SEC may be ready to move on money market reform

Commission could vote Aug. 29, setting off a comment period that could lead to new regulations

Aug 8, 2012 @ 3:56 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission appears to be ready to move on money market fund reform.

Quoting unnamed SEC officials, The Wall Street Journal reported Wednesday that the commission will vote Aug. 29 on the new regulations, against which the industry has been lobbying for months. Any action on that day is likely to start a public comment period, which could last 60 to 90 days.

The SEC would not confirm the Aug. 29 date.

For months, SEC Chairman Mary Schapiro has argued that a run on money funds poses a systemic risk to the financial system and could put taxpayers on the hook for a bailout. She said that new rules are required to prevent a collapse like the one experienced by the Reserve Primary Fund in 2008, when it “broke the buck” — the $1 net asset value that the funds maintain.

She has been fighting strong, unified resistance from the financial industry, which has argued that money funds are among the safest investments on the market and that reforms implemented in 2010 to strengthen liquidity requirements are sufficient.

Any new rules would have to be OK'd by three commissioners. Republicans Troy Paredes and Daniel Gallagher Jr. have indicated they oppose new regulations, while two others, Ms. Schapiro and Elisse Walter, favor reform. Democratic commissioner Luis Aguilar appears to be on the fence.

A veteran and politically savvy regulator, Ms. Schapiro apparently has decided that the timing is right to take the next step.

“Most likely, she feels that she has three commissioners,” said Jack Murphy, a partner at Dechert LLP and a former chief counsel in the SEC Division of Investment Management.

Mr. Aguilar, however, could keep his cards close even if he votes to open a reform proposal to public comment.

“A vote to propose something doesn't mean anybody has committed themselves to voting for or against a final rule,” Mr. Murphy said.

Mr. Aguilar declined to comment.

During a comment period, thousands of critiques from the industry and advocacy groups will be filed, pushing off a final rule into next year.

Ms. Schapiro and the SEC staff have indicated that the proposal, which is said to be 337 pages, revolves around two options — instituting a floating NAV or imposing a capital buffer with redemption restrictions.

Both ideas have drawn fierce resistance. Financial industry officials argue they undermine the features of money funds that make them attractive — a certain return and immediate access to capital. They said that the changes would sharply increase costs for sponsors in the $2.7 trillion money fund market, and limit fund availability for companies and state and local governments that depend on them for cash management.

The Investment Company Institute has been at the forefront of the opposition.

“The ICI and scores of groups representing money market fund investors — including businesses, state and local governments, nonprofits and individual investors — have told the SEC that the structural changes the staff are pursuing will harm investors, disrupt financing and damage the economy,” ICI spokeswoman Ianthe Zabel wrote in an e-mailed statement. “There's been a robust dialogue and we hope the commission will heed it.”

The potential rule-making process is almost certain to extend beyond the election and could be influenced by that vote. For instance, if presumptive Republican presidential nominee Mitt Romney defeats President Barack Obama — or Republicans retain control of the House and take over the Senate — action on money fund reforms could be slowed halted.

“A lot depends on the election,” Mr. Murphy said. “This one's a lot more political than SEC rule makings normally are.”


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