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SEC’s GOP Commissioners Offer ‘Way Forward’ on Money-Market Reform

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The Securities and Exchange Commission’s (SEC) two Republican commissioners, Troy Paredes and Daniel Gallagher, voiced their “dismay” on Tuesday with the statement issued last week by SEC Chairwoman Mary Schapiro, in which she said she lacked the votes needed to pass further money-market fund reforms.

Gallagher and Paredes issued a joint statement in which they detailed their own “way forward” in reforming the funds by imposing “gates” on money-market fund redemptions.

The two commissioners said that 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.”

The changes to money market funds that Schapiro pushed for included requiring money-market funds to abandon the stable $1 net asset value (NAV) in favor of a floating value, or combining significant capital requirements with holdback restrictions on redemptions. Schapiro decided to cancel a vote on the reform proposal after getting word from Commissioner Luis Aguilar, a Democrat, that he would join the two Republicans in voting against the proposal.

Gallagher and Paredes said in their statement that their decision “not to support the chairman’s proposal, based on the data and analysis currently available to us, has also been informed by our concern that neither of the chairman’s restructuring alternatives would in fact achieve the goal of stemming a run on money-market funds, particularly during a period of widespread financial crisis such as the nation experienced in 2008.” The Reserve Primary Fund, they said, “did not ‘break the buck’ in a vacuum, but rather in the midst of a financial crisis of historic proportions.”

The two commissioners said that “discretionary gating directly responds, we believe, to run risk, both as to an individual fund and across multiple funds, as well as to the potential disparate treatment between retail and institutional investors.” Instituting this type of change, they said, “should have the effect of addressing the conditions that gave rise to certain forms of governmental support in 2008, when money-market funds had to sell portfolio assets to meet redemptions and scaled back their participation in short-term credit markets.”

Gallagher and Paredes also stress that money funds are “squarely within the expertise and regulatory jurisdiction of the SEC,” and that they “do not intend to abdicate our responsibility to regulate money-market funds.” To move this reform agenda forward, they said, so that there can be “constructive dialogue and engagement in this area, we ask that the commission’s staff of economists conduct detailed research and analysis on money-market funds.”