SEC
Chairman Mary L. Schapiro has issued a statement noting that significant money
market mutual fund reforms are unlikely in the near term. The basis for the
Chairman’s statement was her being informed that three Commissioners would not support
a staff proposal for additional reforms. Said Chairman Schapiro, “I…consider
the structural reform of money markets one of the pieces of unfinished business
from the financial crisis.” The Chairman also observed that the staff proposal
would have provided the Commission an opportunity to receive public comments on
these reforms.
Chairman
Schapiro noted that some commissioners suggested an alternative approach might
be to issue a concept release on new money fund reforms. However, the Chairman
appeared to reject this approach by suggesting that public comment on a
proposal would be more valuable. According to Chairman Schapiro: “A concept
release at this point does not advance the discussion. The public needs
concrete proposals to react to.”
During the
recent financial crisis, Reserve Primary Fund broke the buck (i.e., returned
less than $1 NAV) largely due to a bad investment in Lehman Brothers commercial
paper. Because of the perceived risk to the domestic economy if other money
market funds failed, the Fed and Treasury created multiple facilities to
support these funds. The SEC issued an interim temporary final rule to allow money
market mutual funds to participate in the Treasury guarantee program (IC-28487).
This extraordinary support for money market funds has now ended.
Chairman
Schapiro’s statement cited two reasons for seeking new money fund reforms: (1)
money market funds have difficulty absorbing losses above a certain size, and
(2) money market fund investors tend to withdraw funds quickly in a crisis resulting
in runs on these funds. Reforms previously being considered by the SEC included
a floating NAV and mark-to-market valuation to remind investors that money
market fund investments are not guaranteed. Alternatively, the SEC could
require money funds to have a capital buffer that would be augmented by a
minimum balance at risk requirement.
The
Chairman’s statement also noted that no federal securities laws permit money
market mutual funds. Rather, these funds exist due to Investment Company Act
Rule 2a-7, which allows money funds to do business in exchange for limits on
the types of investments these funds can make. The Chairman further observed
that while many sponsors supported their money funds during the recent financial
crisis, there is no legal requirement to provide support, nor is there a
guarantee that sponsors will be able to provided support when it is most
needed. The Chairman noted that Commission staff had logged 300 instances of
sponsor support to money funds from the 1980s to the present.
The
Commission began the reform process in 2010. Release No. IC-29132, among other
things, revised the risk-limiting provisions of Rule 2a-7 and added a rule to
allow the suspension of redemptions and to provide for the orderly liquidation
of fund assets. Chairman Schapiro’s August 2012 statement observed that the
2010 reforms had been intended as a first step, to be followed by additional
reforms.
In March
2011, the Commission proposed to amend Rule 2a-7 by removing references to
credit ratings in favor of a new method of determining credit worthiness with
resulting modifications of the terms “eligible security” and “first tier
security,” and by revising the standards for monitoring securities ratings and for
conducting stress tests. The proposing release observed that these amendments
are similar to revisions the SEC had proposed in 2008 (Release No. 33-9193).
Additionally,
Fed Chairman Ben S. Bernanke, has on several recent occasions noted the need
for structural reforms of money market funds. For example, in an April 9, 2012
speech, Chairman Bernanke noted the connections between the still mostly
unregulated shadow banking system and money market mutual funds. Chairman
Bernanke also observed that additional money fund reforms are needed beyond
those adopted by the SEC in 2010. Said Chairman Bernanke, “Additional steps to
increase the resiliency of money market funds are important for the overall
stability of our financial system and warrant serious consideration.”
Chairman Schapiro issued her statement little more than one week after the Federal Reserve Bank of Boston staff published a report noting that many money market mutual funds would have broken the buck without support from their sponsors during the financial crisis. The report identified 21 prime money market mutual funds that would have broken the buck without a single instance of sponsor support. The report also found 31 prime money funds would have failed without repeated sponsor support.