Chairman Schapiro Promises Money Market Fund Proposal
In a recent speech, SEC Chairman Mary Schapiro promised a money market reform proposal, most likely to include some type of capital buffer structure. Ms. Schapiro argued that a capital buffer would discourage a run on money market funds in the event of market volatility. She indicated that the SEC was considering three funding options: sponsors, shareholders, and the capital markets. Ms. Schapiro also indicated that a floating NAV may not be the best solution for money market fund protection. Ms. Schapiro asserted that the 2008 crisis highlighted structural weaknesses in money market funds and that the redemption run exacerbated the crisis.
OUR TAKE: We disagree with Ms. Schapiroâ€™s basic proposition that the money market fund industry needs more regulation. In the middle of the worst crisis since the Great Depression, only one fund broke the buck, and the SEC prosecuted the fund sponsor for fraud. The private market stepped up and supported all the funds. We believe that a â€œcapital bufferâ€ will create a moral hazard (reducing the disincentive against making risky investments) and make funds more costly to run.