Following passage of the Dodd-Frank Wall Street Reform I and Consumer protection Act, federal rulemaking is becoming increasingly complex, thanks to the new Financial Stability Oversight Council (FSOC). Consider recent developments in money market fund reforms, where the U.S. Securities and Exchange Commission (SEC) could soon be forced to take up a vote on new regulations, even after Chairman Mary L. Schapiro announced on Aug. 22 that no such vote would occur.
Further reforms to money market funds (MMF) have been on the horizon for several years, starting during the financial crisis when the Reserve Primary Fund "broke the buck," meaning the net value of its assets fell below [dollar]1 per share. This triggered investors to rapidly redeem MMF shares out of concern for the safety of their investments. It also caused the federal government to intervene with a terror porary MMF guarantee program.
Though in 2010 the SEC adopted rule changes to im-prove the safety of MMFs, Schapiro has publicly announced that further steps must be taken to mitigate systemic risk and the susceptibility of MMFs to runs. Then, in testimony before the U.S. Senate Banking Committee in June, she explained two potential reform options that SEC staff was developing to further reform MMFs.
First, to require funds to use floating net asset values (NAV), allowing investors to buy and sell shares based on the market value of the funds' assets instead of using the stable [dollar]1 per share price. The second option would be to maintain the current stable value, but require funds to maintain a capital buffer to support the stable values, com-bined with certain redemption holdbacks or fees.
Reactions to Potential Rules
FEI's Committee on Corporate Treasury submitted a state-ment for the congressional hearing record expressing concerns with these reform options. First, the floating NAV could create significant problems for corporate treasurers who do not have the systems in place to mark-to-market on a daily basis or the policies in place to allow for investment in variable rate instruments.
The letter also stated that redemption holdbacks would essentially undermine what makes MMFs such important tools for businesses, which is the ease of investing and re-deeming funds when a working capital need arises.
In August, Schapiro ultimately canceled the vote on fur-ther regulations of MMFs (when discovering that three out of the five SEC commissioners would not support the...