[ by Howard Haykin ]

Just a month after being excoriated by her critics for canceling a vote on new tighter rules for the money market industry, it looks as though SEC Chairman Mary Schapiro can borrow a quote from Mark Twain, and confidently say: "The reports of Money Market Reform's death are greatly exaggerated."

Beginning on the day following the aborted vote, Treasury Secretary Timothy Geithner has been in the forefront defending the reform movement and expressing optimism that new rules can be passed one way or another. 

Now, sparked by the Secretary's words and his actions, the prospects of renewed dealmaking among regulators, funds and banks in the near or foreseeable future are very real.  Yet, the money-market mutual-fund industry, which opposed the rules in earlier stages of debate, could still succeed in derailing new rules or new legislation, some analysts say. 

But they cannot deny the fact that federal regulators “are still in the game" and "found a way to keep this one alive" - that, according to Stephen Myrow, managing director at ACG Analytics Inc., an investment research firm in Washington.

That said, there's no way to predict the final outcome - and anything can happen.

Dodd-Frank Powers. Mr. Geithner’s move - his first under new powers created by Dodd-Frank - puts the ball back in the SEC’s court.  If the SEC doesn’t pass new regulations, Geithner said in his letter yesterday, the council he chairs - the Financial Stability Oversight Board ("FSOC") - should use its Dodd-Frank authority to designate activities of money market funds a systemic threat, effectively ordering the agency to take action.

FSOC also has the authority to designate individual firms or to label their payment, clearing and settlement activities as systemically important, which would put them under heightened government supervision.

As such, Geithner recommended three steps for the SEC to consider for reducing the risk that funds might pose to the financial system: (i) floating net asset values; (ii) requiring funds to hold capital buffers of "adequate size"; and, (iii) imposing capital and enhanced liquidity standards.   While the changes are similar to those proposed by Ms. Schapiro, the Commission is already laying the ground for compromise and passage of a new plan.

In response to a recent request from the 3 SEC commissioners who were ready to vote against the rule proposal, the SEC staff has begun studying whether the rules could disrupt money market funds and short-term credit markets, according to 2 people familiar with the matter.  The study could be completed within 6 weeks. 

Talk of Compromise. The SEC, along with the Fed and Treasury Department, has pressed to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run and helped freeze credit markets.  The crisis calmed only after the Treasury guaranteed shareholders against losses and the Fed began buying fund assets at face value to help meet redemptions.

Ms. Schapiro has strongly argued that the funds’ $1 share price encourages investors to flee at the first sign of trouble because those who act quickly can sell shares at $1 each even if the net asset value has dropped below that level. Her proposal offered 2 options: a capital buffer combined with some limits on redemptions, or a floating share price.

While the funds industry has been united in its general opposition to Schapiro’s plan, individual companies have staked out different positions on the options and made varying overtures to the SEC on what new rules might be acceptable.

New York-based BlackRock Inc. (BLK) published a paper in March saying the funds industry could live with a floating share price provided that market pricing was applied only to some securities.  The Internal Revenue Service agreed not to treat price fluctuations as taxable events.

A floating NAV (net asset value) is not accepted by all.  Christopher Donahue, CEO of Pittsburgh-based Federated Investors Inc. has long said the floating NAV would destroy money funds.

SEC's Strong and Persistent Opponent.  Talks between the SEC and the industry’s trade group, the Investment Company Institute ("ICI"), broke down in December 2011.  And things don't seem to have warmed up with the passage of time. ICI President Paul Schott Stevens has said funds would continue to oppose any regulation. 

"The money-market fund proposals Secretary Geithner presents to the FSOC already have been the subject of extensive analysis and commentary," Mr. Schott said in a statement.  "These proposals have elicited strong opposition for their adverse impacts on investors, issuers and the economy."

For further details, go to:  [Bloomberg, 9/28/12].