* SEC's Aguilar worries about cash-management impact* Schapiro says setback shows "needed clarity" for other regulators* A win for fund industry reform opponentsBy Ross KerberNEW YORK Aug 23 A bid by Securities and Exchange Commission Chair Mary Schapiro to impose extra rules on the $2.4 trillion U.S. money market mutual funds industry has been blocked by a majority of the commission's members, she said on Wednesday evening. The decision marks a victory for fund companies and allies which fought proposed changes, such as requiring funds to maintain capital buffers, they feared would destabilize money market investment. Luis Aguilar, one of the SEC's five commissioners and seen as the swing vote, said there remained too many unknowns in the broader cash-management industry to feel confident new rules would not spook investors away from money funds, which play a central role in financial markets. Some might move to even less-regulated funds, he said."The more I have looked into it, the more I have realized there's a lot we don't know," Aguilar said in a telephone interview. Aguilar said he was not opposed to new rules being proposed after more study, adding that he hoped other U.S. regulators such as the Federal Reserve and the Treasury Department, which have pressed for reforms look at similar questions.
With two other commissioners already lined up with Aguilar, Schapiro was left to call on those other regulators to pick up where she left off, on what had been a central part of her agenda. In a statement sent by an SEC spokesman, Schapiro did not name Aguilar b ut said the declaration by three other commissioners that they would not support more money fund rules "now provides the needed clarity for other policymakers as they consider ways to address the systemic risks posed by money market funds. I urge them to act with the same determination that the staff of the SEC has displayed over the past two years."In the detailed statement, Schapiro cancelled an expected interim vote on the new rules, reviewed what she said are risks still facing money funds, and warned that tools that once propped up the industry no longer exist. For instance, terms in a bank bailout prohibit Treasury officials from dusting off a guarantee program used in the fall of 2008. At the time one of the industry's best-known funds "broke the buck" and saw its net asset value fall below $1 per share, while dozens of others needed support from their sponsors amid investor withdrawals.
John Hunt, partner at the Nutter McClennen & Fish LLP law firm in Boston, said Wednesday's developments at the SEC mean whatever else happens in Washington, "it seems unlikely (that) any concrete regulation of money market funds could be drafted and proposed before the election, much less adopted as a final rule."Schapiro is a member of the Financial Stability Oversight Council, established to thwart risks to the financial system and led by Treasury Secretary Timothy Geithner. Asked to comment on the SEC's decision, a Treasury spokeswoman sent a statement noting the council has "recommended in its last two annual reports that additional reforms are needed to mitigate the risks that money market funds pose to financial stability. This was a key source of stress during the financial crisis, and it must be addressed."The SEC had already passed rule changes in 2010 to make money funds more liquid and transparent. Many had expected the SEC would soon put forward for public comment staff proposals for additional rules such as requiring the money market funds to adopt capital buffers and redemption restrictions, or to abandon their traditional $1 per share net asset value. But some experts worried changes would upset the money funds' central functions as major buyers of institutional debt.
Major fund sponsors including Fidelity Investments of Boston and Federated Investors Inc of Pittsburgh had been among the most vocal critics of the proposed changes, saying they would drive away investors and dry up a key source of funding for municipal bonds and other securities. Aguilar, the SEC commissioner, said he found such arguments convincing after speaking with executives such as corporate treasurers, who rely heavily on money funds to park unused cash. Some commentators had suggested the SEC should vote to move staff ideas along for public comment, which still would not have committed it to new rules. But Aguilar said even such an action would lead some customers to move their cash. "We know it's not an idle threat," he said. Aguilar said he would have preferred the SEC to draft a "concept release" to study the broader cash-management industry, such as the role played by so-called "short-term investment funds" overseen by the Treasury's Office of the Comptroller of the Currency, and of "liquidity funds" exempt from many investment company rules. In her statement, Schapiro noted the idea of a concept release but said the agency has been working on money fund reforms more than two years. "A concept release at this point does not advance the discussion. The public needs concrete proposals to react to," she said."