SEC poised to adopt reforms for money market funds

WASHINGTON (Reuters) - U.S. regulators unveiled rules on Wednesday that will force "prime" money market funds used by large institutions to float their share price, in an effort to reduce the risk of investor runs.

The Securities and Exchange Commission's new rules, which are expected to be adopted later Wednesday, come after more than two years of struggling to agree on how to craft reforms that will help prevent a repeat of the 2008 financial crisis.

In 2008, the Reserve Primary Fund's heavy exposure to Lehman Brothers led panicked investors to yank out their money, causing the fund to 'break the buck' when its net asset value fell below $1 per share.

The Federal Reserve was ultimately forced to backstop the industry until the chaos subsided.

The switch from the current stable $1 per share net asset value (NAV) to a floating NAV aims to help prevent investors from getting spooked by the prospect of funds breaking the buck.

The SEC's rule also contains a second provision that will permit fund boards to lower so-called redemption "gates" or charge fees of up to 2 percent in stressed market conditions.

The board would be allowed to start charging the fees or lower the gates if a fund's weekly liquid assets fall below 30 percent of its total assets. Gates could only remain in place for 10 business days.

The reform will affect a wide variety of asset managers, from Blackrock Inc, Fidelity and Vanguard to Charles Schwab Corp, Pimco and Federated Investors Inc, as well as numerous companies and municipalities that rely on money funds such as Boeing Company.

The two-pronged reform for the $2.6 trillion industry comes after a long battle between the SEC, the industry and federal banking regulators who sit on the Financial Stability Oversight Council.

The industry and the U.S. Chamber of Commerce have warned that any rules that drastically change the structure of money market funds could cut off a major supply of short-term funding for corporations.

Wednesday's final rule would not subject retail money market funds or government funds to a floating NAV, because they are considered less likely than institutional investors to run on a fund if the market deteriorates.

Only institutional prime funds, including municipal prime funds, will be covered by the new floating NAV requirement.

One major sticking point over moving to a floating NAV has centered on whether it may trigger certain tax rules.

Critics have said they fear that investors will be forced to track tiny gains and losses for tax purposes, creating a huge headache.

The SEC said Wednesday that the U.S. Treasury Department and the Internal Revenue Service will be unveiling a plan permitting investors to use a simplified tax accounting method that "will eliminate the need to track individual purchase and sale transactions for tax reporting purposes."

But SEC Republican Commissioner Michael Piwowar said in prepared remarks Wednesday he is still troubled that the agency is adopting the money fund reforms without first getting public feedback on whether the tax plan will alleviate people's concerns.

"We should wait to adopt the floating NAV," he said.

(Reporting by Sarah N. Lynch; Editing by Andre Grenon and James Dalgleish)

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