* SEC economists say 2010 fund reforms have helped industry
* Reforms would not have prevented Reserve Primary Fund woes
* Study was requested by three SEC commissioners
* Commissioners were wary of Schapiro's planned reforms
* Study makes no policy recommendations on money funds
By Sarah N. Lynch
WASHINGTON, Dec 5 U.S. Securities and Exchange
Commission economists have found that reforms adopted in 2010
have bolstered the $2.6 trillion money fund industry but would
not have prevented the Reserve Primary Fund from "breaking the
buck" during the financial crisis.
The SEC's findings were laid out in a new study released
late on Wednesday that examines the 2008 financial crisis and
the impact of reforms implemented as a response to those events.
During the crisis, heavy exposure to collapsed investment
bank Lehman Brothers caused the net asset value (NAV) of the
Reserve Primary Fund, a large money market fund, to fall below
$1 per share, or "break the buck" in industry parlance.
"The findings indicate that funds are more resilient now to
both portfolio losses and investor redemptions than they were in
2008," the report says.
"That being said, no fund would have been able to withstand
the losses that The Reserve Primary Fund incurred in 2008
without breaking the buck, and nothing in the 2010 reforms would
have prevented The Reserve Primary Fund's holding of Lehman
The study was requested by SEC Democratic Commissioner Luis
Aguilar and Republicans Troy Paredes and Dan Gallagher, all
three of whom were reluctant to support any new reforms
championed by SEC Chairman Mary Schapiro without additional
The study does not make any policy recommendations.
However, it does explore various explanations for redemption
activity by investors during the financial crisis, and how any
potential structural changes to money funds could affect
Since last year, Schapiro has been calling for a new round
of reforms to the money market fund industry.
Although the SEC implemented numerous reforms in 2010, she
has said those did not go far enough to prevent runs that could
cause money market funds, ordinarily presumed to be risk-free
investments, to drop below an industry target of $1 per share
and thus lose money.
Those reforms at the time bolstered fund transparency,
tightened credit quality standards, shortened the maturities of
fund investments and imposed a new liquidity requirement.
Earlier this year, Schapiro circulated a draft proposal to
SEC commissioners that contained several options for new
measures. The leading option called for capital buffers coupled
with redemption limits during periods of stress.
Another approach called for moving from a stable $1 per
share net asset value to a floating NAV, so that investors would
not get spooked by the prospect of funds breaking the buck.
But Schapiro faced staunch opposition from money market
funds, as well as corporate treasurers, who said her proposal
could effectively kill the industry.
Aguilar, Paredes and Gallagher were all wary of her call for
more regulations without first studying the effects of the 2010
reforms, which were adopted in response to the Reserve Primary
The SEC voted to publicly release the economists' report on
Wednesday after Aguilar issued a public comment earlier in the
day announcing the study had been completed and delivered to
He said in his statement he was glad the study more closely
explores one of his primary concerns - that major structural
changes to money funds could give rise to a migration by
investors into instruments in an "unregulated market".
Those who prefer "yield over principal stability and low
investment risk" could shift their money into floating NAV
offshore money market funds or other instruments, the report
But non-financial commercial paper issuers would probably be
largely unaffected by a decrease in demand from money market
funds, and municipalities that use money market funds for
short-term funding needs would also not likely feel a huge
impact, the report said.
It is unclear exactly how the study will affect ongoing
negotiations at the SEC over possible money market fund reforms.
Following the defeat of Schapiro's plan in August, the U.S.
Financial Stability Oversight Council recently decided to take
up the issue in an effort to pressure the SEC to come to a
consensus on new reforms.
Last month, the FSOC rolled out a framework of new rules
that largely mirror the plan championed by Schapiro.
It is collecting comments on the draft, which discusses the
various regulatory approaches.
If the SEC refuses to act, then the FSOC could formally
present its recommendations, which would force the SEC to agree
to them, or reject them in writing within 90 days.
With Schapiro about to depart the agency on Dec. 14, that
will leave the SEC split between two Democrats and two
Republicans, potentially making it harder to reach a consensus.
Aguilar has not publicly commented specifically about his
views on either the capital buffer or floating NAV proposals.
Gallagher, however, has previously said he would be open to
a floating NAV if it were coupled with rules allowing fund
boards to impose liquidity "gates" on redemptions.