WASHINGTON, DC (Reuters) - A key securities regulator expressed skepticism on Wednesday about the need for more sweeping money market fund reforms, saying that the effect of new rules implemented last year in response to the 2008 financial crisis is still unknown.
“We cannot know what risks money market funds pose unless ... we have a clearer understanding of the effects of the commission’s 2010 money market reforms,” said Daniel Gallagher, a new Republican member of the U.S. Securities and Exchange Commission who has only been on the job for 26 business days. “Any rulemaking in this space could be premature and possibly unnecessary.”
Gallagher’s comments, which came at a U.S. Chamber of Commerce event on SEC reform, mark a contrast to those made by SEC Chairman Mary Schapiro a month ago in a major speech she made to the brokerage industry.
In that speech, Schapiro, an independent, announced that the SEC was leaning toward proposing new capital buffers to better protect the safety and soundness of money market funds.
She also said then that despite some major reforms implemented by the SEC in 2010, those measures still fell short of what was needed.
But Gallagher on Wednesday said he was a bit wary of new rules establishing capital buffers for money market funds, noting that such a plan could kill the industry.
“The level of capital that would be required to legitimately backstop the funds would effectively end the industry,” he said. “And I have doubts that a smaller cap that accrues over time would be sufficient to protect investors in funds in an actual crisis.”
The $2.6 trillion money market fund industry came under scrutiny during the financial crisis after one fund “broke the buck” and saw its net asset value fall below the critical $1-per-share level.
The Federal Reserve stepped in with emergency liquidity lines, and some money funds required millions of dollars in support from their parent firms.
The SEC approved measures that took effect in May 2010 to tighten credit quality standards, shorten weighted average maturities and impose a liquidity requirement on money market funds. But money market funds came under scrutiny again this summer over questions about their exposure to European bank paper.
The Financial Stability Oversight Council, which was created by the Dodd-Frank Act, has been working with the SEC to review a menu of possible policy options.
In addition to the capital buffer, the SEC has also been exploring a plan strongly opposed by the industry that would mandate a floating net asset value. Such a measure would allow the value of each share of a fund to vary, or “float,” away from the $1-per-share value most investors have come to expect from the funds.
Gallagher said he is still keeping “an open mind” on all of the various options, and a floating NAV should be kept “on the table.”
Schapiro has previously said she hopes to get out some money market fund proposals “in short order.” A majority of commissioners would need to approve a proposal in order for it to be put out for comment.
Reporting By Sarah N. Lynch, editing by Gerald E. McCormick