- Last Updated: 11:47 PM, July 28, 2012
- Posted: 11:02 PM, July 28, 2012
Controversy is swirling around proposed federal regulations on money-market funds.
The Feds are looking to reduce the threat of the $2.6 trillion under the funds’ management bringing down the global economy, á la September 2008, when US investors pulled more than $300 billion in one week, in fear of losing their equity.
“The next run might be even more difficult to stop,” warned Mary Schapiro, chairman of the Securities and Exchange Commission, in recent testimony to a House of Representatives subcommittee.
The New York Fed later said money-market fund investors should be “gated,” or prohibited from pulling their assets all at once, in order to make the industry “safer and more fair.”
Funds should also set aside a portion of investors’ balance as a “minimum balance at risk” that would require a 30-day notice, the New York Fed’s staff said recently.
This measure may reduce systemic risk and protect small investors from losing assets because they are slow to request a withdrawal, according to the report.
“The delay would ensure that redeeming investors remain partially invested in the fund long enough to share in any imminent portfolio losses or costs arising from their redemptions,” the bank said in a statement.
Americans have stashed some $2.6 trillion in these funds because they seem ultra-safe and generally have a greater return than savings accounts.
SEC’s Schapiro also suggested tougher capital requirements for money funds, comments that left fund-industry spokesmen fuming.
These potential rule changes, the industry believes, would be “onerous” and “disruptive” to its ability to attract assets.
If such rules were adopted, they would “have the potential to eliminate an important source of capital for US businesses, state and local governments,” says John Woerth, a spokesman for the Vanguard Group, which has nearly $160 billion in money-market assets.
“Before the latest crisis, there was only one occasion when a money-market fund [share was worth less than] a dollar — in 1994. The world yawned,” Paul Schott Stevens, CEO of Investment Company Institute, told the Senate Banking Committee.
Stevens claimed that Schapiro had drawn the wrong conclusions by “persistently viewing money-market funds through the narrow prism of 2008.” He contends that the SEC “clings to plans that would destroy money-market funds.”
But longtime securities-industry gadfly Bill Singer, a New York securities lawyer who is often a critic of regulation, praised Schapiro’s “frank” comments.
“What we get so much of the time from regulators is spin and false. This time, Mary Schapiro is absolutely right,” Singer says. “Just because we survived 2008 doesn’t mean the system will survive similar problems.”