Money market fund reform continues to have a high profile at the Securities and Exchange Commission, according to SEC Chairman Mary Schapiro, who devoted the entirety of her speech to the topic today at the annual meeting of the Securities Industry and Financial Markets Association. Although the SEC adopted significant money market reforms in 2010, Schapiro made it clear that she believes additional steps should be taken to address the structural features that make money market funds vulnerable to runs.
The leading candidate for reform at this point, according to Schapiro, is a capital buffer for money market funds. A capital buffer would serve as a dedicated, transparent, and sizable source of capital on which money market funds could draw in times of trouble. Schapiro said that much of the SEC staff's energy, working jointly with staff from other Financial Stability Oversight Council member agencies, is focused on developing a meaningful capital buffer reform proposal. The SEC is closely examining the appropriate size of any buffer, and it is not yet clear whether the capital would come from the fund's sponsor, the fund's shareholders, or the market, through the issuance of debt or a subordinated equity class. Schapiro noted the challenges of developing and implementing such a reform in a low or nearly "no" interest rate environment. A capital buffer potentially could be combined with redemption restrictions in order to address incentives to run that may not be curtailed by a capital buffer alone.
The other leading option for reform at this point, Schapiro said, is a floating net asset value per share. She acknowledged disadvantages of the floating NAV proposal, which would essentially end money market funds as a product distinct from ordinary mutual funds with short-term, high-quality portfolio holdings. It seems likely that, by focusing on only two reform proposals, one of which is floating money market funds' NAVs, Schapiro intends to garner support for the capital buffer proposal. Schapiro said that she looks forward to making substantial progress on the money market fund reform initiative in the coming months so that the SEC can issue a proposal in very short order. This seems to imply a proposal in early 2012, and not in 2011.
Schapiro's remarks have been posted online at
John M. Baker <JMB@...
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1250 Connecticut Avenue, NW, Suite 500
Washington, DC 20036
FundLaw Listowner http://groups.yahoo.com/group/fundlaw