Champ and his staff were looking for a way to carve out retail money funds, but there wasn’t an existing rule that distinguished them from institutional products. Investment companies themselves had different categorization methods.
Eureka Moment
The breakthrough came when the United Services Automobile Association, an investment adviser that caters to military members and veterans, proposed identifying retail funds as ones that limit a shareholder’s redemptions to $250,000 a day. Funds that set the limit would be able to keep the stable $1 share price. The SEC embraced the concept and adjusted the threshold to $1 million a day.
“That was sort of a eureka moment, like ‘here is a really good idea,’” Walter said.
Walter was replaced in April by Mary Jo White, who was favored by the White House to reestablish the regulator’s reputation as a tough sheriff of Wall Street. By then, the proposal’s main ingredients were already decided.
Weaknesses Cited
White didn’t ask for substantive changes, according to two people familiar with the matter.
In an interview, Schapiro questioned the decision to exempt funds that invest in government debt. Schapiro now works for Promontory Financial Group LLC, which has done work for Bloomberg LP, the parent company of Bloomberg News.
“There is no investment product that is risk-free,” Schapiro said. “While the run was on a prime fund, my preferred approach would be to fix the structural weaknesses of a stable share price for all money-market funds.”
Other critics say the proposal is weak because it didn’t include the capital buffer, which had been advocated by Robert E. Plaze, the SEC’s longtime expert on money funds, and some at the Federal Reserve. Plaze retired from the agency in August.