SEC’s Schapiro: Money-Market Funds’ Stable NAV Is a ‘Fiction’

ICI's Schott Stevens says stable NAV ‘clearly not fiction,’ as the degree to which NAV fluctuates is ‘quite marginal’

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

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Securities and Exchange Commission Chairwoman Mary Schapiro reiterated to senators Thursday her view that further reforms to money-market funds are necessary, saying the funds still “pose a significant risk” to the nation’s economy.

Despite the fact that the SEC reformed money-market funds after the Reserve Fund “broke the buck” during the financial crisis of 2008, Schapiro said members of both political parties as well as the Financial Stability Oversight Council (FSOC) had “raised concerns” about the funds.

The 2010 reforms have not been enough, “and that’s why we’re here today,” Schapiro told the Senate Banking Committee.

In response to Schapiro’s insistence that money market-funds pose a “systemic risk” to the nation’s economy, Sen. Richard Shelby, R-Ala., ranking member of the committee, asked Schapiro if FSOC had yet designated any money-market funds or their activity as “systemically important,” noting that Federal Reserve officials have discussed the funds’ risks in talks about “shadow banking.”

Schapiro replied that while she’s “not a big fan” of the term shadow banking, FSOC has not designated any of the funds as systemically important.

Sen. Jack Reed, D-R.I., pointed to the problem of FSOC designating some money-market funds as systemically important and leaving out others. Schapiro agreed, stating that the benefit of a rule being issued by the SEC is that it would apply to all money-market funds under the SEC’s Rule 2a7.

Shelby went further to ask Schapiro if the Fed should regulate the funds. Schapiro replied: “I think the SEC is a fine regulator; I think [money-market funds] are, at the end of the day, investment products and the SEC is the expert on investment products.” However, the funds’ “value doesn’t fluctuate like investments because we have the fiction of the stable NAV.

Paul Schott Stevens, president of the Investment Company Institute (ICI), retorted in his comments to lawmakers that the $1 stable net asset value is “clearly not fiction,” adding that the degree to which money-market funds’ NAV fluctuates is “quite marginal.”

The SEC has proposed three areas of reform: shifting to a floating NAV, establishing capital buffers and imposing redemption restrictions.

Sen. Tim Johnson, D-.S.D., chairman of the committee, asked Schapiro about the pros and cons of the three proposed changes.

Schapiro replied that she believes the costs of any of the proposed changes “would be far, far outweighed by the benefits of forestalling another devastating run” on money-market funds. She added that any additional reforms proposed by the agency would be released for a public comment period.

As to which changes made in 2010 were most beneficial, Schapiro noted the 10% daily and 30% weekly liquidity measures put in place to meet the “high level of redemptions.” However, she added the 2010 reforms do not address a money-market fund “suffering a severe loss due to a credit event.”

With a proposed rule from the SEC, Schapiro told lawmakers: "I am hopeful that we will have the debate that we need to have."

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