SEC’s Money-Market Overhaul Faces Uncertain Future

New ‘study’ requirement comes as Moody’s examines big banks, causing further uncertainty

SEC Chairwoman Mary Schapiro. (Photo: AP) SEC Chairwoman Mary Schapiro. (Photo: AP)

Supposedly safe money-market funds have been in the spotlight since the Reserve Primary "broke the buck" in 2008 after a bad bet on Lehman Brothers. The scrutiny only intensified after a number of commentators revealed just how exposed many money-market funds are to the problems in Europe, prompting calls for reform and greater oversight into the funds’ underlying holdings.  

In response, the SEC had planned to untether the $1 net asset value, allowing it to float with other investments, along with imposing capital requirements and limiting fees on redemptions. But SEC Chairwoman Mary Schapiro was stymied in her efforts last week, as a provision attached to a funding bill would require the SEC to study the situation once again.

Such a move would push any action past November's presidential election and possibly to a new SEC chairman, The Wall Street Journal noted in an editorial on Monday. The provision was added by Rep. Jo Ann Emerson, R.-Mo., of the House Appropriations Committee.

The SEC’s plan had met with stiff resistance from fund industry lobbying groups. Mellody Hobson, president of Ariel Investments, noted at the Investment Company Institute’s (ICI) annual conference in May that the industry and the SEC were at “loggerheads” over the issue.

During a keynote presentation, Hobson told Schapiro that the fund industry has “never dug in its heels like this,” in objection to a reform proposal by the SEC. Schapiro responded in agreement: the industry is “more dug in and strident [on money-market fund reforms] than we’ve seen on other issues.”

Adding futher confusion, Moody’s is scrutinizing a number of major U.S. banks this week, including Bank of America, JPMorgan Chase, Morgan Stanley, Citigroup and Goldman Sachs. The examinations are seen as a possible precursor to downgrades, throwing more turmoil into an increasingly tumultuous money-market situation.  

What many investors don’t know, and what commentators like Sallie Krawcheck, the controversial former head of wealth management at Bank of America and Citigroup, point out is that that as recently as last summer, the largest money funds averaged 45% of their investments in European bank paper, with one major player at just under 70%.

Sallie Krawcheck“They don't know that, were the investments to falter, half of the top 10 money-fund providers are not large and presumably well-capitalized banks but instead asset managers that don't have anything like banks' capital resources," Krawcheck (left) noted in the Journal in February.

Nor, she continued, do money-fund investors know that the largest money-fund managers have been gaining share in the industry over time, therefore concentrating and potentially heightening the risk of a failure.

“And they don't know that, while these firms will likely go to extreme lengths to avoid ‘breaking the buck,’ the $1 net asset value represents an implicit, rather than explicit, guarantee. Even then, there is no certainty that firms will be successful in raising capital in a downturn since, by definition, they will be trying to do so during a market dislocation.”

In a comment letter to the SEC in May, Scott Goebel, senior vice president and general counsel for the mutual fund behemoth Fidelity Investments, recognized the need for greater oversight, but urged regulators to go slow in instituting new rules.

“We believe that some minimum international standard must exist for consistent treatment and management of money-market funds under a global regulatory framework,” Goebel wrote. “However, we realize that money market fund regulation has developed in different markets based on differences in relative size and maturity of national economies. It is important for regulators to recognize these differences within their jurisdictions, which may necessitate varying regulation.”

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