Thursday's Wall Street Journal featured yet another editorial on money fund reform. This one, entitled, "The SEC's Big Chance," says, "Prominent alumni of the Securities and Exchange Commission are defending the agency's turf in a battle of Beltway bureaucracies. Wouldn't it be nice if someone defended taxpayers? On Wednesday several former SEC chairmen and commissioners wrote to the Financial Stability Oversight Council (FSOC) urging that panel of regulators to stay out of the way and let the SEC address potential reforms to money-market mutual funds. Perhaps the alums should also tell their old colleagues at the SEC to get on with it." The Journal piece immediately drew a response from Investment Company Institute President & CEO Paul Schott Stevens, who writes in "Money Market Funds: There Goes the Wall Street Journal Again, "Over the past three years, the Wall Street Journal has published six editorials on money market funds, and each has advanced more myths and distortions about these funds. By the time we saw the latest ("The SEC's Big Chance," Review & Outlook, Feb. 20), we were shaking our heads in disbelief. As Ronald Reagan once said, "There you go again.""
The Journal wrote, "Taxpayers have been waiting years for the SEC to act to prevent a repeat of the 2008 federal bailout. If SEC commissioners want to keep other regulators from trying to fix problems created by SEC regulations, the obvious solution is to rewrite SEC rules -- now. Though money funds are securities holding assets that rise and fall in value, SEC rules allow money funds to employ an accounting fiction to create the perception that their values are fixed. To further persuade investors that these securities are super-safe, the SEC anoints private credit-ratings agencies, including Standard & Poor's, Moody's and Fitch, to determine which assets are least risky and allegedly suitable to be owned by money funds."
The editorial explains, "Neither failing can really be excused, but it's hardest to understand why the SEC still hasn't proposed a plan to bring accurate pricing to these funds. Since former SEC Chairman Mary Schapiro tried and failed last year to issue such a proposal, Commissioner Troy Paredes has remained opposed to reform. But previous holdouts Daniel Gallagher and Luis Aguilar have said they're willing to support accurate prices. So the votes appear, at last, to be there. The letter-writing alumni led by former GOP commissioner Paul Atkins argue that the SEC, traditional overseer of securities, has the most expertise and will do a better job than bank regulators on the stability council. This is a valid point -- if the SEC really intends to act."
The Journal tells us, "Charles Schwab CEO Walt Bettinger recently proposed in these pages to bring floating share prices to institutional prime money funds, which were the source of the 2008 panic in this market. We'd prefer reforms industry-wide, but the Bettinger plan, coming from a major provider of money funds, shows a sincere effort to solve the problems. Does the SEC have any more excuses for inaction? The Washington Post reports that current SEC Chairman Elisse Walter wants to do more than simply keep the seat warm until Obama nominee Mary Jo White shows up. Perfect. If Ms. Walter can bring transparent pricing to money funds and repeal the SEC's endorsement of private credit judges, she could go down as the greatest chairman in SEC history."
Stevens responds, "These inaccuracies, however, are no laughing matter for the millions of investors who rely on money market funds -- or for the businesses, nonprofits, and municipal governments that depend on these funds for financing. The misleading assertions start with the notion that "taxpayers have been waiting years" for the Securities and Exchange Commission to reform money funds. We refer readers to the SEC's Jan. 27, 2010 press release, "SEC Approves Money Market Fund Reforms to Better Protect Investors," outlining a sweeping set of reforms that have already proven to make these funds more resilient."
The ICI leader tells us, "The editorial's core argument -- that money funds use an "accounting fiction" to maintain a stable value -- is also false. Under GAAP, amortized cost accounting commonly is used by financial and nonfinancial firms to value short-term, high quality assets -- like those that money market funds must hold. Its use has been well-supported by regulators and standard-setters for more than 30 years. Detailed disclosures demonstrate that money market funds' mark-to-market values seldom vary from $1.00 by more than one-hundredth of a cent, further supporting the use of amortized cost."
Finally, Stevens comments, "We do agree that the SEC is the appropriate agency to consider any further reforms. The SEC moved swiftly to make reforms in 2010. Last summer, a bipartisan majority resisted the chairman's rush toward further structural changes because commissioners wanted data to analyze the effects of those reforms. The commissioners now have that study, and have said they are moving steadily ahead to offer new proposals. The fund industry will address those ideas when they're issued. Until then, we believe that a deliberate, thoughtful approach to regulation is to be applauded -- not scorned."
