Money Funds Seen Failing in Crisis as SEC Bows to Lobby
Money-market fund companies have doubled lobbying efforts to convince regulators and lawmakers that they aren’t a threat to the financial system. The money may have been well-spent.
The 10 biggest money-fund managers and the Investment Company Institute trade group reported combined lobbying spending of $16 million in the first half of 2012 and $31.6 million last year in disclosures that reference money-market mutual funds, according to a review of documents by Bloomberg News. That compares with $16.7 million in all of 2010.
The companies are seeking to block new rules championed by Securities and Exchange Commission Chairman Mary Schapiro that are headed for a vote before a divided commission as soon as this month. The proposal would force funds to abandon their fixed $1 share price or introduce withdrawal limits and capital buffers. Schapiro can count on only one supporting vote from the other four commissioners, even as Federal Reserve officials have said that failure to enact tougher rules will leave the $2.5 trillion industry vulnerable to investor runs and threaten global credit markets.
“If the industry blocks this plan and something else bad happens and people on Main Street lose money, they’ll be kicking themselves for not fixing this,” Douglas W. Diamond, a finance professor at the University of Chicago Booth School of Business, said in a telephone interview. “The current structure does potentially have systemic risk, and it’s the kind of thing that could happen very quickly given the situation in Europe.”
Money-market mutual funds, which hold short-term debt and are used by clients for liquidity, are part of the so-called shadow banking system, along with hedge funds and other institutions not subject to banking regulation, that provide cash globally.
The industry has drawn scrutiny since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which held debt issued by Lehman Brothers Holdings Inc. Its closure a day after Lehman’s bankruptcy triggered an industrywide run on funds eligible to buy corporate debt, helping to freeze global credit markets.
The run abated only after the U.S. Treasury guaranteed money fund shareholders against losses on more than $3 trillion in securities for a year and the Fed began financing the purchase of fund holdings at face value to help them make redemptions. Congress has since prohibited the Treasury from acting in the same way again.
The SEC passed rules changes in 2010 requiring funds to meet liquidity minimums, reduce average maturities and disclose holdings more frequently, and allowing funds to close more quickly in an emergency. Schapiro has said more action is needed to prevent another run.
Her plan, presented to commissioners June 25, has the support of Democrat Ellise B. Walter at the SEC, while Republican commissioners Troy A. Paredes and Daniel M. Gallagher have said they oppose the plan. Luis A. Aguilar, a political independent appointed by President Barack Obama, has signaled his opposition without saying whether he would kill it before inviting public comment.
Aguilar has held 11 meetings in the past eight months with fund companies and others opposed to additional regulation, according to SEC records. Other opponents include the U.S. Chamber of Commerce and corporate treasurers from CVS Caremark Corp. (CVS) and retail food chain Safeway Inc. (SWY)
The U.S. Chamber paid for one prominent public display objecting to the SEC plan in April when it purchased more than 30 advertising spaces in the Union Station Metro stop in Washington, D.C., where many of the SEC’s employees arrive for work each morning. The chamber didn’t disclose how much the effort cost.
Featuring large, colorful question marks, the ads argued that money-market funds are “strong,” and asked, “why risk changing them now?” David Hirschmann, a chamber official, said the effort is part of a campaign to highlight questions that business wants to ask regulators about the need for additional rules.
Aguilar, the independent commissioner, is among SEC employees who ride the Metro to work.
The ICI, in addition to lobbying commissioners and Capitol Hill, hired public relations firm MWW Group, based in East Rutherford, New Jersey. MWW was paid $300,000 to $400,000 to build opposition to the SEC’s plans among corporate treasurers and state and municipal government officials, according to a person familiar with the project who wasn’t authorized to speak publicly.
The ICI spent an undisclosed amount to pay for a survey of corporate treasurers conducted by consulting firm Treasury Strategies. The results, released in April, showed a majority of treasurers would decrease or discontinue their use of money funds if the SEC enacted the Schapiro plan.
The ICI also led early efforts to propose alternative reform plans the industry would accept. Its detailed recommendation that industry participants form a liquidity bank capable of backstopping funds during a crisis cost $3 million to $4 million to prepare, the person said. The plan was rejected by regulators because it would require granting the facility access to the Fed’s discount window for emergency lending.
Money funds don’t use market prices to value holdings. To maintain a $1 share price they value securities very close to their face value and round the fund’s per share net asset value to the nearest penny. Earnings from the investments are distributed monthly to shareholders as cash or new shares.
Regulators have argued at least since June 2009 that the stable share price encourages flight from money funds at the first sign of trouble, because it allows those who react quickly to sell their shares at $1 each even if the net asset value has dropped below that level. The remaining shareholders, usually less sophisticated, individual investors, are left to shoulder the losses when the fund is no longer able to redeem at the stable price.
Schapiro said in June before the Senate Banking Committee that funds continue to pose a threat to the financial system. She has received public backing from Eric Rosengren, president of the Federal Reserve Bank of Boston, and Treasury Secretary Timothy F. Geithner.
“I still believe, as does the SEC and the Fed, that they are still vulnerable to runs that cannot just disadvantage investors, but could hurt the system as a whole,” Geithner said July 27 before the same Senate panel.
Geithner added that if the SEC doesn’t take action, the Financial Stability Oversight Council could. FSOC, established under the Dodd-Frank law, is charged with identifying, and acting to contain, systemic risks. Its members include Geithner, Schapiro, Fed Chairman Ben S. Bernanke and other senior government officials.
The top fund companies include Boston-based Fidelity Investments; New York’s JPMorgan Chase & Co. (JPM); Federated Investors Inc. (FII) in Pittsburgh; Valley Forge, Pennsylvania-based Vanguard Group Inc.; San Francisco-based Charles Schwab Corp.; Bank of New York Mellon Corp.; New York’s BlackRock Inc. (BLK); Goldman Sachs Group Inc. in New York; San Francisco-based Wells Fargo & Co. (WFC) and Morgan Stanley (MS) in New York, according to research firm Crane Data LLC.
“The proposed ideas don’t adequately consider the unintended consequences on retail investors, or on the capital markets and municipalities that finance themselves through the money markets, and so we will continue to advocate for this important investment tool,” Marie Chandoha, president of Charles Schwab Investment Management, said in an e-mailed statement.
Bobbie Collins, a spokeswoman at BlackRock, Patrice Kozlowski of BNY Mellon, John Roehm of Wells Fargo, Adam Banker of Fidelity and Ianthe Zabel of the ICI declined to comment. Officials for JPMorgan, Federated and Vanguard didn’t return e-mails seeking comment.
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