WASHINGTON — Senators from both parties expressed skepticism Thursday about whether new regulations on money market funds, championed by Securities and Exchange Commission Chairman Mary Schapiro, are necessary to protect taxpayers in a future crisis.
Schapiro received an uneasy greeting from members of the Senate Banking Committee — demonstrating that not only does her reform effort face an uphill battle with the SEC's five commissioners, it is also likely to face strong bipartisan opposition on Capitol Hill.
The toughest questioning of the SEC chief came from Sen. Pat Toomey, R-Pa., who argued that the money market fund industry has shown great resilience over the course of several decades.
"You're portraying an industry that's extremely vulnerable, that has all these risks of runs," Toomey said. "And I really find that extraordinary in light of the actual history."
Schapiro argued that although reforms enacted by the SEC in 2010 have been helpful, they do not go far enough to protect against the possibility of runs on the funds. In the 2008 financial crisis, one money market fund's value fell below $1 per share, and the federal government took a series of extraordinary steps to shore up the industry.
"Current and former regulators of both political parties have raised flags about the risks posed by money market funds and the need for reform," Schapiro testified. "It is essential we address this risk now rather than waiting until the middle of the next crisis."
Schapiro, who acknowledged that her views are not shared by all of the SEC's commissioners, presented two options for reform.
Under one option, the share prices of funds would float depending on the value of their underlying assets. Under the other option, the funds would maintain a stable value, but they would need to maintain capital buffers, and fund investors might also face restrictions or fees on redemptions.
But senators threw cold water on both ideas, expressing concern about their impact on the cash-management practices of both corporations and municipalities.
Sen. Michael Bennet, D-Colo., said that he saw first-hand the impact that a disruption of the money market fund market can have on local governments, since he was superintendent of the Denver schools in 2008.
"But I think we need to be really cautious about this because I think the costs are potentially very real and very large for municipalities, for school districts, for local government," Bennet added.
Members of the Banking Committee went after even the details of Schapiro's argument, trying to find problems with her contention that money market fund sponsors have provided voluntary support to their funds more than 300 times since the 1970s.
Under questioning from Toomey, Schapiro said that just three of those instances of voluntary support came after the 2010 reforms were put in place.
Schapiro contended that while the two-year-old reforms have worked well in ensuring sufficient liquidity at times when lots of investors are redeeming their funds, there are still incentives for investors to spark a run at times of stress in the financial markets.
In particular, she noted that because investors who redeem their shares early can get all of their funds back, investors have an incentive to get out of the funds at the first sign of trouble. And it's likely the large institutional investors who will be first to act, she said.
"The slower moving retail investors and small businesses will bear the full loss," she argued.
In remarks to reporters after her testimony, Schapiro said that she will be speaking with the SEC's five commissioners over the next month in an effort to build support for her reform proposal, which would need three votes to move forward.
Schapiro's proposal is opposed by Republican commissioners Troy Paredes and Daniel Gallagher, and Democratic commissioner Luis Aguilar is seen as a swing vote. Recent reports have suggested that Schapiro may be open to a compromise in order to secure a third vote.
