Where Do Money-Fund Reforms Stand?

A recent history of proposals including introduction of a floating NAV for prime funds and a requirement that money funds set aside a capital buffer against losses.

A year ago, when opposition from the asset-management industry killed her plan to make money-market mutual funds safer, U.S. Securities and Exchange Commission (SEC) Chairman Mary Schapiro looked to Timothy Geithner, then the Treasury Secretary, to tackle “one of the pieces of unfinished business from the financial crisis.”

It remains unfinished.

The 10 biggest money-fund providers and the Investment Company Institute, the industry’s trade group, reported combined lobbying spending of about $63 million from the beginning of 2011 through the first quarter of 2013 in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. They found the most receptive audience with commissioners Daniel M. Gallagher and Troy A. Paredes, two Republicans, and Luis A. Aguilar, a Democrat.

The industry considered Aguilar, a former general counsel at money-management firm Invesco Ltd., as a possible swing vote to block Schapiro’s proposal, according to a lobbyist who asked not to be named because the meetings were private. Both Aguilar and Gallagher complained that Schapiro’s team wouldn’t consider their input on the plan, including Aguilar’s call for a study of the impact of the 2010 rule changes. Gallagher accused Schapiro of ceding too much control to the Federal Reserve and Treasury.

When Walter stepped into the chairman’s job in December, she began by holding individual meetings with each commissioner, a type of walk-the-halls diplomacy that Schapiro rarely practiced. Gallagher and Paredes gave her a list of must-do issues, which included a new proposal for money funds, according to two people familiar with the matter.

From the start, Walter expected she would have to find a way to bridge diverging views on the commission. Gallagher and Paredes were united against the idea for a capital buffer, though they were open to changing the fixed-share price.

Walter shared that concern, although she didn’t say so publicly, as the commission struggled with the rule in early 2012. Her doubts were supported by SEC economists, whose work showed that many prime funds couldn’t raise capital without reducing the returns they promise to investors or reducing their holdings of commercial debt.

“The capital buffer was very different because it was adding a feature that doesn’t exist in this space,” she said. “Frankly, I had always worried, and then when I heard from the economists, I was more worried that capital buffers would really be too expensive to work.”

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