PALM DESERT, Calif. – The second set of reforms of the money market mutual fund industry now being considered will be an “interesting test case” of regulators’ ability to conduct effective analysis of the costs and benefits of rules they institute, according to a former director of the Division of Trading and Markets at the Securities and Exchange Commission.
The push by the Financial Stability Oversight Council and the Securities and Exchange Commission to create a new round of rules that govern the money fund industry will demonstrate the regulators ability or lack thereof to carefully consider the impacts of the rules they institute, said Erik Sirri, a professor at Babson College near Boston who served as director of the trading and markets unit at the SEC from 2006 to 2009.
"It's about crafting better, more effective, more efficient regulation,'' Sirri said at the Investment Company Institute’s annual Mutual Funds and Investment Management conference.
Under consideration are potential requirements that the money fund industry let the value of shares float from the standard $1 value, the adoption of different levels of capital buffers to ward off runs and restrictions on redemptions, in times of crisis.
Similar rules were being pushed by former chairman Mary L. Schapiro last year. But she dropped the initiative in August, when she did not have enough votes on the commission to formally propose new rules. At the time, commissioners criticized the plans for lack of sufficient analysis of the impact on the industry and the economy, as a whole.
The SEC also has faced a string of court cases that have pushed it to raise the level of its economic analysis of rules it wants to introduce.
In 2005, a federal circuit court ruled that the commission failed to adequately consider the costs imposed on the mutual fund industry by a requirement that required that mutual fund boards have no less than 75% independent directors and be chaired by an independent director.
In 2010, the same District of Columbia court criticized the SEC’s level of analysis of the impact on competition of a reclassification of fixed indexed annuities as securities .
And in 2011, the court also criticized the SEC’s cost-benefit analysis of a proxy access rule that would provide shareholders with information about shareholder-nominated candidates for boards of directors.
Courts are pushing the SEC to do “bottom up analysis” of the economic impact of new rules, such as the money fund reforms, said Barry P. Barbash , a partner at Willkie Farr & Gallagher LLP and a former head of the division of investment management at the SEC.
There have been “substantial changes in processes at the SEC,’’ toward that end, said Sirri.
Indeed, the SEC issued a Guidance Memorandum on March 16, 2012, that described its commitment to “[h]igh-quality economic analysis” as part of its rulemaking.
That memorandum Iaddresses each of the court criticisms, according to a study released this month by Paul Rose and Christopher J. Walker of The Ohio State University Moritz College of Law. But, they said, “ot remains to be seen whether the SEC will put its new guidance memorandum into practice.”