Regulators’ fight to reform money market funds continues. Despite the fact that Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro said in mid-August that she had received word from three commissioners—including Luis Aguilar, a Democrat—that they would not support her proposed reforms, the two Republican commissioners came out with their own “way forward” in reforming the funds. (Read about some drawbacks to money market funds in “Time to Consider Alternatives to Money Market Funds,” page 91.)
Schapiro’s proposed reform plan, which was set to come before the Commission for a vote on Aug. 29, would have 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 hold-back restrictions on redemptions. Those proposed reforms, she said, “were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.”
But Schapiro decided to cancel a vote on the reform proposal after getting word from Aguilar that he would join the two Republican commissioners in voting against the proposal, arguing that Schapiro’s plan could have too many unintended consequences.
Aguilar told Investment Advisor 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 to see how the “reforms have worked” since being adopted, he said.
Schapiro released a statement in which she said that “the declaration by the three Commissioners that they will not vote to propose reform now provides the needed clarity for other policymakers as they consider ways to address the systemic risks posed by money market funds. I urge them to act with the same determination that the staff of the SEC has displayed over the past two years.”
She continued: “As we consider money market funds’ susceptibility to runs, we must remember the lessons of the financial crisis and the history of money market funds. And, we must be cognizant that the tools that were used to stop the run on money market funds in 2008 no longer exist. That is, there is no ‘back-up plan’ in place if we experience another run on money market funds because money market funds effectively are operating without a net.”
The issue of money market fund reform “is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away,” Schapiro said. “Money market funds’ susceptibility to runs needs to be addressed. Other policymakers now have clarity that the SEC will not act to issue a money market fund reform proposal and can take this into account in deciding what steps should be taken to address this issue.”
The other regulator in question is the Financial Stability Oversight Council (FSOC), which is said to be considering its own plan toward reform.
The two Republican SEC commissioners, Daniel Gallagher and Troy Parades, issued their own statement about a week after Schapiro’s failed vote, stating that money market funds are “squarely within the expertise and regulatory jurisdiction of the SEC,” and that they “do not intend to abdicate [their] responsibility to regulate” them.
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.”
The two commissioners also offered their own reform plan 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 Parades 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 stand-alone proposal” in Schapiro’s plans, “but instead is coupled with a capital buffer.”
Gallagher and Parades 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.”