SEC chair fights for tighter regulation

City A.M. Reporter
SECURITIES and Exchange Commission chairman Mary Schapiro will brief Congress today on her case for tightening the regulation of money market funds, arguing they remain a threat to the economy.

In testimony prepared for a Senate Banking Committee hearing, Schapiro argues that reforms put in place in 2010 after a run on some funds in 2008 were not sufficient.

“The next run might be even more difficult to stop, however, and the harm will not be limited to a discrete group of investors,” she said in prepared remarks obtained by Reuters. “The tools that were used to stop the run on money market funds in 2008 are either no longer available or unlikely to be effective in preventing a similar run today.”

To buttress her case, Schapiro will point to the results of a staff survey showing that on 300 occasions since the 1970s a parent company has had to step in to provide support to one of its troubled funds.

“Despite these risk-limiting provisions, money market funds can – and do – lose value,” she said.

Several Federal Reserve governors have backed more fund restrictions, but Schapiro has so far been unsuccessful in gaining enough support within the commission for increased supervision of the $2.6 trillion industry.

She has said that further steps are needed to stop potential problems at money funds from spreading throughout the financial system, as happened in the 2008 credit crisis when the Reserve Primary Fund “broke the buck” with its net asset value falling below $1.

"Given the role money market funds play in providing short-term funding to companies in the short-term markets, a run presents not simply an investment risk to the fund's shareholders, but significant systemic risk," Schapiro said. "No one can predict what will cause the next crisis, or what will cause the next money market fund to break the buck."

The agency is considering requiring that funds set aside capital against losses, restrict a portion of withdrawals or eliminate fixed share prices.

But the agency is facing stiff opposition from the industry and from several SEC commissioners.

The critical holdouts include Republican Commissioners Troy Paredes and Dan Gallagher, as well as Democrat Luis Aguilar, who have all questioned the need for additional reforms.