SEC Chairwoman Mary Schapiro’s abandonment of her quest to impose tougher rules on money market mutual funds is a “national disgrace,” said former SEC Chairman Arthur Levitt.
“There’s clearly a need to do something about money market funds,” Mr. Levitt said Thursday in an interview. “Everything else is marked to the market. This should be marked to the market in the interest of investors. The fact that Mary Schapiro couldn’t get her three members of the commission to support this is really a national disgrace.”
Three of the four other commissioners didn’t support a four-year effort to make money funds more stable, Ms. Schapiro said in a statement that urged other policymakers to take action. That could move the fight over how to regulate the industry’s $2.6 trillion in funds to the Financial Stability Oversight Council, a panel of regulators created by the Dodd-Frank Act.
“This is a national issue,” Mr. Levitt said. Protecting investors “is a matter that the president should weigh in on. The Federal Reserve Board took that position. The Treasury Department is supportive of money market regulation.”
Ms. Schapiro has worked to make money funds safer since the collapse of the $62.5 billion Reserve Primary Fund in September 2008. She has argued the funds’ stable share price encourages investors to flee at the first sign of trouble because it allows those who react quickly to sell their shares at $1 each even if the net asset value has dropped below that level. Her proposal would have given fund managers a choice of switching to a floating share price that reflected the market value of holdings, or establishing a capital buffer to protect against credit losses and redemption restrictions to discourage investor flight.
“We’ve had a number of instances where funds have broken the buck, and the funds have made up for it because they know that the whole faith and confidence in the fund market would be damaged,” Mr. Levitt said. “Today, the margin of error is narrower than it’s ever been.”
Ms. Schapiro’s plan was supported by one other commissioner, Democrat Elisse B. Walter. Republicans Troy Paredes and Daniel M. Gallagher opposed it, while Democrat Luis A. Aguilar had signaled he didn’t support the plan without saying whether he would at least approve that it be put out for public comment.
Mr. Levitt said companies including Goldman Sachs Group (GS) and Morgan Stanley (MS) would probably oppose the regulation because they have their own money market funds. “The sponsors of money market funds simply don’t want this regulation,” Mr. Levitt said.