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 Chairman Mary Schapiro called off her proposed second round of reform for money market mutual funds.
The reforms were ultimately rejected by mejpmmbers 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 refroms, 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, adding that 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.’’
Instead, the pair 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. 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,” he 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. 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.
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.”