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Schapiro stands defiant on money market reform

By Jason Kephart

May 13, 2012 6:01 am ET


Securities and Exchange Commission Chairman Mary Schapiro is not backing down from her stance that the money market fund industry needs additional reform.

“We have a legitimate concern over the risks posed by stable net asset values and it’s not hypothetical,” Ms. Schapiro told more than 1,500 attendees of the Investment Company Institute’s general-membership meeting inWashingtonon Friday. “We saw what happened in 2008. It had a profound effect on broker-dealers and financial advisers.”

Ms. Schapiro was referring to the infamous “breaking of the buck” by the Primary Reserve Fund in September 2008. As Lehman Brothers Holdings Inc. collapsed, the fund’s holding of the bank’s short-term debt caused the net asset value of its shares to fall below $1, sparking a run on money market funds. The Federal Reserve and the Treasury Department stepped in and stopped the run with a temporary guarantee of the $1 share price.

“We know we don’t have those tools anymore,” Ms. Schapiro said. “We have to step in and confront this head-on.”

The mutual fund industry is resisting Ms. Schapiro’s efforts to impose further regulation, arguing that it would hurt investors and impede financing for businesses, as well as state and local governments, and undermine the economic recovery.


Ms. Schapiro’s speech appeared to do little to soften that resistance.

“The level of rhetoric was substantially diminished this time around, but it continues to be an ongoing issue,” was all that Susan Wyderko, president of the Mutual Fund Directors Forum, would say about Ms. Schapiro’s comments.

Karrie McMillan, general counsel for the ICI, was not available to comment on Ms. Schapiro’s remarks.

“I think the remarks [Ms.] Schapiro made stand on their own,” ICI spokeswoman Rachel McTague wrote in an e-mail.

The mutual fund industry has maintained that reforms enacted in 2010, which put restrictions on the length and quality of commercial paper in which money market funds could invest in, among other things, were enough to shore up the funds.

The SEC is considering further changes to buttress the value of money funds. The ones being most seriously considered are forcing money market funds to use a floating net asset value, as do other mutual funds, or requiring them to keep a capital buffer in place to act as a backstop in case of any Lehman-like blowups.

Ms. Schapiro’s comments suggest she favors the idea of a floating NAV.

“I want money market funds to be reflective of the fact that they are investment products, and the value does fluctuate,” she said.

Still, she said that neither of those options is “set in ink” and won’t be even if, or when, a formal proposal is put forward.

“We’re always open to having discussions with the industry,” she said. “We’re counting on the industry to engage constructively on solutions.”

“The reforms we put into place in 2010 were very positive and have worked well,” Ms. Schapiro said. “We still come in every morning when there’s been a problem — like the sovereign debt crisis inEurope— and ask, “How are money market funds being affected?’”

Ms. Schapiro said that’s one question that keeps her up at night.

“One of the things that happened after 2008 was commentators asking, “Where were the regulators?’” she said. “We can’t sit by when we see systematic risks and not have a discussion about it. I see a problem, I think it’s a threat to our system, I have to ask how we can try to fix it.”

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