A senior U.S. regulator has been thwarted in her efforts to reform the $2.6-trillion (U.S.) money market fund industry, admitting defeat in her attempt to introduce more stability to a sector some identify as a source of systemic risk.
Mary Schapiro, Securities and Exchange Commission chair, said she was cancelling an SEC vote to propose fixes to the industry, which had been vigorously opposed by fund groups including Federated Investors, after Luis Aguilar, SEC commissioner, said he opposed the proposals.
Ms. Schapiro’s reforms had been backed by the U.S. Treasury and Federal Reserve, among other regulators. Mr. Aguilar, a former executive at a company that offers money market funds, had been viewed as the swing vote on the five-person securities commission.
The fight over how to regulate the funds, used by U.S. households and companies as an alternative to bank accounts, is now likely to shift to the Financial Stability Oversight Council, the body of U.S. regulators charged with responding to potential sources of systemic risk. It has been debating whether to designate the entire industry as systemically significant, according to people familiar with the matter.
Doing so would subject the industry to Federal Reserve oversight, weakening the ability of money market fund companies to lobby regulators such as Mr. Aguilar who can stand in the way of enacting government-recommended reforms.
“Other policy makers now have clarity that the SEC will not act to issue a money-market fund reform proposal and can take this into account in deciding what steps should be taken to address this issue,” Ms. Schapiro said.
“I urge them to act with the same determination that the staff of the SEC has displayed over the past two years,” she added.
Ms. Schapiro has championed proposals that would force the industry to either switch to a floating price for its funds, currently fixed at $1 per share, or accrue capital for a rainy day and penalize investor withdrawals during times of stress. The funds’ fixed $1 share price is a “fiction,” Ms. Schapiro has said.
Money market funds offer higher yields than bank deposits but they are not guaranteed by the U.S. government. However, officials believe that investors expect a full return of their principal, and when the funds “break the buck” it could trigger a run.
The funds played a prominent role in the financial crisis when one popular fund, the Reserve Primary Fund, “broke the buck” by falling to a value of 97 cents a share in 2008.
The perception that the funds will never drop below their $1 a share has allowed fund managers to take greater risks in search of higher returns without having to worry about losing investors’ money, officials have said.
A Treasury representative said that FSOC “has recommended in its last two annual reports that additional reforms are needed to mitigate the risks that money market funds pose to financial stability.”
“This was a key source of stress during the financial crisis, and it must be addressed.”
In advance of what Ms. Schapiro had hoped would be an Aug. 29 vote on the matter, a chorus of voices had emerged to support her in her bid to reform the industry.
Bill Dudley, New York Fed president, called Ms. Schapiro’s proposals “essential” to reform an industry with a “glaring vulnerability.”