* Bair renews backing for ideas like ending $1 per share
* Fund firms seek compromise for oversight of $2.5 trillion
By Ross Kerber
Nov 1 Former financial regulator Sheila Bair
voiced worries about a new industry compromise plan for money
market mutual funds, including implementing a fee for
withdrawals during times of stress, saying it could worsen a
Fund companies met with regulators last week in Washington,
hoping they would accept limited new rules for stabilizing the
funds if necessary. But Bair dismissed such notions in a
statement e-mailed by a spokesman.
"While I commend responsible members of the industry for
trying to find solutions, I am concerned that gates coming down
or fees going up in the middle of a crisis could make matters
worse," Bair said in the statement on Thursday.
"Another layer of complexity is not going to calm an already
very risk-averse market," wrote Bair, who chairs the Systemic
Risk Council, a non-partisan group of former regulators,
investors and academics backed by the Pew Charitable Trusts and
the CFA Institute, set up to monitor new financial rules and
Bair's comments show how difficult it may be to find a
compromise that will please all sides in the debate over the
future of the $2.5 trillion money fund industry.
Its funds play a critical role in financial markets as major
buyers of corporate and agency debt. Stresses some funds
suffered during the financial crisis threatened system-wide
Bair was head of the Federal Deposit Insurance Corp until
last year and remains an influential voice among those pushing
for financial reforms.
Other members of the Systemic Risk Council include Brooksley
Born, former head of the U.S. Commodity Futures Trading
Commission, former Treasury Secretary Paul O'Neill, and former
Citigroup Chief Executive John S. Reed.
Securities and Exchange Commission Chairman Mary Schapiro in
August failed to round up the votes at her agency to move
forward with ideas like having the funds build up capital
buffers or abandon their traditional $1-per-share value that
many investors expect.
At Schapiro's urging the Financial Stability Oversight
Council -- led by Treasury Secretary Timothy Geithner -- has
taken up such ideas anew.
Fund firms and some officials worry Schapiro's ideas would
drive away investors, and fund firm allies have pushed back. On
Thursday, for instance, a prominent law firm warned the council
could expose itself to legal challenges in its approach.
Still, many in the industry would like to resolve the
debate. Fund firms, including BlackRock Inc of New York
and Fidelity Investments of Boston, met with regulators last
Friday to discuss a proposal built around concepts that
BlackRock had put forward publicly in September.
Among other things, BlackRock's plans would allow funds to
charge investors an extra fee to withdraw money during times of
stress, discouraging hasty departures. The fee would go back
into the fund, encouraging other investors to stay put.
None of the participants have discussed Friday's meetings in
detail. Spokespeople for the SEC, BlackRock, and fund industry
trade group the Investment Company Institute declined to respond
to Bair's critique.
The council that Bair chairs has previously backed
"BREAKING THE BUCK"
The ongoing debate comes four years after one of industry's
best-known funds "broke the buck" during the financial crisis
and reported a share price below $1, dragged down by heavy
holdings in the collapsed investment bank Lehman Brothers.
Dozens of other money funds needed support, and Federal agencies
eventually stepped in with backstops.
Fund executives have argued that rule changes from 2010 have
already made the funds more resilient, including making the
funds more liquid and more transparent about their holdings.
In August three of the SEC's five commissioners blocked
Schapiro's attempt to publish new rules for public comment. She
then urged other regulators to pick up the ball, leading to the
In her statement, Bair urged the FSOC to press forward.
"This is a key test for FSOC," she wrote. "FSOC should not be a
venue to relitigate and weaken needed reforms. It should be a
mechanism for strengthening them."
Asked about BlackRock's proposal, the foundation of the
industry's plan, Bair wrote that it might favor larger fund
firms and bring the undesirable effect of encouraging more
"We need strong, simple rules that work in good times and in
bad," she wrote. "The direct approaches championed by SEC
Chairman Mary Schapiro and the SEC staff are the way to go." .