat
Toomey (R., Penn.), the top Republican on the Senate Banking Committee, said.
Two of the proposals put forward Wednesday seek to make the financial system
more stable by reducing panicked investors' tendency to flee money-market
funds and by regulating opaque derivatives known as "swaps." The other two
rules would seek to enhance fairness and transparency in the stock market.
They would introduce new restrictions on corporate executives' trading and
heighten disclosure requirements around share buybacks by publicly traded
companies.
The new rules for money-market mutual funds aim to prevent episodes that
occurred during the past two recessions, in 2008 and 2020, when the Federal
Reserve was forced to backstop the funds after they were hit with a wave of
redemption requests that caused credit markets to seize up.
Money markets are typically used by corporate treasurers, pension funds and
millions of individual investors as a safe place to park cash and earn a
higher return than they could obtain in a bank account. They provide companies
with liquidity for short-term loans, called "commercial paper," to cover
immediate expenses like payroll.
But money-market funds aren't regulated like banks, which must meet minimum
capital requirements and offer deposit insurance. Regulators say this makes
them more susceptible to runs when markets are under severe stress, creating
broader risks to the financial system.
"This is about resiliency," Mr. Gensler said in an interview, noting that
Americans have roughly $5 trillion invested in money markets. "Though there
have been reforms in 2010 and 2014, we found again in 2020 some
instability...with the dash for cash."
The SEC's proposed changes include a measure called "swing pricing" that firms
including BlackRock Inc. and Federated Hermes Inc. have warned could destroy a
subset of the industry that holds short-term corporate debt and caters to
institutional investors. The measure would require these funds to adopt
policies for adjusting their share prices by a "swing factor" on days when
they have net redemptions. The factor would be determined by transaction costs
and the market impact of selling a slice of the fund's portfolio.
The goal is to protect investors who remain in the fund from dilution by
investors who redeem their shares, Mr. Gensler said.
The SEC's timing caught money-market fund managers off guard, said John Tobin,
investment chief at Dreyfus Cash Investment Strategies, which oversees $350
billion in money funds. Many didn't expect to see the new proposed rules until
next spring, he said.
The swing-pricing proposal is likely to draw universal industry opposition,
said Mr. Tobin, whose business is a unit of Bank of New York Mellon Corp. He
said the rule would create operational challenges and could encourage
institutional investors to head for the exits before a fund executes any
swing-price decision.
"It's definitely a shot across the bow," he said. "This is a watershed
moment."
The SEC also proposed significant restrictions on arrangements, known as
10b5-1 plans, by which corporate officers and directors schedule stock trades
ahead of time to avoid running afoul of insider-trading rules. Among other
changes, the agency would require executives to wait 120 days before buying or
selling their employer's stock after setting up or modifying the plans.
That proposal follows academic research suggesting the arrangements are being
abused as company leaders cash in at historic levels on their companies'
shares.
"The core issue is that these insiders regularly have material information
that the public doesn't have," Mr. Gensler said in a statement. Wednesday's
proposed changes seek to ensure their stock trading is done "in a way that's
fair to the marketplace," he added.
Commissioners also voted 3-2 along party lines to propose increased
disclosures around public companies' stock buybacks, which are also hitting
records this year.
Repurchases support stock prices by reducing the number of shares outstanding
in a company, lifting the firm's earnings per share. Like dividends, they
enable companies to return cash to investors. But critics, including many
Democrats, say buybacks give executives who are partly paid in equity or
options a roundabout way of boosting their own compensation, at the expense of
workers' wages or productive investments.
The SEC's proposal would require stock-buyback disclosures to be more detailed
and more frequent. Rather than disclosing monthly aggregate share repurchases
once a quarter, companies would have to report buybacks on the next business
day. They would also have to indicate whether any executives bought or sold
shares within 10 business days of a buyback program's announcement.
"Companies may determine to allocate capital towards share repurchases for a
number of different reasons," Democratic SEC Commissioner Allison Lee said.
"But one of those reasons should not be for the opportunistic, short-term
benefit of executives."
The SEC's chief economist, Jessica Wachter, said during the meeting that the
costs of complying with the increased disclosure requirements might discourage
some companies from buying back stock. Ms. Peirce and Mr. Roisman issued
strong dissents against the rule.
"Say 'dividend,' and nobody gets angry, but say 'share buyback,' and the rage
boils over," Ms. Peirce said. "Today's proposal channels some of that rage
against repurchases in a way that only a regulator can: through painfully
granular, unnecessarily frequent disclosure obligations."