A top U.S. securities regulator said on Friday he hopes his agency will consider a fresh package of money market fund reforms, even as the new U.S. risk council plans to explore ways to also tighten regulations on the industry. Daniel Gallagher, a Republican commissioner who had previously helped block certain fund reforms at the Securities and Exchange Commission, said in an interview he is not opposed to implementing some new rules and believes the SEC can move forward on its own revised plan. Gallagher's openness to an alternative proposal may greatly increase the chances for new rules that the $2.6 trillion fund industry has fought. The industry says money market funds are a safe investment with attractive returns, while critics worry that they are vulnerable to runs and create a false sense of security for investors who do not realize they are not backed by federal insurance. SEC Chairman Mary Schapiro said last month that she had failed to get enough support among the agency's commissioners to move forward a proposal. That prompted Treasury Secretary Timothy Geithner on Thursday to send a letter to his fellow members of the Financial Stability Oversight Council to consider their own money market fund reforms, citing the SEC's inability to do so to date. Gallagher said that FSOC's plans to tackle money market funds are well in line with its authority under the Dodd-Frank financial reform law, but that the SEC does not need an extra push from the panel to act."I think we have the ability to work on a parallel track," Gallagher said. "We absolutely should come up with our own package."In an interview on the sidelines of an SEC investor advisory committee meeting on Friday, Schapiro told Reuters she is willing to keep working internally at the SEC on a proposal, but said it is also important for FSOC to remain involved."I'm always pretty optimistic I can get things done…and I am willing to keep working on it," she said. "I do think it's important for FSOC to stay focused on this and pursue it." Schapiro is also a member of the FSOC. Since last year, Schapiro has been pushing for additional reforms for money markets.
Although the SEC implemented a series of reforms in 2010, she has said those do not go far enough to prevent runs on funds like the one experienced in the financial crisis after the Reserve Primary Fund "broke the buck" when its net asset value (NAV) fell below $1 a share. She had circulated a draft proposal to SEC commissioners that contained several options. The leading option called for capital buffers coupled with redemption limits during periods of stress. A second option called for possibly moving from a stable $1 per share net asset value to a floating NAV, so that investors would not get spooked by the prospect of funds breaking the buck. But Gallagher, along with Republican Commissioner Troy Paredes and Democrat Luis Aguilar, declined to support that plan. Beyond the SEC, most in the money fund industry and corporate treasurers have also criticized Schapiro's plan.
Major companies that sponsor money market funds including: Fidelity Investments, Vanguard Group Inc, and Federated Investors Inc as well as their trade group, the Investment Company Institute, have argued that 2010 reforms are good enough. Those reforms included increasing the liquidity of funds and requiring more disclosure of their holdings. The companies also worry that new rules would drive money out of their funds, amid very low interest rates. The fund firms' have gained support from many companies and local-government agencies that rely on money funds to buy debt instruments. The SEC's three dissenting commissioners called for the commission to first conduct a study to look at whether the 2010 money market fund rules were sufficient. Gallagher said on Friday that SEC economists are honoring their request for a study, and he expects it will not take too long. He also said he is open to taking a much harder look at a reform that would couple a floating NAV with rules allowing fund boards to impose liquidity "gates" on redemptions. In doing this, he said, the SEC will have to take serious steps to address the tax and accounting issues associated with it.
"I like the floating NAV piece. I think, though, that we need to seriously consider coupling it with gating to ensure we completely address run risk," he said."I'm still not positive, based on what I've seen, that it will completely solve run risk. I think it will go a long way to help, but if you added gating to it … you get the best of both those. Gating directly addresses run risk. It stops a run in its tracks."When asked about Gallagher's comments, Schapiro said her previous proposal had included a floating NAV."I have always thought floating the NAV...was the more principled way to deal with this issue," she said. "If you think about it, you would never invent this product now with a stable net asset value. We would say this is an investment pool and its value ought to fluctuate with the value of the investments that underlie it."In Geithner's letter, he said FSOC should formally ask the SEC to move forward with new rules in a "name and shame" bid to get the divided SEC to act. He also said the council and its member regulators should consider exercising other powers to regulate the money market fund industry more tightly, including naming some firms as "systemic" and imposing capital surcharges on banks that sponsor money funds. The letter also encouraged FSOC members to explore the concept of gating, but in conjunction with capital standards. Gallagher has said he has serious concerns with any proposal requiring funds to hold more capital. At a closed-door FSOC meeting on Friday, regulators discussed Geithner's options and planned on crafting money market fund reform recommendations for the council to consider at its November meeting, Treasury said in a statement. Treasury officials said they were heartened by Gallagher's comments on the floating NAV and said they felt more optimistic now that something will get done about money market funds. The officials said all of the members of FSOC are on the same page that new reforms to reduce systemic risk are needed.