After Mary Shapiro, the Securities and Exchange Commission head lost a swing vote that would allow the rules for the mutual fund and money market industry to push through, the highly-awaited vote was called off. Luis Aguilar reportedly revealed his position on the rules, which denotes a setback for the federal regulators and the administration of Obama and defeat of Shapiro. They consider the money funds as a potential risk that is a consequence of the last financial crisis.
Representatives of companies from the mutual fund industry reportedly met with SEC commissioners and politicians in an attempt to obtain their support against additional rules for the industry.
Mutual Funds
The proposed rules would require a small part of the cash of investors held for around thirty days once investors would redeem their shares, which minimize the incentive of leaving once trouble starts. According to Aguilar, the plan will have a number of inadvertent effects and compel investors to opt for unregulated areas in the market.
He was not comfortable with the proposed rules particularly with the possibility that billions of dollars will go into an unregulated market. Instead of adding more rules, he indicated that a systematic evaluation should be done by the regulators on the cash-management industry. However Schapiro was more anxious of the fragility of the financial system.
Schapiro indicated that since most of the commissioners were against the new rules, the planned August 29 vote would not be necessary. Officials revealed that a new set of regulators can work on identifying individual fund companies that may be subject to increased examination by the Fed. A limit can also be placed on the exposure of banks to money-market funds used in purchasing short-term debt.
Rules were imposed by the SEC in 2010 which restricted the type of investments that can be held by money funds while increasing the cash that should be available to meet redemptions by shareholders. The latest proposal of Schapiro was met by objections in the industry since the earlier changes have sufficiently protected the industry from future problems.
The Fed and other regulatory agencies want additional rules in order to prevent the 2008 financial crisis from being repeated. The crisis saw the share value of the Reserve Primary fund fall under its $1 target. The 2008 financial crisis saw the Reserve fund investing on the short term debt of the Lehman Brothers Holdings. The debt became worthless following the filing for bankruptcy by Lehman, which resulted to losses for the Reserve Primary and started a run among other money funds.
