Updated Sunday, July 13, 2014 as of 8:39 PM ET
Practice - Regulatory/Compliance
SEC Drops Money Fund Reform
by: Bloomberg News
Thursday, August 23, 2012
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Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission, canceled a vote on a proposal to tighten money-market fund rules amid opposition from fellow commissioners and a lobbying campaign by fund companies.

Three of the five commissioners told her they wouldn't support her proposal, Schapiro said in a statement today. Other policy makers should address "one of the pieces of unfinished business from the financial crisis," Schapiro said.

"The declaration by the three commissioners that they will not vote to propose reform now provides the needed clarity for other policy makers as they consider ways to address the systemic risks posed by money-market funds," she said in the statement. "I urge them to act."

Schapiro, backed by the Federal Reserve, has worked to make money funds more stable since the collapse of the $62.5 billion Reserve Primary Fund in September 2008. Its closing triggered a wider run on money funds, helping to freeze global credit markets.

The announcement marks a victory for the mutual-fund industry, which has lobbied against the Schapiro proposal. The plan called for funds to abandon their traditional $1 share price, or to adopt capital buffers and redemption restrictions, changes executives said would destroy products that manage $2.6 trillion for U.S. companies and households.

A vote on the proposal was expected to happen as early as Aug. 29, though it hadn't been formally scheduled.

Quest Abandoned

That meant the  asset-management industry scored a victory as Schapiro abandoned her quest to impose tougher rules on money-market mutual funds.

Three of the four other SEC commissioners didn't support a four-year effort to make money funds more stable, Schapiro said in a statement that urged other policy makers to take action. Two Federal Reserve bank presidents, Eric Rosengren of Boston and William Dudley of New York, and Treasury Secretary Timothy Geithner had backed Schapiro's proposals, which had been opposed by fund companies including Federated Investors Inc. and Fidelity Investments.

The announcement means the fight over how to regulate $2.6 trillion in funds used by U.S. households and companies as an alternative to bank accounts probably will move to the Financial Stability Oversight Council, a panel of regulators created by the Dodd-Frank Act. Congress charged FSOC with identifying threats to U.S. financial stability.

"The celebration by money-fund managers and investors will be brief," Peter Crane, president of research firm Crane Data LLC in Westborough, Massachusetts, said in a telephone interview. "But this definitely reduces the odds of radical change."

Schapiro has worked to make money funds more stable since the collapse of the $62.5 billion Reserve Primary Fund in September 2008. Its closing triggered a wider run on money funds, helping to freeze global credit markets.

'Unfinished Business'

Schapiro has argued the funds' stable share price encourages investors to flee at the first sign of trouble because it allows those who react quickly to sell their shares at $1 each even if the net asset value has dropped below that level. Her proposal would have given fund managers a choice of switching to a floating share price that reflected the market value of holdings, or establishing a capital buffer to protect against credit losses and redemption restrictions to discourage investor flight.

Three of the five commissioners told her they wouldn't support her proposal, Schapiro said yesterday. Other policy makers should address "one of the pieces of unfinished business from the financial crisis," she said.

"The declaration by the three commissioners that they will not vote to propose reform now provides the needed clarity for other policy makers as they consider ways to address the systemic risks posed by money-market funds," she said in the statement. "I urge them to act."

Geithner, who chairs FSOC, has said the body could address money funds if the SEC failed to act. Other members of FSOC include Schapiro and Fed Chairman Ben S. Bernanke.

Republican Opposition

Schapiro's plan was supported by only one other commissioner, Democrat Elisse B. Walter. Republicans Troy Paredes and Daniel M. Gallagher opposed it.

Democrat Luis A. Aguilar, a former attorney for Atlanta- based fund manager Invesco Ltd., had signaled he didn't support the Schapiro plan without saying whether he would at least approve that it be put out for public comment.

The announcement marks a victory for the mutual-fund industry, which has lobbied against the Schapiro proposal, saying it would destroy the attraction of funds to investors and deny companies, cities and states of a cheap source of short- term funding.

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