Commissioners Daniel Gallagher and Troy Paredes, the two Republican members of the Securities and Exchange Commission, today issued a joint statement expressing their views on the SEC's regulation of money market funds. Although Gallagher and Paredes have often been seen as opposing money market fund reform, they rebut that characterization and urge further work on strengthening the resiliency of money market funds. The statement is an unusually public rejoinder to Chairman Mary Schapiro's statement of August 22, in which she stated that the declaration by three Commissioners that they would not vote to propose reform provided clarity that the SEC would not act.
Commissioner Luis Aguilar, the third Commissioner who declined to support Schapiro's reform proposal, previously issued a statement on August 23, in which he stated his support for a concept release asking serious and probing questions about the cash management industry as a whole to diagnose its frailties and assess where reforms are required. Gallagher and Paredes state that they respect his views and commend him for his efforts to engage in a constructive dialogue. They go on to explain in some detail why they believe that the changes Schapiro advocated - a "floating NAV" and a capital buffer coupled with a holdback restriction - were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation's financial system.
Gallagher and Paredes instead urge proposing a "gating" approach, which would permit money market fund boards, as they deem appropriate and consistent with their fiduciary obligations to investors and without having to seek an exemptive order from the SEC, to "gate" redemptions to stave off a run and to allow the fund manager time to mitigate the concerns of investors who otherwise may be inclined to redeem. Such a proposal would, they note, require enhanced disclosures to investors that would clearly explain the liquidity and principal reduction risks that could accompany a fund board's discretionary gating authority. They also urge further research into several questions, including the effects of the 2010 money market fund regulatory reforms.
Their statement concludes by stressing that money market funds are squarely within the expertise and regulatory jurisdiction of the SEC, and that they do not intend to abdicate their responsibility to regulate money market funds. They ask that the SEC's staff of economists conduct detailed research and analysis on money market funds, including the staff's best efforts to answer their questions, as well as others that are germane. Action by the SEC staff is subject to the direction of the Chairman, so the requested staff review will not happen automatically. However, the statements by three Commissioners that they favor further study - and, potentially, further reform - will undoubtedly put pressure on Schapiro to give further consideration to money market fund reform.
The joint statement by Gallagher and Paredes is available at
Aguilar's statement is at
Schapiro's statement is included in my FundLaw post, which is at
The Chairman of the Board of the International Organization of Securities Commissions on August 25 issued a statement affirming that IOSCO will continue its work to develop policy recommendations for strengthening oversight and regulation of the shadow banking system, including money market funds. That statement is at
John M. Baker <JMB@...
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
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