Schapiro: "Money-Market Funds Remain Susceptible to Runs"
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Tuesday, February 07, 2012

Schapiro: "Money-Market Funds Remain Susceptible to Runs"

The Securities and Exchange Commission's new money market mutual fund regulations are almost here, and industry leaders aren't happy. The Wall Street Journal's Andrew Ackerman and Kirsten Grind report that the SEC is about to "unveil a two-part plan to stabilize money funds."

Paul Schott Stevens of the Investment Company Institute (ICI) said the proposals could "force an enormous number of sponsors out of the business and leave those that remain with a product that nobody will want to invest in or make available to investors."

Out of the five commissioners which are about to decide on the proposal, three have reportedly been reluctant to support money fund reforms.

Federated Investors [profile] CEO and president J. Christopher Donahue said that Federated plans to sue the SEC if the the regulators' two-part plan will interfere with their capacity to do business [see, 1/30/2012].

"We're going to do everything in our power to attack it," said the publicly-traded, Pittsburgh-based, money market mutual fund provider's CEO in an interview with the WSJ.

Yet the SEC's chief is standing behind the plan, reminding the pub's readers of the dark days in September 2008 when the Reserve Primary Fund broke the buck and other money funds appeared ready to follow suit.

"Money-market funds remain susceptible to runs and to a sudden deterioration in quality of holdings, and we need to move forward with some concrete ideas for proposals to address these structural risks," SEC chairman Mary Schapiro told the pub last week.

The SEC's proposal includes three ways for funds to boost their capital: "by injecting more cash from corporate coffers; issuing stock or debt securities; or collecting more money from shareholders." The WSJ also reports that the regulators are also proposing to scrap the fixed $1 net-asset value and make it floatable. Donahue was not placated by the options.

"The generosity of giving you the choice of which way to die is really not much of a choice," Donahue reportedly said.

"I understand why very few in the industry support changing the current structure. At the end of the day, the taxpayer simply can't beon the hook for failure, and the tools to ameliorate a run that existed in 2008 when Reserve broke the buck don't exist anymore," Schapiro said.

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