Money Fund Reform Not Over
August 31, 2012
Who would've thunk it?
After more than a year of battling it out in Washington, D.C., and around the country, Securities and Exchange Commission Chairman Mary Schapiro called off her proposed second round of reform for money market mutual funds.
The reforms were ultimately rejected by members of her own brain trust, including Republicans Troy Paredes and Daniel Gallagher as well as Democratic commissioner Luis Aguilar.
But are money market reforms really dead?
First, listen in to why Schapiro's proposed reforms were shot down. The reforms centered on allowing the figure that represents the net asset value of a money fund to float from the standard $1 a share at the close of every day but also included the establishment of capital buffers and restrictions on redemptions.
These reforms, according to a joint statement by Paredes and Gallagher last week, "were not supported by the requisite data and analysis.''
"Further action must be advanced on the basis of data and rigorous analysis showing that any such changes to our existing rules would be workable, would be effective in achieving their purpose, and would not unwisely disrupt the functioning of money market funds and short-term credit markets,'' they said.
Schapiro's proposals were "unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation's financial system,'' they said.
The pair instead advocated a closer look at "gating" the withdrawal or "redemption" of capital in money funds, during a run such as that which occurred in September 2008 as the credit crisis erupted.
Gating would "allow the fund manager time to mitigate the concerns of investors who otherwise may be inclined to redeem,'' they said. They also recommended enhanced disclosure about the risks of investing in money market funds.
Separately, Aguilar proposed that the SEC should look at the entire cash management industry before deciding on reforms that affect only the $2.6 trillion money fund segment of it. "I remain concerned that the chairman's proposal will be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the dark, opaque, unregulated market," Aguilar said.
In the aftermath of Chairman Schapiro's money fund reforms defeat, a collective sigh of relief was heard from opponents of the reforms such as the Investment Company Institute and Federated Investors.
ICI president and CEO Paul Schott Stevens said, "Like hundreds of other organizations that have submitted their views, we have strongly opposed the structural changes to money market funds under consideration at the SEC, because of the adverse consequences of these proposals for investors, issuers and the economy. The exhaustive record before the Commission clearly does not support these changes. We are pleased with the recent announcement that the Commission will not be pursuing them further."
Christopher Donahue, president and chief executive officer of Federated Investors, said: "We have talked to regulators at the SEC, Fed and Treasury about money funds since the 1970s, at times about ways to improve them and at other times about ways to keep the products alive. We will remain vigilant in telling our story about the beauty of money funds to regulators in demonstrating their importance to investors, institutions and the American economy. "
Federated manages $265 billion in money-market assets, ranking them second in money-fund assets at the end of July, behind Fidelity Investments and JPMorgan Chase & Co., according to research firm Crane Data.
"Based on the past, we can't predict what regulators might do, but I know for certain that we will have more opportunities to repeat the sounding joy of money market funds and their 40-year history of serving investors by offering stability, convenience, liquidity and historically higher yields than competing products,'' Donahue said.
And Donahue just may get his chance to "repeat the sounding joy of money market funds" to regulators if Schapiro has anything left to say about it.
In a concession statement, Schapiro said that: "The declaration by the three commissioners that they will not vote to propose reform now provides the needed clarity for other policy makers as they consider ways to address the systemic risks posed by money-market funds.
"I urge them to act,'' she said.
The ball is now in the court of the Financial Stability Oversight Council, a panel of financial system supervisors created by the 2010 Dodd-Frank Wall Street Reform Act. Its members include not just Federal Reserve chairman Ben S. Bernanke, but Schapiro, as well.
The Federal Reseve and two regional Federal Reserve bank presidents, Eric Rosengren of Boston and William Dudley of New York, backed Schapiro's proposals. According to Suzanne Elio, a spokesperson for the Treasury, the FSOC is readying a game plan of its own.
"Treasury is in the process of consulting with the Federal Reserve Board, the Securities and Exchange Commission and other regulatory agencies to consider the appropriate next steps to reduce risks to financial stability from money market funds," she said.
On a broader scope, the chairman of the board of the International Organization of Securities Commissions, Masamichi Kono, said last month that: "I have taken careful note of Mary Schapiro's statement on Money Market Fund Reform in the United States. While refraining from directly commenting on a statement of the Chair of a member organization, I would like to reaffirm that IOSCO will continue its work on the basis of the mandate given to it by the G20 Heads of State and the FSB, to develop policy recommendations for strengthening oversight and regulation of the shadow banking system, including Money Market Funds."