When Schapiro left the SEC in mid-December, after four years of steering the agency’s response to the financial crisis, the seeds of a new effort were already planted.
Aguilar, Gallagher and Paredes had taken heat from former regulators such as Arthur Levitt, who led the SEC during the 1990s and labeled the failure to propose new rules for money funds a “national disgrace.”
Geithner had called on the Financial Stability Oversight Council, a creature of the 2010 Dodd-Frank law, to recommend new money-fund rules. FSOC was created by Congress to fill regulatory gaps and monitor the kind of threats that contributed to the financial crisis. In late November, the FSOC issued a proposal consistent with the ideas favored by Schapiro and her staff.
Preemptive Action
With FSOC looking over their shoulder, SEC commissioners were united in wanting to show the agency could get the job done, Walter said.
“The interest of FSOC changes the dynamic, brings in another force,” Walter said. “Everyone at the SEC agreed, no matter what their view was on the merits, that it was preferable that action on this issue should be taken by us.”
Aguilar, Gallagher and Paredes also had gotten something they wanted: in late November, the SEC issued a study on the 2008 run and the role of current rules. The report made it clear that investors ran from prime funds and parked cash in funds that bought U.S. government debt, whose assets grew by $409 billion between early September and early October 2008, according to SEC data. It also showed that retail investors hadn’t contributed much to the run.
Exemptions Sought
After the study was issued on Nov. 30, Aguilar said he would consider additional regulation.
Some fund companies were already pushing the commission to exempt retail funds from new rules, laying the grounds for a compromise. On Nov. 22, Charles Schwab Corp. Chief Executive Officer Walter Bettinger wrote in the Wall Street Journal that imposing a floating share price on prime funds used by institutions “is the right thing to do to bring the debate to closure.” Retail funds should be allowed to keep the fixed $1 share price, he wrote.