For the better part of two years, Mary Schapiro told anyone who would listen that the federal government could not afford another bailout and that the money market mutual fund industry would have to backstop itself.

Even though the chairman of the Securities and Exchange Commission had already overseen a covey of changes in 2010 that were designed to improve the resiliency of such funds in times of stress, she never strayed from pursuit of much more fundamental reform. The most controversial and most opposed: Letting the stated value of a share in such funds float, every day. Let the stated value unequivocally equate to the net value of the underlying assets.

That, of course, would break the bedrock promise of money funds: A dollar in would always be worth a dollar out. A requisite if you wanted to compete with bank accounts for investors' savings.So in August, when she found she did not have the votes to force change of that magnitude, she folded her hand and walked away from the battle.

The fund industry applauded.

"We have strongly opposed the structural changes to money market funds under consideration at the SEC, because of the adverse consequences of these proposals for investors, issuers and the economy,'' said Paul Schott Stevens, chief executive of the Investment Company Institute, the primary defender of mutual funds of all types. "The exhaustive record before the Commission clearly does not support these changes. We are pleased with the recent announcement that the Commission will not be pursuing them further."

Now, she is walking away from the SEC altogether. A week ago today, she announced she would leave her post, altogether. The fund industry applauded, again.

"While we disagreed with Chairman Schapiro on some issues, we have immense respect for her commitment to public service and the interests of investors,'' Stevens said, this time around. "We wish Chairman Schapiro well in the future."

But that does not mean that reform of the money fund industry is now dead in its tracks. Instead, the timing of potential reform is insulated from Schapiro's departure.

That's because the money fund overhaul has now been taken over by the Financial Stability Oversight Council, headed by Treasury Secretary Timothy Geithner. And it says it isn't letting go, until it returns formal recommendations for reform of money funds to the SEC, which would be charged with making the rules needed to enact those recommendations and making those rules stick. The only thing that could change that outcome? The SEC taking up the cudgel, itself, first.

Here's the FSOC's timetable.

  1. A 60-day public comment period began November 19, 2012, when the council's own proposed recommendations were published in the Federal Register.
  2. Institutional investors, individual investors, fund industry executives and other parties have until January 28, 2013 to submit their own comments, analyses and recommendations.
  3. A formal set of recommendations for money fund reform will be issued by the end of April 2013 in all likelihood.

And where will that ball end up? At the SEC. The Dodd-Frank Wall Street Reform Act of 2010 requires the fund industry regulator "to implement the recommended standards, or similar standards that the council deems acceptable, or explain in writing within 90 days why it has determined not to follow the recommendation,'' according to Amias Gerety, deputy assistant secretary of the FSOC.
What could change that timetable? The SEC moving ahead, on its own, sooner. "If the SEC moves forward with meaningful structural reforms of money market funds before the council completes its process, it is expected that the council would not issue a final recommendation to the SEC,'' he wrote in a summary of what happens next that he posted to the FSOC's web site the day after Schapiro said she was stepping down.

Pointedly, the alternatives being considered sound eerily similar to those that Schapiro dropped in August.

They are:

  1. Floating the net asset value of shares in money funds. The FSOC would require share prices to reflect the actual market value of holdings in an investment portfolio, day by day.
  2. Stable value, with a capital buffer and minimum balance at risk. This would require money funds to keep a buffer of up to 1% of assets to absorb day-to-day fluctuations in value. Also, a "minimum balance at risk'' would require that a small amount of a shareholder's investment be made available for redemption on a delayed basis and subject to first losses if a fund suffers losses that exceed its buffer.
  3. Stable value, with a capital buffer and other support. This would require funds to build a buffer of 3% of assets. That would be combined with other measures to increase the ability of funds to withstand runs.

These are not the only alternatives that may come into play, Gerety and the FSOC say. And they're not alone.
The incoming chairman of the SEC, Elisse Walter, also sees other options as potentially viable. She said so, in fact, at the 2012 Mutual Funds and Investment Management Conference of the ICI in Phoenix, in March. There, the ICI's general counsel, Karrie Macmillan, called the SEC's proposals for money fund reform "outrageous" and encouraged audience applause when she made the charge and repeated it.

Next up on stage was Walter. She chastised the members of the ICI for "unconstructive disengagement" on the issues involved. And she made it clear that floating the net asset value of shares in a fund, capital buffers and limits on redemptions were not the only possible courses of action.

"There are further options still,'' she said. "A simple list includes mandatory redemptions in kind; insurance; private emergency liquidity facilities; funds as special purpose banks; enhanced restraints on unregulated substitutes; revisiting and enhancing the parameters adjusted in our 2010 rules; and, added investor transparency.''

More important, of course, is what she says are the options, after she takes office as chairman of the SEC.

That time arrives Dec. 15.

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