U.S. regulators who have questioned whether money-market mutual funds could threaten the nation’s economy shouldn’t try to shrink the industry, Securities and Exchange Commission Chairman Mary Schapiro said.
“It’s not for the government to say,” Schapiro said today at an Investment Company Institute conference in Washington. “They should be the size they should be. I want them to be resilient. I want them to be reflective of the fact that they are investment products and their value does indeed fluctuate.”
It would be a “fool’s errand to say the right size is X,” she said.
The Financial Stability Oversight Council, a panel of regulators created by the Dodd-Frank Act to monitor threats to the economy, has said money-market funds remain “susceptible” to the type of runs that disrupted credit markets in 2008. Industry groups have expressed concern that other regulators, particularly the Federal Reserve, are pressuring the SEC to contain risk by reining in money-market funds.
Since the industry’s assets peaked at $3.9 trillion in 2009, the total has shrunk by a third to almost $2.6 trillion. The largest funds include JPMorgan Prime Money Market Fund, Fidelity Cash Reserves and Vanguard Prime Money Market Fund.
Schapiro is working on two proposals to address money markets. The first would strip funds of their traditional fixed $1 share price, substituting a floating value. The second would impose capital requirements and restrict redemptions.
The SEC has a “very legitimate concern about the risks that are posed by a stable” asset value, she said. “It’s not hypothetical. We all know what happened in 2008.”
Schapiro doesn’t yet have enough votes on the five-member commission to release a proposal for public comment. The two Republican commissioners, Troy Paredes and Daniel Gallagher, are opposed to additional regulation and Democrat Luis Aguilar is uncommitted.
Paredes, Gallagher and Aguilar released a statement today saying they opposed a document published last month by the International Organization of Securities Commissions which found that “confidence shocks” in money funds can “quickly have a broader macroeconomic impact.”
The document “does not reflect the views and input of a majority of the Commission,” according to the statement released by the three commissioners. “In fact, a majority of the Commission expressed its unequivocal view that the Commission’s representatives should oppose publication of the Consultation Report and that the Commission’s representatives should urge IOSCO to withdraw it for further consideration and revision.”
Industry leaders, backed by the U.S. Chamber of Commerce, have said either of the two proposals would destroy the utility of money funds to investors as well as to corporate and municipal borrowers. Last month, the Chamber bought all the advertising space inside Washington’s Union Station Metro stop to publicize its opposition to new rules.
The subway station is adjacent to the SEC’s headquarters. Schapiro joked that the ads aren’t effective.
“We’re wonkish enough that we’d really prefer a 50-page comment letter than a sign over the fare card machine at the Metro,” she said.