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 "More should be done to mitigate the first mover-advantage enjoyed
by investors who run during times of heavy redemptions," said SEC
Republican Commissioner Michael Piwowar, making his first public
comments on money fund reforms since joining the agency in August.
"There also remains a need to provide investors with more timely
information about funds' holdings, including the value of those
holdings," he added in prepared remarks before the U.S. Chamber of
Commerce.
The SEC's five commissioners are weighing a proposal to reduce the
risk of runs on money market funds, like the one seen in 2008 when
the Reserve Primary Fund's net asset value fell below $1 per share
as panicked investors withdrew money to avoid exposure to Lehman
Brothers.
The Chamber has been among the most vocal business trade groups to
lobby against overly strict new rules for money market funds, saying
any regulations that fundamentally alter the structure of the
product could cut off a major supply of short-term funding for
corporations.
In a wide-ranging speech, Piwowar also took aim at other U.S.
regulators who have tried to pressure the agency to enact new
reforms for asset managers and money funds, saying they should back
off and leave it up to the experts at the SEC.
The SEC's proposal contains several regulatory options, including
potentially forcing prime funds used by institutional investors to
float their net asset value and/or allowing fund boards to impose
liquidity fees and redemption gates during times of market stress.
The Chamber has remained opposed to a floating net asset value,
saying such a drastic change could effectively kill the product.
The SEC's money fund plan was released in June before either Piwowar
or his Democratic colleague Commissioner Kara Stein had joined the
SEC, making it hard for observers to gauge how the final plan may
shape up.
Piwowar declined to say which option he might support, telling the
audience he is still studying the plan.
However, he noted that before he can make a decision on the floating
NAV option, the Internal Revenue Service needs to first issue
guidance to address how such a change could affect tax treatment for
money funds.
"We need to get an answer from Treasury about the tax implications,"
Piwowar said. "That is a threshold issue for me."
The industry has warned that certain tax concerns must be addressed
in order to make a floating NAV workable.
The IRS last summer addressed one of those concerns, after it issued
guidance to grant investors some relief from "wash sale" rules,
which bar an investor from recognizing losses from the sale of
securities if the investor purchased substantially identical shares
within 30 days before or after such sale.
The IRS has still not, however, released separate guidance to
address how investors might avoid burdensome daily record-keeping
requirements if a floating NAV is adopted.
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BITTER FEUD
The SEC's money fund proposal came about following a bitter internal
feud between the SEC's former Chair Mary Schapiro and three other
SEC commissioners.
The three commissioners at the time, including Republican Dan
Gallagher and Democrat Luis Aguilar, questioned whether more rules
were needed because the agency had already adopted rules in 2010
that improved fund transparency, tightened credit quality standards,
shortened the maturities of fund investments and imposed a new
liquidity requirement.
In an effort to end the stalemate, the Financial Stability Oversight
Council, a panel comprised of the heads of each major market and
banking regulator, intervened and tried to pressure the SEC.
The SEC finally issued a proposal, but only after SEC economists
released a study that helped justify further reforms.
Piwowar said Monday he believes the SEC was wrong to cede ground to
the FSOC on money funds.
He also said he was concerned the FSOC has continued to tread on the
SEC's turf by weighing whether to designate large asset managers
such as Blackrock or Fidelity as systemically important, a tag that
carries tough capital rules and oversight by the Federal Reserve.
He said he has been rebuffed in his efforts to sit in on some of the
biweekly meetings held by the council, and complained the Federal
Reserve exerts too much influence over its policy-making.
"The FSOC, within which the banking and prudential regulators exert
substantial influence, represents an existential threat to the SEC
and the other member agencies," he said.
(Editing by Chizu Nomiyama and Stephen
Powell)
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