PHOENIX - Commissioner Elisse Walter told fund industry executives gathered here to re-engage with the Securities and Exchange Commission on a new round of reform of money market mutual funds - and end its "unconstructive disengagement'' on the subject.

"Late last year, the industry brought its dialogue with the commission to an abrupt end,'' she told attendees at the Investment Company Institute's Mutual Funds and Investment Management Conference. "It has since moved to the media with a flurry of statements in the press. That deeply disappoints me, the chairman, and the commission staff."

She said the mutual fund industry, whose lead proponent is the ICI, should "move away from media statements and move back, back to building on the discussion of the past two years.''

The industry should "re-start a process of constructive engagement instead of one of unconstructive disengagement,'' she said.

Her comments immediately followed an opening address at the conference from ICI general counsel Karrie McMillan, that Walter appeared to take as part of the volley.

"What the SEC is considering doing to money market fund investors is outrageous,'' McMillan asserted at the outset Monday of the conference. "Outrageous.''

And when the audience began to applaud that statement, McMillan, who soon would introduce Walter, encouraged them to "go for it."

"Outrageous" in McMillan's view are proposals that the SEC appears to be seriously considering that would allow the net asset value of a money market mutual fund float from a stable $1 a share; and, a proposal that would require capital buffers, and slow the ability of investors to pull their money out of funds.

Both are designed to prevent the kind of run on money market mutual funds that occurred in September 2008, when the Reserve Primary Fund "broke the buck." That fund, the nation's oldest money fund, saw the value of its assets fall precipitously as investment bank Lehman Brothers went under. The fund was heavily invested in Lehman assets.

Letting the value float will "destroy the value of money market funds for investors-and for the economy,'' according to McMillan. The funds will lose the liquidity and convenience that have led investors to put $3 trillion into them, and force them "to swallow all the legal, tax, and accounting burdens of floating funds,'' unnecessarily.

The capital buffer with redemption limits will lower yields - and reduce confidence and interest in the funds, McMillan said. In effect, that proposal will tell investors, "you can put your money in-but you can't get it all back when you want it."

She said, "It's time for the SEC to recognize the success of its 2010 reforms-and move on. "

McMillan noted in her introduction that Walter "can be tough as nails.'' Walter, she noted, keeps replicas of two legs of the Wizard of Oz witch sticking out from a credenza in her office. And Walter would say, after her speech, that she leaves it up to visitors to view those legs anyway they want - and figure out for themselves who the witch might be.

"I too can feel the oxygen leaving the room,'' said Walter. "For some reason lately, and Karrie's speech reflects this, this topic seems to be making all of us emotional, strident and to a certain extent I think some of us are losing our heads."

"I hope you will take a deep breath and then engage or re-engage in the discussion of these issues," she said.

"Your engagement is essential to reaching optimal answers to the important questions posed in securities regulation. And the topic of money market funds in particular is just too important to let the dialogue play out through a public volley of slogans. But I am afraid that is where we are today.''

Walter was clearly in no mood to "move on,'' in McMillan's term.

"I also don't think we can simply say that enough has been done, that the commission's latest rules have addressed all the problems,'' she said.

The "breaking of the buck" in 2008 led to $300 billion being pulled out of money funds in three days and a massive government intervention to prop the industry at that point.

An intervention that can't happen again, she said, in the next financial crisis.

McMillan had argued that the reforms instituted in 2010 that required funds to invest maintain a portion of their portfolios in highly liquid assets, reduce their exposture to long-term debt and reduce exposure to risky assets worked throughout last year's Eurozone debt crisis.

That, McMillan contended, was proof that the 2010 reforms were sufficient safeguards for the future.

But Walter was not swayed.

"I feel very strongly that we can't simply say this kind of financial crisis can't happen again,'' she said, speaking of the 2008 global credit crisis, primarily.

"The next one - and there will be a next one - will be both the same and different from the past,'' she said. "We have to plan for the inconceivable, as well as the likely and unlikely.''

In the end, Walter said, the industry and the SEC "need to continue to discuss that. Debate it. Try to come to a meeting of minds or at least truly informed disagreement.''

After Walter departed. McMillan said she'd be willing to sit down and talk with about money market mutual fund reform.

"I find it very interesting that she's open to ideas,'' McMillan said, after the commissioner said the regulatory agency wanted the fund industry to 're-engage' in discussing reform of the money market mutual fund business.

Walter said that the SEC was still considering options other than floating the net asset value of such funds from $1 a share or mandating capital buffers with some sort of limit on withdrawals.

A few other options, Walter said, include:

* A liquidity or redemption fee

* A two tier-system, where retail investors choose between floating or stable NAV funds and institutions could be limited to a floating NAV

* Mandatory redemptions 'in kind'

* Insurance

* Private emergency liquidity facilities

* Funds at special purpose banks

McMillan said that "we were under the impression that the SEC was under pressure to get something done" at the end of 2011 and was, at that time, not prepared to take more time to discuss the reform.

In 2010, for instance, Walter noted that the SEC clearly indicated with a first round of reform of the funds that a second round was coming.

McMillan said she would be willing to sit down, along with other ICI staff or industry members, and talk with Walter about possible approaches to that next round of reform.

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