Yesterday, Bloomberg wrote an article entitled, "Money Funds Future May Hinge on Former Invesco Executive Aguilar," which says, "The future of the $2.6 trillion U.S. money-market fund industry may hinge on Luis A. Aguilar, a Democrat on the U.S. Securities and Exchange Commission whose colleagues are evenly split over whether to impose new rules in 2012. Aguilar, a former general counsel at money-management firm Invesco Ltd., hasn't revealed his views on the proposal most likely to reach a final rulemaking vote this year, said four people who discussed the topic with commissioners and agency staff. The plan, which would require funds to build capital cushions, has support from SEC Chairman Mary Schapiro and Elisse B. Walter, a Democrat appointee, and is opposed by Republicans Daniel M. Gallagher and Troy A. Paredes, said the people, who asked not to be identified because the information is private." (See also Crane Data's Dec. 16 News "More Money Fund Regs Premature, Unnecessary Says SEC's Gallagher".)
The Bloomberg piece explains, "New rules would hit the industry as it faces its biggest challenges since money funds first appeared four decades ago. Treasury yields near zero have forced some money-fund managers to cut fees, and Europe's sovereign-debt crisis has further reduced an already shrinking supply of available debt the funds can purchase. Assets have shrunk 30 percent since the end of 2008 and money funds charge 54 percent less on every dollar managed."
It continues, "Regulators have debated how to make the funds more stable since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run that helped freeze global credit markets. The run abated only after the Treasury Department temporarily guaranteed money-fund shareholders against losses and the Federal Reserve began buying fund assets at face value to help them meet redemptions. The SEC enacted new rules in 2010 -- including liquidity requirements, shorter maturity limits and enhanced disclosure requirements -- in an attempt to prevent future runs and government bailouts."
Bloomberg writes, "Schapiro said in a Nov. 7 policy speech that additional steps were needed to address the funds' vulnerability to runs. She said SEC staff had narrowed prospective reforms to capital cushions and a plan that would eliminate the traditional $1 share price, the so-called stable net-asset value. Schapiro didn't discuss the speech with all the commissioners before delivering it, according to three other people familiar with the situation, who asked not to be identified because the matter isn't public. The SEC staff may offer separate proposals for a floating share price and capital cushions. When one or both reach the final rulemaking stage, Aguilar may cast the deciding vote."
The article quotes SEC Commissioner Aguilar, "My own consideration of how money markets have performed, which includes conversations with the industry, leads me to conclude that the reforms that we did make have in fact worked as we wanted them to work."
The piece also says, "The people familiar with the SEC's deliberations said the capital cushion plan had a significantly better chance to gain the three necessary votes for final approval than the so-called floating NAV. One person said discussions between industry representatives and commissioners focused almost exclusively on capital cushions without serious consideration of a floating NAV. The capital buffer concept would require fund providers to build a reserve of cash to cover losses in the event of a credit default. The buffer could be accumulated by drawing money out of shareholder returns, or through a direct infusion of cash from the companies, or a combination of the two."
It adds, "The people familiar with deliberations said the SEC staff hadn't settled on exactly how to build the cushion and how big it should be. Money fund providers are split over the proposal. The people said the staff's eventual proposal would also likely grant fund managers the ability to limit the pace of withdrawals by shareholders during a crisis. In her November speech, Schapiro said "much of the staff's energy" was focused on developing a capital buffer plan combined with redemption restrictions.
