WASHINGTON--Securities and Exchange Commission Chairman Mary Schapiro defended her calls for additional reforms to the $2.6 trillion money-market mutual fund industry before a Senate panel Thursday, warning funds still pose systemic risks.
But she encountered skepticism from a bipartisan group of senators over whether additional industrywide changes are needed beyond a set of 2010 reforms. Those reforms were designed to increase money-fund resilience during large shareholder redemptions.
"I think some of us would like to know what in essence those 2010 changes did before you move on to a next set of reforms," said Sen. Robert Menendez (D., N.J.).
"In my view, you're portraying an industry that's extremely vulnerable, that has all these risks of runs, and I really find that extraordinary in light of the actual history," said Sen. Patrick Toomey (R., Pa.).
Ms. Schapiro, along with other top regulators at the Federal Reserve and Treasury Department, has warned money funds remain prone to destabilizing panics despite the prior reforms, in part because investors can still flee money funds en masse if a security they own suddenly declines in value, she said.
About 56 million American corporations, municipalities and individuals invest in money funds, which are cash-like instruments that are designed to be ultra-safe. But one fund, Reserve Primary, in 2008 "broke the buck" by falling below the $1-a-share value the funds seek to maintain. Investors fled, and the U.S. Treasury Department and Federal Reserve intervened to backstop the industry.
Ms. Schapiro's new proposals, including to limit how quickly investors can withdraw all their money from funds, have run into resistance from the industry, which maintains the reforms the SEC chairman is seeking might add more risk to the financial system while harming their businesses.
Ms. Schapiro stressed the reforms she has outlined, including the 30-day holdback of 3% to 5% of an investor's assets, would ensure that retail investors aren't forced to bear the brunt of any losses should institutional investors flee when a fund gets into trouble. Retail investors comprise about 35% of the industry, and are generally much slower to act than more-sophisticated institutions.
Ms. Schapiro said a related proposal designed to work in tandem with the 30-day rule--a requirement that funds post a capital buffer against the assets in their portfolios--would boost confidence in the industry.
"It ought to be explicit capital support," she said. "Investors had ought to be able to know that it will be there when it is needed, not being left to wonder whether the sponsor is still capable of providing that support.
But J. Christopher Donahue, president and chief executive officer of Federated Investors Inc. (FII), said the economics of requiring money funds to establish a capital buffer "just doesn't work" given the already-low returns the funds currently earn and the high cost of capital for funds to raise money by selling so-called subordinated debt.
Though only two money funds have ever broken the buck, Ms. Schapiro said SEC staff have found that money funds have been rescued from financial trouble by their parent companies more than 300 times since the 1970s. Pressed by lawmakers for more details on the study, which she characterized as a "tabulation," Ms. Schapiro said she would share the data with members of the committee as soon as possible.
Ms. Schapiro said she shares several lawmakers' concerns about the impact of further reforms on states and localities, which use money funds for cash management purposes. But she said "if a municipal treasurer can't bear the risk of loss of even a 1-penny-a-share in their cash management account, one has to wonder whether a money-market fund is the right place to be in the first instance because they do have that risk."
Ms. Schapiro conceded one "genuine screw-up," referring to the publication in April of a report by an international organization of securities regulators calling for additional money-market reforms. Three of five SEC commissioners issued a statement saying the report's conclusions do not reflect the opinions of a majority of the SEC. Ms. Schapiro said the report's publication was premature.
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