A statement entitled, "Corker Urges SEC to Continue Pursuit of Money Market Fund Reform to Protect Taxpayers from Potential Bailout," was released Friday by Senator Bob Corker's office. It says, "In a letter to the Securities and Exchange Commission today, U.S. Senator Bob Corker, R-Tenn., a member of the Senate Banking Committee, urged the commission to continue pursuit of money market fund reform to protect taxpayers from a potential bailout, building on the common ground established with an initial proposal from Chairman Mary Schapiro. Despite making progress, the SEC set aside further consideration of a proposed money market rule last month due to a lack of consensus among commissioners."
The Corker letter, addressed to all five SEC Commissioners (Schapiro, Walters, Aguilar, Gallagher and Paredes), comments, "I am writing to you today in regards to the SEC's recent efforts around money market fund reform. My concern is that a run on money market funds is still a real risk in the case of a financial system dislocation. As you know, about two thirds of assets in money market funds are institutional investor money, while one third of assets come from retail investors. In the event of a disruption in our financial system, Congress could be faced with a difficult choice: (1) allow individual investors to bear significant personal losses while institutional investors (who likely watch the commercial paper markets closely and would quickly recognize market distress) flee, or (2) provide another bailout for a fund or the fund industry."
He continues, "Based on my read of Chairman Schapiro's initial draft proposal and the dissenting comments of some of the commissioners, I believe that the SEC may be honing in on a solution that might work. Both proposals point out the benefits of some form of a redemption restriction. Some observers in the industry have suggested a 3%-5% withdrawal holdback for 30 days as a way to help prevent the collapse of a fund in case of a market panic. Generally, these observers also suggest a de minimis exception of some form for small retail investors. On the other hand, the dissenting view of some commissioners appears to advocate for a "gating" approach that would allow some redemption restrictions managed by a fund's Board. It appears that there is common ground here around a set of rules that could stem a run and the potential need for government intervention. I am writing to encourage you to find an acceptable solution and move forward with a reform proposal along these lines for public comment."
Corker adds, "In the end, an optimal solution will be found if the SEC Commissioners and industry work together to find an appropriate structure that minimizes the risk of a wholesale run. Whatever that solution, reforms now are better than a taxpayer bailout down the road. Inaction is not an option."
In other news, former FDIC Chairman Sheila Bair, now at the Pew Charitable Trust's Systematic Risk Council, released a "Statement by the Systemic Risk Council (SRC) on Money Market Fund Reform" late last week. It says, "We were deeply disappointed to learn that three SEC Commissioners have refused to publish for public comment a proposed rule to reduce the systemic risk posed by money market funds. Given the size and scope of this risk we believe the Financial Stability Oversight Council (FSOC) -- and its members -- should use their individual and collective authorities to address this risk before another potentially destabilizing run."
The statement continues, "On July 19, 2012 the Systemic Risk Council called for prompt and decisive action to curb systemic risks posed by money market mutual funds. When the Reserve Primary Fund "broke the buck" in 2008, extraordinary actions were required of governments worldwide to back-stop and calm investors in the money market fund (MMF) industry. The risk that emergency government support may again be needed to stem large outflows from money market funds remains a serious challenge for U.S. and other markets. The Council believes such circumstances have been allowed to linger for too long and strongly supports proposals recommended by SEC Chairman Mary Schapiro."
It adds, "At that time, the Council also noted that "In the event the SEC fails to act promptly on these measures, we believe that the FSOC should use its powers under the Dodd-Frank law to move forward with reforms to protect taxpayers against the risk of a need for bailouts in the future." We applaud Chairman Schapiro for her leadership on this important issue, and we regret the unwillingness of a majority of the Commission to seek public comment on this vital reform. Given the current impasse at the SEC, we believe the FSOC should use the full range of authorities given it under Dodd-Frank to effectuate needed reforms. These authorities include using Section 120 to formally recommend that the SEC move forward on Chairman Schapiro's recommendations, and using Title 8 to designate certain money market mutual fund "activities" as "systemically important" -- and requiring that the SEC impose heightened risk management standards as the FSOC determines necessary to address the risk. Clearly the SEC is best positioned to address this issue most efficiently, but, if the Commission continues to be unwilling to take the necessary action, FSOC must step in."
