Update on Money Market Fund Reform: Standoff Continues, but Intervention Looms
Last month we examined the reforms that the Securities and Exchange Commission (SEC) is considering for U.S. money market funds as part of their effort to make the industry more transparent and less risky. SEC Chairman Mary Schapiro is calling for money market funds to maintain a capital buffer, restrict redemptions, and float their NAVs. Campaigns have been in full swing on both sides of this issue over the past month, with regulators reiterating calls for reforms and asset managers digging in their heels in opposition. Importantly, support within the SEC itself remains uncertain, and the reforms could very well be doomed without a majority of the five SEC commissioners’ approval. That is, unless the Financial Stability Oversight Council (FSOC), a creation of the bureaucratic behemoth known as the 2010 Dodd-Frank Act, steps in. Politics may soon dominate the debate.
Here are some of the new developments over past month:
- The SEC remains divided. Chairman Schapiro has a strong ally in Commissioner Elisse Walter, but Commissioners Daniel Gallagher and Troy Paredes have been vocal in their opposition. The swing vote lies with Commissioner Luis Aguilar. Aguilar has expressed reservations about the need for additional regulation but has otherwise been noncommittal. Without Aguilar’s support, the proposed reforms would not be put out for public comment.
- Key players continue to weigh in. Money market fund industry participants continue to be in almost unanimous opposition to the proposed reforms. Most recently, Charles Schwab Investment Management’s letter to the SEC described the proposed reforms as “unworkable for funds and for individual investors.” And a survey of corporate treasurers indicated that a majority would either reduce or discontinue their use of money market funds if any of the proposed reforms were put in place. Regulators, however, continue to take a more supportive stance. In a speech on 9 April 2012, Fed Chairman Ben Bernanke reiterated previous support for money market fund reforms, noting that “the risk of runs created by a combination of fixed net asset values, extremely risk-averse investors, and the absence of explicit loss absorption capacity remains a concern.” At the same conference, seconding Bernanke’s call for further reforms, Eric Rosengren, president of the Federal Reserve Bank of Boston, specifically endorsed the idea of capital buffers and floating NAVs. While noting the costs of implementing reforms, Rosengren warned, “the risks to the stability of the financial system that underpins the economy are too great not to take the actions that will make the industry, and our financial system, more stable.”
- Nuclear option: FSOC intervention. The FSOC is charged with “identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system.” The council consists of ten voting members and five nonvoting members and is chaired by the Secretary of the Treasury, Timothy Geithner, making the FSOC a decidedly political body. The FSOC could step in and declare money market funds to be “systemically important financial institutions,” making those with $50 billion in assets — there are seven — subject to a range of enhanced regulatory measures, including capital, liquidity, leverage, and risk management requirements. Such a move would likely not sit well with the fund industry.
We will continue to monitor developments as this story unfolds.