U.S. Securities and Exchange Commission Chairman Mary Schapiro faced skeptical lawmakers from both parties today as she defended her campaign to overhaul the regulation of money-market funds.
In an appearance before the Senate Banking Committee that lasted just under an hour, Schapiro told lawmakers that while most funds are “well and responsibly managed,” they are susceptible to the types of runs that helped freeze credit markets in 2008. Schapiro hasn’t been able to convince a majority on her five-member commission to support a proposal to rewrite money-market rules and today’s hearing demonstrated the difficult task she faces on Capitol Hill as well.
“In my view, you’re portraying an industry that’s extremely vulnerable, that has all these risks of runs and I really find that extraordinary in light of the actual history,” Senator Patrick Toomey, a Pennsylvania Republican, told Schapiro. “We’ve had another round of real stress: an ongoing recession, European credit crisis, downgrade of the U.S. government, considerable redemption pressure and not a single problem in this industry.”
Concern over money funds, once seen as among the safest of investments, grew after the September 2008 collapse of the $62.5 billion Reserve Primary Fund, contributing to a broader run that exacerbated a freeze in global financial markets. The run calmed after the Treasury Department temporarily guaranteed money-fund shareholders against losses and the Fed began buying fund assets at face value to help them meet redemptions.
Schapiro said her goal is not to “demonize an industry.” She is proposing that money market funds either allow their net asset values to float or hold more capital and prevent customers from withdrawing all their funds at once.
Senator Robert Menendez, a New Jersey Democrat, said he was concerned about the idea of requiring money funds to float their share prices.
“I think that’s a problem,” he said.
Such a proposal would follow rules the SEC adopted in 2010 that introduced liquidity minimums, average maturity limits and new disclosure requirements. Schapiro told the Senate panel that since those rules took effect, three money-market funds have required their sponsors to step in and support them to avoid their net asset value falling below $1 per share.
Schapiro also told the Senate panel that the International Organization of Securities Commissions prematurely released a study of possible changes to money-market fund rules in April
The study’s release, which drew objections from three of the SEC’s five commissioners, was a “genuine screwup,” Schapiro said. IOSCO, based in Madrid, is an international organization of securities regulators, including the SEC.
Options in the study included changing the money-market fund industry’s stable net asset value. The two Republican members of the SEC, Troy Parades and Daniel Gallagher, joined Commissioner Luis Aguilar, a Democrat, in issuing a statement on May 11 saying IOSCO’s report “does not reflect the views and input of a majority of the Commission.”
Schapiro later told reporters that IOSCO normally waits for the SEC’s full input before issuing a report.
“They published before getting our comments,” Schapiro told reporters. “It was a timing mismatch. We thought we’d get more time. Normally they wouldn’t publish without checking back with us first to see why they hadn’t gotten our comments and that just didn’t happen.”