As we mentioned yesterday, new SEC Commissioner Michael Piwowar spoke Monday at the Chamber of Commerce on "Advancing and Defending the SEC's Core Mission". He tells the Chamber, "By way of example, and as I will discuss further, money market fund reform presents an opportunity to both advance and defend the SEC's mission. I have not yet reached any conclusions on the substance of money market reform, but I do want to preview how I am approaching the issue.... As if the SEC does not already have enough to do to advance our core mission, we are also faced with the need to defend it. Currently, I see two outside forces that are threatening our ability to effectively protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."
Piwowar says, "The first threat is special interests, from all parts of the political spectrum, that are trying to co-opt the SEC's corporate disclosure regime to achieve their own objectives. The Commission, therefore, should carefully consider whether any additional disclosures benefit investors or whether they enable the agenda of special interests to the detriment of investors. With simply our current disclosure requirements, I worry that investors are already suffering from what former SEC Commissioner Troy Paredes calls "information overload." Commissioner Paredes points out that "[i]ronically, if investors are overloaded, more disclosure actually can result in less transparency and worse decisions, in which case capital is allocated less efficiently and market discipline is compromised.""
He continues, "The second threat to our core mission is banking regulators trying to impose their bank regulatory construct on SEC-regulated investment firms and investment products. Yet the Commission -- not the banking or prudential regulators -- is responsible for regulating markets. My concern is that the banking regulators, through the Financial Stability Oversight Council (FSOC or Council), are reaching into the SEC's realm as market regulator. Therefore, one of my first acts as a Commissioner was to request that I be afforded an observational role at FSOC meetings.... The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and the other member agencies."
Piwowar explains, "Last September, the Department of Treasury's Office of Financial Research (OFR) published a study -- and I use the term "study" loosely -- prepared for the FSOC on the asset management industry. The study sets the groundwork for the regulation of asset managers by the FSOC. Among the Council members, only the SEC solicited public feedback regarding the study. I applaud Chair White for doing so. In response, the Commission has received more than 30 comment letters, including one from the Chamber. I vehemently believe that before the FSOC decides whether further study or action is warranted, the collective voices of the public and the SEC should be heard by the members of the Council. This is all the more important because the vast majority of asset management firms are SEC-regulated entities."
He comments, "Another issue on which the SEC has ceded ground to the FSOC and banking regulators is money market fund reform. One of the most shocking decisions in the 80-year history of the SEC was the wholesale abdication of the Commission's responsibility to the FSOC on money market funds. This choice has been widely criticized by former chairmen, commissioners, and SEC senior staff as threatening the independence of the SEC and the other independent financial services regulatory agencies. I am in complete agreement. The only somewhat coherent systemic risk argument about money market funds that I have heard articulated is that a run on money market funds could lead to banks failing because they cannot rollover short-term debt. The moral of that story is not that money market funds have "structural vulnerabilities." It is that banks are too reliant on short-term funding. The banking regulators have the ability to address such a bank regulatory shortcoming directly. Nothing in the Dodd-Frank Act weakened or repealed that authority."
Under a section entitled, "Money Market Fund Reform -- Advancing and Defending the SEC's Core Mission," Piwowar tells us, "I thought I would end with some words on how I am thinking about whether additional money market fund reforms are needed, and, if so, how I will be evaluating each alternative. As an economist, one of the first questions I ask in the context of any rulemaking is "What is the baseline?" In other words, what is the starting point from which I will evaluate the costs and benefits of any proposed regulatory change? In the case of money market funds, it is tempting to start with a baseline of September 2008, when the Reserve Primary Fund "broke the buck." However, the Commission adopted a number of new money market fund regulations in 2010. The stated objectives of those rules were to "increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds.""
He adds, "Therefore, the proper baseline from which to evaluate any additional money market fund rule proposals is the current regulatory framework, which includes the 2010 reforms. From a cost-benefit perspective, the next relevant questions are "What are the marginal benefits of additional regulations"; and "what are the marginal costs of those additional regulations?" <b:>`_ In order to answer those questions, we need to understand how effective the 2010 regulations were. The Commission's Division of Economic and Risk Analysis ("DERA") has done an excellent job providing the answers to those questions in their 2012 staff report "Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher," and in the economic analysis in the Commission's 2013 proposing release for additional money market fund reforms."
Piwowar explains, "After carefully reading both of those documents and engaging in numerous discussions with Commission staff and money market fund participants, I have concluded that the 2010 money market fund regulations were, in economist-speak, "necessary, but not sufficient." They provided much-needed investor protection improvements in the areas of disclosure, liquidity, credit quality, and operations. However, the reforms were not sufficient to address remaining investor protection concerns in at least two areas. Namely, more should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions. There also remains a need to provide investors with more timely information about funds' holdings, including the value of those holdings."
Finally, he says, "I have not reached any conclusions on which alternatives in the Commission's outstanding rule proposal best address these investor protection concerns while preserving the benefits of money market funds for investors and the short-term funding markets. I will be working with Commission staff over the coming weeks and months to evaluate the marginal benefits of the various alternatives -- floating NAV, fees, gates, additional disclosures, etc. -- and their associated costs."
