The surprise announcement last week by SEC Commissioner Luis Aguilar that he would not support releasing a proposal on radical money market fund reforms is still reverberating across the cash investment world. Opinions vary on whether this likely means that money market funds have dodged the bullet of radical change or whether this opens the door to action by the Financial Stability Oversight Council, the Fed, or other regulars. But early reports indicate that it is more of the former than the latter. We cite some of the early discussions below.
Barron's writes "Money-Market Impasse Is 'Major' Plus For Asset Managers, Citi Says", saying, "The asset-management industry lobbied hard against SEC Chair Mary Schapiro's money-market overhaul. It got what it wanted. This week, the SEC shelved a vote on the plan. Some analysts are predicting good things for asset-management stocks, even though it's not clear that the industry is out of the woods. Citigroup brokerage analyst William Katz calls this week's money-market impasse "a major structural positive" for the affected fund providers. In a note headlined "Money Market Reform Risk(s) Evaporate(s)," he upgraded his investment rating on Federated Investors (FII) to "buy" from "neutral" and raised his price target to $25, from $22. Katz also boosted price targets for BlackRock (BLK), Invesco (IVZ), Legg Mason (LM) and Charles Schwab (SCHW)."
The New York Times' Dealbook, however, comments in a story "In Effort to Curb Money Market Funds, a Plan B Is Considered," "After the failure of one effort to overhaul a major part of the mutual fund industry, top government officials worked on Thursday to find alternative ways to rein in what they see as a systemic threat to the financial system. Treasury Secretary Timothy F. Geithner and other top regulators were given sweeping powers after the 2008 financial crisis that would allow them to force new rules on money market funds, a popular type of mutual fund that has taken some of the blame for the crisis. On Wednesday evening, the head of the Securities and Exchange Commission, Mary L. Schapiro, announced unexpectedly that she was calling off her agency’s long-running effort to change rules for money funds."
The Times commentary adds, "The most obvious next step would be for a council of top regulators, the so-called Financial Stability Oversight Council, to vote on designating money market funds as systemically important, which would pave the way for stricter regulations.... But now that the council is confronted with the possibility of an actual vote, the difficulty of forcing changes on the funds is becoming clearer to advocates and opponents alike. The problem with the option of designating the money fund industry as systemically important and therefore deserving of regulation is that it would send the issue back to the S.E.C. to draw up new regulations. The commissioners could still fail to agree on rules. Alternatively, the council has the power to designate specific money funds or fund managers as systemically important. That would shift regulation of those funds to the Federal Reserve. Any decision could take three to four months, and once approved, a fund manager could ask for a judicial review. This timing could stretch the process past the November elections, which may put new regulators into power."
Also, MarketWatch's Chuck Jaffe writes "Money-market fund reform is dead"." This article says, "Recognizing she did not have enough support to secure a victory, Schapiro last week canceled a vote on proposals for reforming the money-market business, but vowed to keep fighting. She should spend her time more productively. Schapiro and some regulators wanted the changes to go further, and the fund industry vehemently wanted to maintain the new status quo. Loathe as I am to agree with the honchos of the fund business, they got this one right."
Jaffe adds, "With that in mind, Schapiro needs to give up the quest. There is no way to eliminate all potential troubles, even in the safest of asset classes. At some point -- as with the proposals she was floating -- the cure is worse than the disease."
The piece quotes Peter Crane of Crane Data, "The thought that you can make anything perfectly safe and remove risk is ridiculous. The options they have been talking about would not have held up for 10 seconds during the Lehman Brothers meltdown. They might make you feel good until there was a crisis and they failed. Money funds have always been safe, and they're definitely safer now than in 2008, but sometimes people just all decide to run at once, and stuff happens. You can't regulate that out of the market."
