Vulnerability Exposed
To halt the run, the Treasury Department guaranteed all money-fund shareholders against losses from default, putting the government on the hook for about $1.6 trillion in corporate and municipal debt, according to an estimate by research firm Crane Data LLC in Westborough, Massachusetts.
The crisis showed that money funds were vulnerable to runs that could damage broader credit markets. Fifteen months later, the SEC imposed new rules, with the industry’s support. The rules improved portfolio liquidity, required higher-rated assets, shortened the average maturity of fund holdings and forced more disclosure of fund holdings.
“They were way less controversial and we could get them done reasonably quickly,” Schapiro said in an interview. “We were bolstering the resiliency of money-market funds, but we were not solving for the underlying structural problem. That was going to take more time.”
Lobbying Campaign
Schapiro unveiled her second set of reforms -- which would have stripped funds of their fixed share price or required capital buffers against losses -- in November 2011. Several commissioners, whose votes she needed to approve new rules, publicly expressed doubts from the start.
Industry lobbyists met with SEC commissioners and began pressing their arguments -- that regulators needed to study the impact of the 2010 reforms, and that Schapiro’s ideas would impose bank-style regulation on an investment product.
The 10 biggest money-fund providers and the Investment Company Institute, the industry’s trade group, reported combined lobbying spending of about $63 million from the beginning of 2011 through the first quarter of 2013 in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. They found the most receptive audience with commissioners Daniel M. Gallagher and Troy A. Paredes, two Republicans, and Luis A. Aguilar, a Democrat.
Schapiro Setback
The industry considered Aguilar, a former general counsel at money-management firm Invesco Ltd., as a possible swing vote to block Schapiro’s proposal, according to a lobbyist who asked not to be named because the meetings were private. Both Aguilar and Gallagher complained that Schapiro’s team wouldn’t consider their input on the plan, including Aguilar’s call for a study of the impact of the 2010 rule changes. Gallagher accused Schapiro of ceding too much control to the Federal Reserve and Treasury.