Published January 27, 2014
Money market funds still remain vulnerable to runs by investors, and should be subject to further regulation to reduce such risks, one of the newest members of the U.S. Securities and Exchange Commission said Monday.
"More should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions," said SEC Republican Commissioner Michael Piwowar, making his first public comments on money fund reforms since joining the agency in August.
"There also remains a need to provide investors with more timely information about funds' holdings, including the value of those holdings," he added in prepared remarks before the U.S. Chamber of Commerce.
The SEC's five commissioners are weighing a proposal to reduce the risk of runs on money market funds, like the one seen in 2008 when the Reserve Primary Fund's net asset value fell below $1 per share as panicked investors withdrew money to avoid exposure to Lehman Brothers.
The Chamber has been among the most vocal business trade groups to lobby against overly strict new rules for money market funds, saying any regulations that fundamentally alter the structure of the product could cut off a major supply of short-term funding for corporations.
In a wide-ranging speech, Piwowar also took aim at other U.S. regulators who have tried to pressure the agency to enact new reforms for asset managers and money funds, saying they should back off and leave it up to the experts at the SEC.
The SEC's proposal contains several regulatory options, including potentially forcing prime funds used by institutional investors to float their net asset value and/or allowing fund boards to impose liquidity fees and redemption gates during times of market stress.
The Chamber has remained opposed to a floating net asset value, saying such a drastic change could effectively kill the product.
The SEC's money fund plan was released in June before either Piwowar or his Democratic colleague Commissioner Kara Stein had joined the SEC, making it hard for observers to gauge how the final plan may shape up.
Piwowar declined to say which option he might support, telling the audience he is still studying the plan.
However, he noted that before he can make a decision on the floating NAV option, the Internal Revenue Service needs to first issue guidance to address how such a change could affect tax treatment for money funds.
"We need to get an answer from Treasury about the tax implications," Piwowar said. "That is a threshold issue for me."
The industry has warned that certain tax concerns must be addressed in order to make a floating NAV workable.
The IRS last summer addressed one of those concerns, after it issued guidance to grant investors some relief from "wash sale" rules, which bar an investor from recognizing losses from the sale of securities if the investor purchased substantially identical shares within 30 days before or after such sale.
The IRS has still not, however, released separate guidance to address how investors might avoid burdensome daily record-keeping requirements if a floating NAV is adopted.
The SEC's money fund proposal came about following a bitter internal feud between the SEC's former Chair Mary Schapiro and three other SEC commissioners.
The three commissioners at the time, including Republican Dan Gallagher and Democrat Luis Aguilar, questioned whether more rules were needed because the agency had already adopted rules in 2010 that improved fund transparency, tightened credit quality standards, shortened the maturities of fund investments and imposed a new liquidity requirement.
In an effort to end the stalemate, the Financial Stability Oversight Council, a panel comprised of the heads of each major market and banking regulator, intervened and tried to pressure the SEC.
The SEC finally issued a proposal, but only after SEC economists released a study that helped justify further reforms.
Piwowar said Monday he believes the SEC was wrong to cede ground to the FSOC on money funds.
He also said he was concerned the FSOC has continued to tread on the SEC's turf by weighing whether to designate large asset managers such as Blackrock or Fidelity as systemically important, a tag that carries tough capital rules and oversight by the Federal Reserve.
He said he has been rebuffed in his efforts to sit in on some of the biweekly meetings held by the council, and complained the Federal Reserve exerts too much influence over its policy-making.
"The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and the other member agencies," he said.
(By Sarah N. Lynch; Editing by Chizu Nomiyama and Stephen Powell)