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Schapiro money-fund proposal hit on Hill

WASHINGTON (MarketWatch) -- Securities and Exchange Commission chief Mary Schapiro on Thursday received a mostly tepid and sometimes hostile reception from lawmakers on Capitol Hill for her proposals to reform the $2.7 trillion money-market fund industry.

"You are telling us that this is a very vulnerable industry and that there are great threats of a run and using that to justify regulations that I think threaten the very existence of this industry," said Sen. Patrick Toomey, Republican of Pennsylvania, at a Senate Banking Committee hearing about the future of money-market funds.

Toomey represents a state with two major money-market funds providers, Pittsburgh-based Federated Investors(FII) and Malvern-based Vanguard Group. The Center for Responsive Politics lists Federated Investors as one of Toomey's top contributors, as the Pennsylvania Republican received $37,300 from individuals and political action committees from the fund group since 1989.

"Since then [2008] we've had another round of new stresses, an ongoing terrible recession, a European credit crisis, downgrade of the U.S. government, considerable redemption pressure, and not a single problem in this whole industry. No one got in trouble," he added.

In 2008, the Treasury Department had to step in with a guarantee program while the Federal Reserve created a liquidity facility after a major fund, the Prime Fund, "broke the buck" by having a net asset value below $1 a share.

Schapiro reiterated to lawmakers that the agency may soon introduce her two proposals for reforming the industry, including one that would impose capital restrictions on the funds combined with limitations or fees on redemptions by consumers.

The other proposal would permit a floating net asset value for money-market mutual funds, a prospect that money fund managers argue would severely hurt the industry. Currently, the SEC restricts the investments a fund can make to help maintain a stable NAV.

Toomey said he believed that a majority of the five-member commission don't back Schapiro's proposals. However, Schapiro said that even though a majority of the commission have not joined her, some have "open minds" and want to engage and see the cost-benefit analysis while others have expressed views that nothing more needs to be done.

Democrats were less hostile but still raised fears about the impact of the reforms on municipal investors.

"I'm concerned about the impact on municipal participants, at a time that they are all at a real siege because of the local and national economy," said Sen. Jack Reed, Democrat of Rhode Island. "Many municipalities use money-market funds in a very efficient way to manage their cash."

In response, Schapiro said the capital redemption proposal alternative would help municipalities continue to employ these funds because it would allow for a stable NAV.

"I believe that money-market funds will continue to exist and they will continue to invest in municipal securities," Schapiro said. "But if a municipal treasurer can't bear the risk of loss of even a penny or a share in their cash management account, you have to wonder whether a money-market fund is really the right place for them to be in the first instance because they do have that risk if the fund breaks the buck."

She argued that based on the internal SEC studies, there are "continuing" risks to the industry and "considerable exposure to European banks."

Seeking to back her assertion that changes are needed for the money fund industry, Schapiro cited an internal study that said that the SEC found that some fund managers are taking on significantly greater risk than others, "although all their share prices are still priced at a dollar."

"We have learned that while most funds significantly reduced their exposures to European banks in light of all the problems in the euro zone, some funds did not," Schapiro said.

Also seeking to back her proposals, the agency released results from an internal staff review where SEC officials found that since money market funds were first offered in the 1970, fund sponsors have voluntarily provided support to money-market funds on more than 300 occasions.

She said that since 2010, when the agency imposed liquidity rules for money funds, there have been three sponsor support occasions that were necessary because of the downgrade of a foreign bank.