Schapiro hands off tougher money-market fund regulation to FSOC

Mary Schapiro

Mary Schapiro, the chairwoman of the Securities and Exchange Commission, announced on Wednesday that three of the four SEC commissioners did not support her multiyear effort to impose tougher rules on money-market funds.

“The fact that Schapiro couldn’t get her three members of the commission to support this is really a national disgrace,” Arthur Levitt, a former chairman of the SEC, said, according to Bloomberg. “The lobbyists certainly got their way here. Now I think this is a matter that the president should weigh in on.”

Two presidents of the Federal Reserve System, including Boston’s Eric Rosengren and New York’s William Dudley, as well as secretary of the treasury Timothy Geithner, backed Schapiro’s proposals. The proposals have been opposed by fund firms such as Fidelity Investments and Federated Investors Inc.

The announcement indicates that the battle over regulation of $2.6 trillion in funds will move to the Financial Stability Oversight Council, which is tasked by Congress with identifying threats to the U.S. financial system, Bloomberg reports.

Schapiro, who has worked to stabilize money funds since the collapse of the Reserve Primary Fund in 2008, argued that the funds’ stable share price may encourage investors to abandon the market at the first sign of trouble, as it allows investors to sell shares at $1 each, even if the net asset value has fallen below that price.

Schapiro’s proposal would have given fund managers the choice of establishing a capital buffer to protect against losses and redemption restrictions to prevent investors from fleeing, or switching to a floating share price that reflects the market value of holdings.

“The celebration by money-fund managers and investors will be brief,” Peter Crane, the president of research firm Crane Data, said, according to Bloomberg. “But, this definitely reduces the odds of radical change.”

The mutual fund industry has lobbied against Schapiro’s proposal, saying that it would detract investors from funds and deny cities, states and firms a cheap, short-term funding source.

Schapiro’s staff produced a list for Congress this month of more than 300 occasions over the past 40 years in which fund firms have asked permission from the SEC to support funds. The list was presented as evidence that funds are not as stable as the industry says, Bloomberg reports.

The run following the collapse of the Reserve Primary was mitigated only by the Treasury’s guarantee of money-fund holdings against default for one year and the Federal Reserve’s financing of fund asset purchase at face value to assist the funds in raising cash to meet redemptions.

Congress has prohibited the Treasury from acting in this manner again and has hindered the ability of the Federal Reserve to provide liquidity.

“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,” Schapiro said, according to Bloomberg.

Money funds are a component of what is referred to as the shadow banking industry, in which borrowers and investors are paired without financial regulations

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