U.S. Securities and Exchange Commission member Daniel Gallagher,who helped derail efforts to tighten rules for money market mutualfunds, said he would likely support a measure forcing the industryto abandon its marquee $1 share price.

Requiring money funds to have a fluctuating share price “is anattractive option that I am likely to support,” Gallagher, aRepublican, said in an interview.

Gallagher's remarks could help revive the debate at the SEC andoffer a path toward compromise for SEC Chairman Mary Schapiro,whose proposal ran aground last month.

Gallagher said he couldn't vote for Schapiro's plan because itscenterpiece was to make the funds hold extra capital. The cushionwas too small to protect investors, Gallagher said, leading him tobelieve the money would be used as collateral in case the fundsneeded to borrow from the Federal Reserve.

“I could not be complicit in a rulemaking that purported toeliminate bailouts but would actually do the opposite,” Gallaghersaid.

SEC spokeswoman Judith Burns declined to comment.

The Financial Stability Oversight Council, an umbrella group ofU.S. regulators headed by Treasury Secretary Timothy F. Geithner,may discuss money funds at a meeting tomorrow. Schapiro, a memberof the council, has asked the group to consider taking action tostabilize money funds.

Much of the mutual fund industry — led by Boston-based FidelityInvestments and Pittsburgh-based Federated Investors Inc. — haswaged a long lobbying campaign against any SEC action, especiallygiving up the stable share price.

The SEC, along with the Fed and Treasury Department, has pressedto make money funds safer since the September 2008 collapse of the$62.5 billion Reserve Primary Fund, which triggered an industrywiderun and helped freeze credit markets. The crisis calmed only afterthe Treasury temporarily guaranteed shareholders against losses andthe Fed began buying fund assets at face value to help them meetredemptions.

Schapiro has argued that the funds' $1 share price encouragesinvestors to flee at the first sign of trouble. That's becausethose who react quickly can sell their shares at $1 each even ifthe net asset value has dropped below that level.

The industry has maintained that a floating share price wouldmake money funds unworkable for many investors by saddling themwith new accounting and tax obligations. In addition, insurers,municipalities and other large users of money funds are oftenlegally bound to invest assets they account for as cash in fundswith a stable share price.

Two Options

Schapiro gave up on her plan on Aug. 22 after three of the fivecommissioners — Republicans Gallagher and Troy Paredes, joined byDemocrat Luis Aguilar — told her they wouldn't vote to issue it forpublic comment. Her proposal spelled out two options, the capitalcushion coupled with some restrictions on redemptions, or thefloating share price.

In a statement that day she urged “other policy makers” to takeup the issue saying it was too important to “put our head in thesand and wish it away.”

Gallagher previously expressed skepticism of the SEC's proposalswhile stopping short of rejecting a floating share price. In aDecember speech, Gallagher said the commission should first analyzethe impact of money market rules the SEC put into place in 2010,saying that “any rulemaking in this space could be premature, andpossibly unnecessary.”

Gallagher also said a measure forcing funds to abandon thestable $1 share price “is an important option to keep on the tableand to subject to further study and consideration.”

On Aug. 28, Gallagher and Paredes said they supported analternative that would allow firms running money funds to prohibitwithdrawals to stop investor flight in the event of a run. Theybacked Aguilar's call for further study on whether new rules couldcause investors to move money from money-market funds to otherunregulated investments.

In the interview, Gallagher said his support of a floating shareprice was contingent on the SEC “fully understanding andaddressing” the tax and accounting issues that could arise with thechange. Gallagher said a fluctuating share price may need to becoupled with other protections, such as the freezing redemptionsoption that he and Paredes had suggested.

While Schapiro's plan offered the variable share price as onealternative, Gallagher said it was secondary to the capital buffer.The proposal included about 150 pages describing the capital bufferand just 40 pages on the floating share price.

'Stalking Horse'

“It was intended to act as a stalking horse to push the industryto support the capital buffer proposal,” he said.

While Schapiro's plan did not say the capital could be used forcollateral for borrowing from the Fed, Gallagher said, “I came tounderstand that this is likely what was intended.”

Setting up a Fed-run lending program for money funds during anemergency would help the largest banks continue to fund their ownoperations via the short-term credit markets while not protectingthe companies and individual investors who rely on money funds as asafe place to park their cash, Gallagher said.

Regulators rejected an earlier proposal to create a liquidityfacility for the industry in part because it could have opened thedoor for Fed lending.

“This whole exercise has been about the role that money marketfunds play in the short-term funding markets on which banks rely,something that FSOC members are very concerned about,” Gallaghersaid. “It was never really about investors.”

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