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SEC Seeks ‘Structural Reform’ of Money Funds

BloombergBy Jesse Hamilton and Christopher Condon | Bloomberg

The U.S. Securities and Exchange Commission will soon propose revamping rules for money-market mutual funds, pushing the options of a floating net asset value and capital buffers, SEC Chairman Mary Schapiro said today.

"Money-market funds, while perhaps not the cause of the downward spiral of events, certainly exacerbated the financial breakdown," Schapiro said in remarks prepared for a Securities Industry and Financial Markets Association conference in New York. The SEC is pursuing "further structural reform" in the $2.6 trillion industry, she said.

Regulators have been working to make U.S. money funds safer and more stable since the Sept. 16, 2008, collapse of the $62.5 billion Reserve Primary Fund. Spooked by the fund's closure, investors withdrew about $310 billion from prime money funds that week, helping to freeze global credit markets. The Treasury and Federal Reserve stepped in with guarantees and other steps to stop the run.

"Our country should never again be in the position of having to choose between providing support to private market participants, including money-market funds, or risking a breakdown of the broader financial system," Schapiro said.

The funds industry, led by the Washington-based Investment Company Institute , has opposed abandoning the funds' stable $1 share price. ICI President Paul Schott Stevens has argued the move would destroy the attraction of the product that manages capital for companies and individuals.

‘Dramatic' Changes

Moving to a floating share price would require "dramatic" industry changes and pose a challenge to policy makers in managing the transition, Schapiro said.

At a time of crisis, a capital buffer "could mitigate the incentive for investors to run since there would be dedicated resources to address any losses," she said.

Schapiro said the SEC would make proposals "in very short order" without giving a date. Any proposal would be followed by a public comment period.

To contact the reporters on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editors responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net