(Reuters) - The two Republican members of the U.S. Securities and Exchange Commission said they were “dismayed” by the agency chairman’s comments in her push to reform money market funds, and called for new ideas such as giving funds more discretion to limit withdrawals in times of crisis.
In a statement issued Tuesday, commissioners Daniel Gallagher and Troy Paredes also said they “do not intend to abdicate our responsibility to regulate money market funds.” Analysts said that could make it harder for other bodies like the Financial Stability Oversight Council to tackle the issue, as SEC Chairman Mary Schapiro had suggested last week.
The comments also showed the logjam at SEC over what to do about the funds, one of the most sensitive questions coming out of the financial crisis. Joan Ohlbaum Swirsky, a Philadelphia attorney who specializes in money funds, said she could not recall such a fierce debate at the financial regulator.
“I haven’t seen them come to this kind of a gridlock,” she said.
On August 22 Schapiro acknowledged that she lacked the votes on the five-member SEC to move forward with a proposal she said would strengthen the $2.5 trillion industry, which plays a key role in the financial system as a major buyer of corporate and government debt.
Schapiro - an Independent - had sought changes like requiring the funds to build up capital buffers or to move away from their policy of maintaining $1 per share net asset value.
On Tuesday, in response to the SEC dissidents, Schapiro defended her process and said in a statement that she and her staff had in fact aimed to seek public comments on the very idea of withdrawal limits.
“Other regulators are now in a position to consider the Commissioners’ views as they evaluate additional steps to be taken,” she said.
Schapiro’s concepts had won backing from officials at the U.S. Treasury Department and the Federal Reserve, but the fund industry has fiercely opposed new reforms. It is unclear what moves other regulators might make, and November’s elections could change the political landscape.
Schapiro has had an ally on money fund reforms in SEC Commissioner Elisse Walter, a Democrat. But the other Democrat on the body and the swing vote, Luis Aguilar, last week made clear he did not want to act without a deeper study of the cash-management industry whose investors, he worried, could be spooked even by small money fund reform steps.
Aguilar’s dissent showed sharp divisions at the SEC, and in their statement on Tuesday — their first extensive comments on the matter — the two Republican commissioners made the disagreements seem even more forceful.
Schapiro’s statement on August 22, they wrote, “creates the misimpression that three Commissioners — a majority of the Commission — are not concerned with, or are somehow dismissive of, the goal of strengthening money market funds. This is wholly inaccurate,” they wrote.
The pair continued that Schapiro’s proposal “is flawed because it is premised on an incomplete perspective on the 2008 financial crisis.”
At the time one of the industry’s best-known funds, Reserve Primary Fund, failed to maintain the $1 per share value investors expect and “broke the buck,” dragged down by heavy holdings in the collapsed Lehman Brothers. Another 21 funds would likely have done the same without support from their sponsors, the Federal Reserve found in a study this month, and several government backstops were rushed into place.
Schapiro’s SEC had already agreed on rule changes in 2010 to make the funds more liquid and transparent. Gallagher and Paredes wrote that the evidence so far suggests those reforms have been effective, as evidenced by the funds’ performance through the ongoing euro zone crisis and the 2011 U.S. debt ceiling debate.
They wrote they would consider further reforms and studies and asked for staff reviews. In particular, they said the agency should consider what they called “discretionary gating”. That would allow fund boards to restrict redemptions without having to liquidate funds, as is now required, and not coupled with buffers.
“Regrettably, the Chairman dismissed this approach,” they wrote, airing out what had been an internal, but long-running, disagreement.
Jerry Klein, managing director of Treasury Partners, a New York investment adviser that invests assets in money funds for corporate clients, said the statement shows there is still room for the SEC to take further steps.
But it also shows the opposition that other agencies would face if they tried to encroach on the SEC’s oversight of the funds, Klein said.
Of the two commissioners, Klein said, “They clearly see money funds as their jurisdiction, and people whose responsibility it is to regulate banks and other parts of the financial system should stay in those markets.”
Reporting By Ross Kerber; Editing by Bernard Orr, Phil Berlowitz and Richard Pullin