WASHINGTON Feb 21 A bipartisan group of former top officials of the Securities and Exchange Commission are urging the U.S. financial risk council to back down from its efforts to pressure the SEC into adopting new rules for the $2.6 trillion money market fund industry.
In a Feb. 20 letter to the Financial Stability Oversight Council (FSCO), four former SEC chairman, five former commissioners and six former senior staffers urged the panel to "respect the jurisdiction, independence, subject-matter expertise and regulatory processes" of the agency.
"We believe strongly that there are compelling reasons the council should forbear from intervening in the SEC's rulemaking process," the ex-SEC officials wrote.
"This conclusion is based upon the superiority of the SEC to the council as an expert, bipartisan regulator and the long-term corrosive effect on the SEC of disregarding determinations by a majority of the commission's members."
The signatories included former SEC Chairmen Roderick Hills, David Ruder, Richard Breeden and Harvey Pitt, as well as former commissioners Roel Campos and Paul Atkins, among others.
The former officials did not take a unified position on the substance of the proposed reforms, saying they have varying opinions.
A Treasury spokeswoman declined to comment on the letter.
The letter comes as the risk council continues to review public comments it has received on a proposed regulatory framework to help prevent runs on money market funds.
Chaired by the Treasury secretary and comprised of the country's top banking and market regulators, the FSOC waded into the money market fund debate last year after former SEC Chairman Mary Schapiro could not win enough support for reforms from her fellow commissioners.
She argued that more reforms are necessary to repeat a run on funds like that seen in the 2008 financial crisis. During the crisis, heavy exposure to collapsed investment bank Lehman Brothers caused the net asset value of the Reserve Primary Fund to fall below $1 per share, something known as "breaking the buck." It caused a damaging ripple effect in the markets.
Among the proposals Schapiro wanted to consider were capital buffers and redemption holdbacks, or a move from a stable to a floating net asset value so that investors would not be spooked by the prospect of funds breaking the buck.
But she faced skepticism by three of her fellow commissioners, who wanted more study of 2010 money fund reforms before tacking on new regulations.
The industry also fiercely pushed back, saying the measures she was seeking could effectively kill demand for the product.
The FSOC was created by the 2010 Dodd-Frank Wall Street reform law that aims to police for potential systemic threats to the marketplace. The law gives it the authority to try and pressure regulators to act, though the FSOC cannot force the SEC to follow its recommendations.
If the SEC does not act on its own, the FSOC may formally present the SEC with its recommended reforms. The SEC would need to accept or reject them in writing within 90 days.
Since Schapiro stepped down in December, the SEC's economists completed a study on money funds, and the agency's remaining four commissioners are busy reviewing an early-stage document outlining potential courses of action.
Meanwhile, the FSOC is still charging ahead with its proposal, which largely mirrors Schapiro's.
So far, it has faced some criticism from asset managers including Fidelity Investments, Vanguard and Blackrock, as well as business groups like the U.S. Chamber of Commerce.
In various comment letters, the industry has urged the SEC and FSOC to support alternative measures including "liquidity fees" that could be imposed on withdrawals from prime money market funds or "redemption gates" that would prohibit withdrawals.
Late last week, an anti-Wall Street group known as "Occupy the SEC" called for yet another idea: allowing fund managers to offer a combination of both floating and buffered net asset value structures.
"The two alternatives together are better than either one as each has relative advantages," Occupy SEC wrote. "Offering the choice of both alternatives to fund sponsors - and ultimately to investors - ameliorates the flaws in either alternative in isolation."
Sheila Bair, the former chairman of the Federal Deposit Insurance Corp and a supporter of tougher new money fund reforms, told Reuters on Thursday she thinks a floating NAV is the best approach at this point.
"The gates can exacerbate runs if people move out before the gates go down, and that generally hurts the retail people," she said.
Bair added she had not yet read the letter from the former SEC officials, but said she didn't agree with the premise.
"We seem to want to protect agencies' independence when they're being weak and not being strong," she said. "The SEC should be the lead on this...but they need to get the reforms in place."
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