Schapiro Pushes MMF Reform Despite Opposition

WASHINGTON — Securities and Exchange Commission chairman Mary Schapiro wants to move forward with regulations aimed at improving the stability of money-market funds, despite strong opposition from industry and state and local government groups.

At an Investment Company Institute meeting here Friday, Schapiro told hundreds of industry executives that she wants their input as the SEC considers whether to propose new money-market oversight measures, which could include a floating net asset value, or NAV,  reserve requirements or redemption restrictions.

“I have very legitimate concerns about the risks that are posed by the stable NAV, and the potential [for it] to cause runs,” she said.

The threat isn’t “hypothetical,” she said. “We all know what happened in 2008. We want to confront this issue. We want to have an open dialogue. I want to put concrete ideas out there for people to react to.”

Her comments came in response to questions asked by ICI board chair Mellody Hobson, president of Chicago-based Ariel Investments LLC.

Hobson told Schapiro that regulations historically have helped make the money-market industry stronger, and its funds safer. But the controversial new reforms under consideration have put the industry at “loggerheads” with regulators, Hobson said. “In working with the SEC, we’ve never dug in like this.”

Schapiro acknowledged the industry’s “great passion” over the issues, as well as the economic and business pressures firms face, but urged attendees to consider the interests of retail investors.

“In some ways, you speak for the 90 million Americans who own mutual funds. You have a unique opportunity to speak for people who don’t otherwise have a mechanism through which to be heard on issues of real importance,” she said.

Schapiro’s push for additional changes to money-market rules stems from cascading events during the height of the financial crisis. 

In September 2008, the net value of the Reserve Primary Fund’s assets fell below $1 per share, known as “breaking the buck,” due to losses the fund suffered from the bankruptcy of Lehman Brothers. The $62.5 billion fund had held $785 million worth of Lehman debt, investments that were valued at zero on Sept. 16. The fund’s NAV dipped to $0.97 per share.

Fear spread, and within weeks investors withdrew $310 billion from prime money market funds, or 14% of the funds’ assets, and short-term credit markets froze.

The federal government halted the run with a taxpayer-funded Treasury guarantee program, but Congress later banned the Treasury from repeating such bailouts.

In response to the events in 2008, the SEC adopted new rules in 2010 that restricted the types of securities that money markets can hold, tightened credit standards and shortened the maturities of fund investments. The rules also allowed funds that break the buck to suspend redemptions while liquidating assets in an orderly fashion.

But Schapiro is convinced the 2010 rules aren’t sufficient to prevent another run.

The commission is now considering proposing rule changes  that would require money-market funds to move to a floating NAV, as opposed to keeping share prices stable at $1. The SEC could also require funds keep reserves as a buffer against fluctuations or temporarily hold back a percent of shares redeemed.

Industry groups have said the 2010 rules are sufficient, and that new measures could lead governments, nonprofits, corporations and institutional investors to yank money out of mutual funds.

Executives at Friday’s meeting noted that opposition to new money-market regulations isn’t limited to the financial industry. The SEC has received opposition letters from groups including the Government Finance Officers Association, the National League of Cities, the National Association of State Treasurers, the U.S. Chamber of Commerce, the Greater Pittsburgh Chamber of Commerce, the North Carolina Independent Colleges and Universities, the Metropolitan Mayors Caucus and the New Jersey Association of Counties, among others.

J.T. Tuskan, senior vice president at Pittsburgh-based Federated Investors Inc., called Schapiro’s comments consistent with earlier statements. Tuskan, who opposes new rule changes, noted that investors in the Reserve Primary Fund recovered 99 cents on the dollar.

Schapiro did not say when the SEC might write new money-market rules. The commission has been working on roughly 100 different rulemaking initiatives that came out of the Dodd-Frank Act, and many of the rules have been delayed.

“It’s not good that we are taking so long, but it’s not bad,” she said. “We are taking the time to get it right. These are monumental rulemakings in some cases.”

In addition to money-market initiatives, Schapiro said the SEC has been identifying “systemically-important” financial institutions for heightened supervisions and, in the next few months, will release an annual report on risks facing the U.S. financial system. She said the report will cover a range of issues, including money-market fund reform, cybersecurity and the low interest rate environment.

For reprint and licensing requests for this article, click here.
Buy side Washington
MORE FROM BOND BUYER