A year ago, when opposition from the asset-management industry killed her plan to make money-market mutual funds safer, U.S. Securities and Exchange Commission Chairman Mary Schapiro looked to Timothy Geithner, then the Treasury Secretary, to tackle “one of the pieces of unfinished business from the financial crisis.”
It remains unfinished.
As Schapiro and Geithner prepared to leave government toward the end of 2012, the effort started anew to make the $2.6 trillion money-fund industry less likely to disrupt global financial markets. Norm Champ, a Harvard University-trained lawyer and the SEC’s top regulator of mutual funds, canvassed the remaining four commissioners, seeking to find common ground on which new rules could be built after Schapiro failed to corral enough votes to push her plan forward.
“We had hit a stalemate,” Commissioner Elisse B. Walter said in an interview. “We started with a blank sheet of paper to figure out where we could all agree, using the knowledge we’d acquired over the prior two years.”
Champ and Walter succeeded in putting together a compromise acceptable to the other commissioners, no small feat given the divisiveness of the issue. In doing so, they scaled back Schapiro’s controversial proposals to require all money funds to float their share prices or set aside capital to absorb losses.
Even so, companies including Fidelity Investments and Federated Investors Inc. oppose the more moderate proposal, saying it will damage the appeal of money funds and add significant costs. What’s more, there’s no consensus that the SEC’s rules, unveiled in June for public comment, would prevent the kind of investor run that in 2008 woke up regulators to the threat money funds pose to the financial system.
Primary Reserve
“Nothing has fundamentally changed to address the structural weaknesses of money funds,” said Sheila Bair, former chairman of the Federal Deposit Insurance Corp. who now leads the Systemic Risk Council, a nonpartisan group whose members include former Federal Reserve Chairman Paul Volcker and former Treasury Secretary Paul O’Neill.
The SEC began working with the Fed and Treasury Department on ways to buttress money funds shortly after the $62.5 billion Reserve Primary Fund was brought down in 2008 by a loss on Lehman Brothers Holdings Inc. debt.
The fund’s decision to re-price its shares below $1, known as breaking the buck, set off a panic among investors, who had assumed their principal would never be lost. They pulled $310 billion from money funds in a single week, almost exclusively from those that were big buyers of corporate debt, according to the SEC. That almost froze the $1.76 trillion market for commercial paper, a short-term IOU used by companies to pay everything from bills to salaries.