New SEC Chair Mary Jo White many well be facing an early
test of her leadership. The battle ground could be money market reform. The
stakes are high - the SEC could find itself becoming less than relevant in a
critical corner of the markets.
Treasury Secretary Jacob Lew testified regarding the
annual report of the Financial Stability Oversight Counsel or FSOC before the
Senate Committee on Banking, Housing and Urban Affairs, the Secretary informed
the Committee. Money market funds, and the need for reform, were one key topic.
The Secretary told the Committee that: "The Council remains concerned that
vulnerabilities in wholesale funding markets could lead to destabilizing fire
sales. Specifically, run-risk vulnerabilities related to money market mutual funds
(MMFs), which became apparent during the financial crisis, still remain despite
an initial set of reforms implemented [by the SEC] in 2010. In November 2012,
the Council issued proposed recommendations for public comment to implement
structural reforms of MMFs to reduce the likelihood of runs."
Secretary Lew's testimony echoes that of former SEC
Chairman Mary Schapiro. In testimony before the same Senate Committee almost
one year ago, Ms. Schapiro testified that: ". . . money market funds as
currently structured pose a significant destabilizing risk to the financial
system. While the Commission's 2010 reforms made meaningful improvements in the
liquidity of money market funds, they remain susceptible to the risk of
destabilizing runs." Testimony before the Senate Committee on Banking, Housing
and Urban Affairs (June 21, 2012).
In the year since Ms. Schapiro's testimony no reform has
taken place. No proposed regulations have been issued for comment by the SEC.
Two months after her testimony the Commission did consider proposals for
reform. The proposed rules were not issued because the Chairman could not
muster three votes necessary to issue the release. Ms. Schapior issued a
statement on August 28, 2012 regarding the need for reform. Commissioners
Gallagher and Paredes issued retorts calling for more study despite all the
work which had been done on the question.
While the Commission studied, the FSOC moved forward. In
November 2012 the Council "issued for public comment proposed recommendations
to the SEC with three alternatives for reform to address the structural
vulnerability of MMFs," according to Secretary Lew in his testimony yesterday.
The next month the SEC staff completed another report on
money market reform. Commissioner Gallagher praised it. In remarks on December
5, 2012 the Commissioner noted that the staff report provided needed research.
Whether the December SEC staff report is sufficient to
generate new proposals for reform in this area has yet to be determined. What
is clear however, is that the if the SEC fails to act the FSOC will. Secretary
Lew told the Senate Committee yesterday that the FSOC is prepared to move
forward if the SEC does not: "The Council is currently considering the public
comments on the proposed recommendations [issued in November 2012]. If the SEC
moves forward with meaningful structural reforms of MMFs before the Council
completes its process, the Council expects that it would not issue a final
recommendation to the SEC. However, if the SEC does not pursue additional
reforms that are necessary to address MMFs' structural vulnerabilities, the
Council should use its authorities to take action in this area."
New SEC Chair Mary Jo White suggested that a new approach
for money market funds is under consideration in her May 1, 2013 remarks to the
Investment Company Institute General Member Ship Meeting. Perhaps. But the
clock is ticking. If the SEC fails to act, it may find itself becoming less
than relevant in this critical area of the markets.
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For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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