Grand Old Parry:
SEC Can Do Better, Gallagher, Paredes Say
August 29, 2012
The two Republican members of the Securities and Exchange Commission said they are not opposed to further reform of the money fund industry, but that changes advocated by Chairman Mary Schapiro “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,’’Commissioners Daniel M. Gallagher and Troy A. Paredes said in a statement released Tuesday evening.
They advocated a closer looking 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.
Chairman Schapiro’s proposals, which were to come to a vote today, were to allow 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. During the credit crisis, the nation’s oldest money fund, the Reserve Primary Fund, “broke the buck” value of its shares, because the value of its holdings in Lehman Brothers assets plummeted. That sparked a run that required government intervention and funding to stem.
The Republicans’ parry comes day after Democratic commissioner Luis Aguilar said, in his own response to Schapiro’s cancellation of a vote on money fund reforms, that the commission should look at the entire cash management industry before deciding on reforms that affect only the $2.6 trillion money fund segment of it.
Gallagher and Paredes 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.’’
The commissioners said “the empirical evidence we have so far” indicates that reforms instituted in 2010 can allow money funds to handle substantial redemptions, such as have occurred during the European sovereign debt overhang and the volatility in August 2011 when Congress could not agree on a national debt ceiling and Standard & Poor’s for the first time cut its rating of U.S. bonds.
And, they said, “even if, by definition, there is no “buck” to break — investors will still have an incentive to flee from risk during a crisis period such as 2008, because investors who redeem sooner rather than later during a period of financial distress will get out at a higher valuation.’’
They said any further reform must be backed by analysis that “would be effective in achieving their purpose, and would not unwisely disrupt the functioning of money market funds and short-term credit markets.” And not lead funds to move to other markets.