In letters and hearings, Congress prods the SEC on its plans to regulate money market mutual funds.
Since the Securities and Exchange Commission earlier this year announced its plans to make safer money market mutual funds, the industry has ramped up its lobbying efforts. And it’s now seeing some results. Lately Congress has taken up the cause, looking for more information on what the SEC plans to do and, more particularly, why.
The SEC proposals announced in February include changing the MMF net asset value from fixed to a floating regime and also suggest a “hold-back” requirement whereby investors would be able to redeem 95 percent of their holdings immediately but then have to wait 30 days to get the rest of the final 5 percent. It also wants the MMFs to have a liquidity buffer. The industry has said any one of these proposals would be enough to kill it.
Now Congress has stepped in. Just a week ago, two Republican House members, Rep. Spencer Bachus of Alabama and Rep. Jeb Hensarling of Texas sent a letter to SEC Chairman Mary Schapiro about the agency’s plans. The letter wondered how an agency that has already missed important deadlines on Dodd-Frank “is devoting time and resources to a discretionary rule without providing Congress or the public with empirical data and economic analysis to justify such a rulemaking.” Further the letter went on to remind the SEC that its mandate is to ensure that investors have all of the material information about an investment, not to engineer investments so that they are free of any risk.
On Wednesday the Capital Markets and Government Sponsored Enterprises Subcommittee had Ms. Schapiro as a witness as it reviewed the SEC’s “activities, initiatives and Fiscal Year 2013 budget request.” This was part of a broader review by Congress of the SEC’s cost benefit analysis (or lack thereof). And Rep. Gwen Moore, a Democrat from Wisconsin, wrote on a blog on The Hill that the SEC’s MMF proposals “are a bad idea.”
“The SEC enacted sweeping changes to MMF governance and reserve requirements in 2010,” Ms. Moore wrote. “These included, but were not limited to, requiring 10 percent overnight and 30 percent weekly liquidity standards. The reforms to MMFs have already helped the industry maintain investor confidence and weather two significant market disruptions: the downgrade of U.S. debt and the Greek/Euro Zone debit crisis.” Therefore, she was uncertain why there was a need for further regulation.
Jerry Hawke, a partner at law firm Arnold & Porter LLP and an advocate for money market funds (Federated Investors is a client), called the current push to further regulate MMFs “overblown nonsense” and said MMFs are already highly regulated. “The funds already maintain a higher amount of reserves than what’s required by the SEC,” he said. “They’ve been operating effectively for several years now and the SEC regulations in place have been very effective.”
Despite the industry push-back, the SEC has support from the Fed and European regulatory bodies. This week, Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston, in a Wall Street Journal opinion piece, wrote that the SEC’s rules following the broken buck “did not address the fundamental inconsistency between investors’ expectations (stability of principal and immediate liquidity) and the assumption of credit risk without a capital buffer;” therefore, “additional reforms are needed.” Also, the Financial Stability Board released a progress report on its efforts to regulate shadow banking, and said it will develop “recommendations to strengthen the regulation of the shadow banking System” focusing on five areas, one of which was “to reduce the susceptibility of money market funds to ‘runs’” and suggested it would propose a floating NAV. News reports said the FSB would have its MMF proposals by the end of November.
Critics have said the Fed has no business weighing in on MMFs, particularly when it was likely the Fed’s own actions – letting Lehman collapse after assuring markets it would not allow SIFIs to fail – that led to the Reserve Primary Fund, a large holder of Lehman commercial paper at the time, to break the buck.
Certainly treasurers are against the new proposals (see related story here). Some companies will not be allowed to use MMFs due to changes; and many would have to liquidate their holdings because of a floating NAV, and would force money into the bank deposits and if not there, riskier assets.