Democrats are joining Republicans in putting pressure on the Securities and Exchange Commission not to tighten regulations governing money market funds.
In a move similar to the bipartisan opposition to a pending Labor Department regulation that would expand fiduciary-duty requirements for retirement plans, Democrats have added their voices — and signatures — to what initially looked like familiar Republican and industry skepticism of a regulatory proposal.
Last Tuesday, 18 Republicans and 15 Democrats — all former state and local officials — sent a letter to SEC Chairman Mary Schapiro warning her that changes in money market funds will make raising money for infrastructure projects more difficult.
When she appeared at an April 25 hearing of the House Capital Markets Subcommittee, Ms. Schapiro heard a couple of Democrats — in addition to Republicans — warn her to tread carefully.
“The debate has widened out considerably,” said David Smith, general counsel at the Mutual Fund Directors Forum. “A lot more people have become engaged in the debate over the last few months than were engaged nine months or a year ago.”
The strengthening push-back from Capitol Hill, in addition to the relentless opposition from the financial industry and a likely split among the five SEC commissioners, has observers doubting whether the commission will be able to move forward.
The systemic risk that a run on money markets poses is a “real danger for the future of the economy,” said Arthur S. Levitt Jr., a former SEC chairman.
But the forces working against reform may overwhelm the SEC.
“I'm very sorry that regulation is unlikely to see the light of day,” Mr. Levitt said last Tuesday at the Bloomberg Washington Summit.
The SEC hasn't made a proposal yet. It is considering changes designed to prevent a situation like the one in 2008 when the net asset value of the Reserve Primary Fund fell to less than $1, prompting investors to stampede for the exits.
POSSIBLE APPROACHES
Among the approaches under consideration are establishing a capital buffer for money funds, imposing redemption restrictions or letting the NAV float.
The SEC maintains that these are a natural follow-up to changes imposed in 2010 that required the vehicles, which typically invest in short-term debt, to use safer assets, shorten fund maturities and invest in instruments that provide 10% daily liquidity and 30% weekly liquidity.
Those steps don't “protect against a credit event that could cause a money market fund to break the buck,” Ms. Schapiro told lawmakers.
Critics argue that more changes would undermine the $2.7 trillion money market sector by threatening the stability and liquidity that makes the funds attractive to companies and investors.
The May 1 letter from the 33 bipartisan members of Congress asserted that the potential changes “would alter the fundamental structure of [money market funds] and would, in turn, lead investors to other, less regulated products.”
They argued that money market funds hold about 60% of the debt that local governments issue to finance construction of roads, bridges, hospitals and housing. They also said that the governments rely on the funds — and the certainty of the $1 NAV — for short-term cash management.
“Any reduction in demand for money market funds would reduce demand for the securities issued by state and local governments, and purchased by [money market funds],” the lawmakers wrote. “As a result, states and municipalities would be deprived of a critical funding source and would be faced with increasing debt issuance costs.”
At the April 25 House hearing, Rep. Gwen Moore, D-Wis., pressed Ms. Schapiro on whether money flowing out of the funds would end up destabilizing other areas of the financial system. For instance, they might substantially boost the amount of money in bank accounts.
“Wouldn't that increase some of the systemic risk that banks might have?” Ms. Moore asked. “I'm concerned about the rationale for these proposals.”
Her Republican colleagues also have expressed their misgivings. In a letter to Ms. Schapiro, House Financial Services Committee Chairman Spencer Bachus, R-Ala., and Vice Chairman Jeb Hensarling, R-Texas, urged the SEC to do a thorough cost-benefit analysis before proceeding.
They also suggested that one of Ms. Schapiro's qualms — the perception that money market fund returns are guaranteed — could be addressed with something less than a new regulation.
“If investors do not understand that their investments in money market funds can result in losses, then the commission should use its existing authority to enhance disclosures rather than change the fundamental characteristics of money market funds,” the lawmakers wrote.
On April 26,
Fidelity Investments sent to the SEC a compilation of customer surveys, the most recent one from April, showing that more than three-quarters of those polled understood that money market funds are not backed by the government.
An issue more likely to be on an investor's mind than regulations governing the funds is their puny returns. Advisers usually seed the funds only with money that a client is setting aside for an upcoming purchase.
“People have them for their security and their safety,” said Andrew Feldman, president of AJ Feldman Financial. “They're not looking to beat the market with a money market fund. That's probably the safest vehicle they have in their portfolio. You know it's not going to be worth less than a $1.”
For now, that NAV is stable.
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