WASHINGTON (Reuters) - A key member of the Securities and Exchange Commission now says he is open to further reform of the money market fund industry, but it is unclear if his support will be enough to get a divided SEC to agree on new rules.
SEC Commissioner Luis Aguilar, a Democrat on the five-member panel, told Reuters on Friday that he is more inclined to support a proposal now that agency economists have produced a study on the effectiveness of prior reforms.
It found that while the 2010 reforms helped bolster the industry, they would not have been enough to prevent a run on the Reserve Primary Fund in 2008 during the financial crisis.
Aguilar said SEC staff were working on an early-stage draft of a new proposal.
“The huge benefit of having the study and the comments we receive on the study is that it will put me, and I suspect my colleagues, in a much better position to allow us to vote on a proposal,” Aguilar told Reuters.
“It’s important information that was lacking in the earlier draft.”
Alice Joe, executive director of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said the study was a good step toward figuring out what, if any, additional reforms should be made.
“It is a welcomed sign that the money market fund debate will be taken up again at the SEC, where it belongs,” Joe said.
However, the path forward could be complicated by the departure of SEC Chairman Mary Schapiro next week, which will leave the agency split between two Republican commissioners and two Democratic commissioners.
For more than a year, Schapiro has been highlighting the need for a new round of reforms for the $2.6 trillion money market fund industry.
But Aguilar, along with Republican Commissioners Daniel Gallagher and Troy Paredes, remained wary about the need for new reforms and said they wanted the agency to study the impacts of 2010 rules before proceeding with another round of regulations.
The economic study was requested by the three and released on Wednesday.
John Nester, an SEC spokesman, said on Friday that the agency’s staff has been conducting extensive analysis for a long time and sharing insights with commissioners.
“There is no specific staff recommendation at this time,” Nester added.
Although the SEC adopted a series of money market fund reforms in 2010, Schapiro has argued those are not enough to prevent a repeat of the events in the 2008 financial crisis.
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.
Schapiro circulated a draft plan earlier this year with several options to bolster the industry. One option called for capital buffers coupled with redemption hold-backs.
Another suggested 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.
The money fund industry and corporate treasurers, however staunchly opposed those proposals, saying they could severely reduce investor interest in the products, which are generally considered safe investments.
After the three commissioners declined to vote for Schapiro’s proposal in August, the U.S. Financial Stability Oversight Council 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.
On Friday, Nester said that throughout the process Schapiro has “never wavered from her belief that a floating NAV is the most principled reform approach.”
He added that Schapiro is “pleased that she was able to keep this issue alive and that there is continued forward progress.”
Aguilar told Reuters he could potentially vote for a proposal containing either of the two options suggested by Schapiro, so long as they were substantiated by the findings in the study.
Although Aguilar said he’s more open to a potential proposal now, it is still unclear if either of the SEC’s two Republicans would be willing to support a proposal. Efforts to reach them and their staff were not immediately successful.
In order to advance next year, it would need support from at least one of the Republican commissioners.
Elisse Walter, a Democratic commissioner who will take over as chairman when Schapiro departs, has not publicly declared her stance on the issue but has closely supported Schapiro on other matters.
Gallagher 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.
Neither he nor Paredes have publicly commented since the study was made public.
Nevertheless, Aguilar said he is optimistic the agency can make progress on the issue in early 2013.
Reporting By Sarah N. Lynch; Editing by Kenneth Barry, Tim Dobbyn and Bernard Orr