The Securities and Exchange Commission's new leader, Mary Jo White, will bring her years of experience as a federal litigator before the fund industry this week as its members try to judge whether she will propose reforms that could cripple the marketplace.
White is scheduled to appear on the last day of Investment Company Institute's General Membership Meeting, which begins Wednesday, May 1. At 8 a.m. Friday, the SEC chair will deliver her first speech to fund managers, who are waiting to see if she will follow in her predecessor's footsteps and push for hardnosed reforms of the $2.7 trillion money market mutual fund industry.
While the Washington, D.C.-based regulator would not to disclose the content of her speech, "SEC chairs have had a long history speaking at this annual event given the importance of effective mutual fund regulation for America's investors," noted SEC spokesperson John Nester.
In the last two years of her tenure, White's predecessor Mary Schapiro put the money market mutual fund industry on edge with recommendations for a second set of reforms beyond those instituted in 2010. Those came in the wake of a run on money funds during the 2008 financial crisis that required a federal backstop.
Schapiro's most-feared suggestion: float the net asset value of shares from the $1 value that has been a bedrock promise of the money fund, which tries to compete with bank accounts.
Other recommendations included limits on redemptions of shares as well as the maintenance of capital buffers meant to preserve fund levels in times when "a sudden market or interest rate fluctuation" could cause a "potential dramatic 'break the buck' effect," as Schapiro put it at a 2011 Securities Industry and Financial Markets Association conference.
The 'break the buck' effect was seen most dramatically in September 2008, when investors pulled $300 billion out of money funds after the value of assets held in the nation's oldest such fund, the Reserve Primary Fund, infamously 'broke the buck,' the former chairman told SIFMA attendees. The net value of its assets fell below $1 a share each, because of its extensive holdings in Lehman Brothers assets, which plunged in value when it failed during the crisis.
The 2010 reforms included measures that "shortened maturities, improved credit qualities, and for the first time imposed liquidity requirements for money market funds," Schapiro noted.
Now, attendees of the membership meeting hope to find out if White's thinking on the subject of preserving the strength of the industry matches that of Schapiro-or of the ICI itself.
ICI President and CEO Paul Schott Stevens said the organization's "position has always been that we are open to further regulatory changes but subject to specific criteria."
"We believe we ought to preserve the basic model of money market funds because of their utility to investors and their value in the economy. And, secondly, we shouldn't so burden sponsors of money market fund as to drive most out of the business," Stevens added.
Of Schapiro's recommendations, the buffer regarding 1% or 3% of assets to prevent fluctuations in daily transactions could have costly consequences for fund operators.
"Whether it's 1% or 3%, [a capital buffer] will so financially burden money market fund providers that there won't be any money market funds left if those are the regulatory proposals," Stevens said.
Stevens noted that the 73-year-old trade association has submitted follow-up proposals of its own which include "redemption gates and liquidity fees that could be imposed to prevent 'run on a money market fund.'"
In a January comment letter to FSOC, the ICI explained that temporary windows or "gates" will prohibit rampant fund liquidation, and the "liquidity fees" would be designed to cover possible costs to funds and their shareholders to in the event of a run.
Schapiro dropped her efforts last August, when she saw she did not have the votes needed to get passage of her proposals by the commission. But that didn't end the movement for more reform. The Financial Stability Oversight Council (FSOC) took the reins in November 2012 thanks to authority instituted by Section 120 of the 2010 Dodd-Frank Wall Street Reform Act. The panel proposed three recommendations for money market mutual funds (MMFs), which mirrored Schapiro's proposals.
While Stevens expects the Washington, D.C.-based securities regulator will institute action on money market fund reform over the summer, he noted that ICI doesn't "know at this point what they [the SEC] is proposing, (but) every indication is that the SEC is working very hard."
Former Treasury Secretary Timothy Geithner chaired the FSOC previously. Unknown is how much his successor, Jacob J. Lew will focus on fund reform.
ICI's Stevens believes, though, that the "SEC is determined to try to get the action back from the FSOC."
"We of course in the industry believe this is an area of SEC expertise, and ought to be the policy maker with respect to any further reforms of money markets," Stevens told Money Management Executive.