Sen. Bob Corker, R-Tenn., urged Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro and the agency’s four commissioners in a letter on Friday to move ahead with further reform of money-market funds as “a run on money-market funds is still a real risk.”
Corker (left), a member of the Senate Banking Committee, told the SEC that he believes there is common ground between Schapiro and the commissioners regarding redemption restrictions on money-market funds.
“Based on my read of Chairman Schapiro’s initial draft proposal and the dissenting comments of some of the commissioners, I believe that the SEC may be honing in on a solution that might work,” Corker wrote. Both proposals put forth by Schapiro and the two Republican commissioners “point out the benefits of some form of a redemption restriction.”
Corker said the commission should continue its pursuit of money-market fund reform to protect taxpayers from a potential bailout, and to prevent Congress from having to step in. “In the event of a disruption in our financial system,” Corker wrote, “Congress could be faced with a difficult choice: (1) allow individual investors to bear significant personal losses while institutional investors (who likely watch the commercial paper markets closely and would quickly recognize market distress) flee, or (2) provide another bailout for a fund or the fund industry.”
“It appears that there is common ground here around a set of rules that could stem a run and the potential need for government intervention,” Corker said. “In the end, an optimal solution will be found if the SEC commissioners and industry work together to find an appropriate structure that minimizes the risk of a wholesale run. Whatever that solution, reforms now are better than a taxpayer bailout down the road. Inaction is not an option.”
Schapiro called off a vote on further reforms to money-market funds in late August after receiving word from three commissioners, constituting a majority of the commission, that they would not support a staff proposal to reform the structure of the funds. One of those commissioners was Luis Aguilar, a Democrat.
The two Republican commissioners—Daniel Gallagher and Troy Paredes—came out with their own proposal not long after that, saying they would like to see a proposal issued for comment “that would permit money-market fund boards, as they deem appropriate and consistent with their fiduciary obligations to investors and without having to seek an exemptive order from the commission, to ‘gate’ redemptions to stave off a run and to allow the fund manager time to mitigate the concerns of investors who otherwise may be inclined to redeem.”
Regrettably, Gallagher and Paredes said, Schapiro “dismissed this approach,” and instead issued a draft release to the commission that “relegates gating to a limited discussion of options that are implied to be inferior to the chairman’s preferred alternatives.” Gating, they said, was “never considered as a standalone proposal” in Schapiro’s plans, “but instead is coupled with a capital buffer.”
Schapiro decided to cancel a vote on her reform proposal after getting word from Aguilar that he would join the two Republican commissioners in voting against it, arguing that Schapiro’s plan could have too many unintended consequences.
Aguilar told AdvisorOne in a Sept. 4 interview that a “majority” of the commissioners, including himself, are “pleading with the SEC staff to do a study of the 2010” reforms that the agency instituted regarding money-market funds. The Divisions of Investment Management and Risk, Strategy and Innovation (RiskFin) should perform such a study so to see how the “reforms have worked” since being adopted, he said.