Cash Management: Schapiro Gone, MMF Battle Moves to Stability Board

The SEC chair’s resignation will not end attempts to tighten fund regulation.

Mary Schapiro may be stepping down as head of the Securities and Exchange Commission, but her signature regulatory initiative lives on. The Financial Stability Oversight Commission – the group of regulators tasked with reducing systemic risk in the financial markets – last week proposed a new set of rules designed to give investors more information about the value of their money market funds. Chairman Schapiro had been a leading critic of the funds’ potentially destabilizing effects.

The SEC did manage to get a package of reforms passed in 2010, which tightened the credit and liquidity standards of the funds. Other commissioners voted down Schapiro’s more recent efforts to tighten the oversight of MMFs.

The FSOC has proposed three options for reporting the value of the funds and buttressing their strength. 

1. Floating Net Asset Value. Require MMFs to have a floating NAV by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV, consistent with the requirements that apply to all other mutual funds.
2. Stable NAV with NAV Buffer and ‘‘Minimum Balance at Risk.’’ Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV.
3. Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs.

The proposed rule, published in the Federal Register on November 19, could have a better chance of passage given the large number of agencies that MMF lobbyists would have to convince. Also, just recently Walt Bettinger, CEO of Charles Schwab, wrote an editorial in the Wall Street Journal suggesting compromise is needed in the MMF battle and lending his support for a floating NAV.