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SEC Ready to 'Confront' Money Market Reform


WASHINGTON, D.C. - Mary L. Schapiro did not 'break the buck' at the annual membership meeting of the Investment Company Institute.

Appearing on stage in conversation with Mellody Hobson, president of Ariel Investments, the chairman of the Securities and Exchange Commission did not unveil or describe any particulars of how she intends to permanently address what she sees as needed long-term restructuring of the money market mutual fund industry.

The industry's greatest fear, potentially, is that the SEC will sever the long-standing tie between shares in such funds and a $1 asset value for each. That one-buck-a-share foundation has allowed such funds to compete effectively with federally insured deposits at commercial banks. Institutional investors, who are the biggest users of money market funds, have assurance with that promise that the value of their shares won't fall.

But, even though she did not announce plans to break the buck and allow the net asset value of shares float, she did tell fund executives in attendance that the SEC intends to directly "confront'' a new round of long-term reforms to the nation's money market mutual funds.

Among the options that the federal regulator of the funds business has been considering, has been letting the net asset value float from $1 a share, as the value of the underlying assets that a fund has invested in moves up or down, to setting aside capital buffers to protect against runs such as the one that occurred in September 2008.

The SEC, she said, remains committed to "honest open debate" on its proposals, as it moves into the final phases of refining its plan of what to put forth for industry comment.

The ICI, the mutual fund industry's leading trade group, has had a "rocky time" of late with the SEC over the money market reforms that are in the works. Hobson, in starting discussion on the subject with Schapiro, noted that the industry and the SEC had been "at loggerheads" on how to proceed.

In March, ICI general counsel Karrie McMillan, had castigated the regulator's plans for a second round of post-2008 reform of the industry.

"What the SEC is considering doing to money market fund investors is outrageous,'' she asserted at the 2012 ICI Mutual Funds and Investment Management Conference in Phoenix. "Outrageous.''

"Outrageous" in the ICI view were a proposal being considered by the SEC that would allow the net asset value of a money market mutual fund float from a stable $1 a share; a proposal that would require capital buffers, and a proposal to slow the ability of investors to pull their money out of funds, even when there was not a run.

At that time, the SEC criticized the industry for conducting dialogue on the reform through the press. "That deeply disappoints me, the chairman, and the commission staff,'' Commissioner Elisse Walter said. She told fund industry executives to re-engage with the SEC on a second round of reform.

In a first round of reforms of the money market industry, in 2010, the SEC tightened credit quality standards, shortened weighted average maturities, and for the first time imposed a liquidity requirement on money market funds.

That round of reform required money market mutual funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, required such funds to report their portfolio holdings monthly to the Commission and permitted a money market fund that had re-priced its securities below $1.00 per share -known as "breaking the buck"-or is at imminent risk of breaking the buck, to suspend redemptions to allow for the orderly liquidation of fund assets.

That came in response to the crisis that erupted in September 2008, when the nation's oldest money market fund, the Reserve Primary Fund, infamously broke the buck.

The delineating feature of money market funds, as Schapiro would note in the aftermath, is that they seek to maintain a stable net asset value at all times of $1 per share. But, Reserve Primary was heavily invested in Lehman Brothers assets. When Lehman headed into bankruptcy, the value of those assets fell dramatically and the fund could not maintain the $1 net asset value of its shares.

Investors pulled $310 billion from money market funds, with large institutional investors making the biggest run on the bank, in effect.

The run was stemmed by federal intervention. The U.S. Treasury on Sept. 19, 2008, created a Temporary Money Market Fund Guarantee Program, that gave, for a time, assurances to investors that the balances in their accounts at money market funds were safe.

Unlike savings accounts at banks, money market funds are not protected by the Federal Deposit Insurance Corporation.

Schapiro said at the ICI membership meeting that she was "counting on the industry to engage constructively in the debate" on what to do next.