SEC's Money Fund Proposal Coming in Next Two Months

The agency's leadership change won't slow the proposal, Commissioner Daniel Gallagher says.

New rules to reduce risk in money-market mutual funds will be proposed in the next two months by the U.S. Securities and Exchange Commission, which won’t be slowed by a leadership change, a commissioner said today. Daniel M. Gallagher said the SEC’s staff is working through technical details of the proposal, which failed to move forward last year under former SEC Chairman Mary Schapiro. Gallagher said he did not expect Mary Jo White, who takes over as chairman this week and sets its agenda, to slow consideration of the proposal, Gallagher said.

“It’s not going to be long now that we get the draft up and start working through it and in the very near term have a proposal,” Gallagher said in an interview outside of an SEC conference in Washington.

The Senate confirmed White, 65, yesterday to join the commission. Her views on money funds aren’t well known. At her March 12 nomination hearing, White said any new regulation should preserve the value of money-fund products for investors.

The SEC staff is considering the new regulations to reduce the likelihood that investors pull their money from the funds in a crisis, which could harm the broader credit markets. One option would have money funds adopt a floating share price, a move designed to make investors less sensitive to small variations in the $1 share price.

The money-fund industry has said a floating-share price would ruin the funds’ appeal. Allowing the share price to vary also would create new tax liabilities for investors, who would have to account for small gains and losses. The SEC has discussed the tax issues with the Internal Revenue Service.

Gallagher said in September he would probably support a fluctuating share price for money funds. In January, he said the SEC would work to mitigate the tax implications for investors.

Regulators have worked to impose tighter restrictions on money funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on money funds that helped freeze global credit markets.

The SEC has been readying its proposal as the Financial Stability Oversight Council, a super-panel of regulators formed by the Dodd-Frank Act, looks over its shoulder. The FSOC, which is headed by the U.S. Treasury secretary, issued a report in November that recommended several reform options, including a floating share value and capital buffers.

Gallagher had predicted in January that the money-fund proposal would be completed by the end of March, but said today that the SEC staff was still working through technical details.

SEC Commissioner Elisse B. Walter, who will be replaced by White as chairman, said today that she hoped the FSOC would wait for the SEC’s proposal before taking any further action.

“Because we have made it clear we are moving ahead and we expect to put out a proposal,” Walter said outside of the SEC conference.


Bloomberg News

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