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Following report, SEC board member is more willing to revamp money market fund

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The government moved closer to revamping the $2.6 trillion money market fund industry when a key regulator said Friday that he feels “more comfortable” with changing the way the industry operates.

Luis A. Aguilar, a Democratic commissioner on the Securities and Exchange Commission, had refused to support a proposal put forward by SEC Chairman Mary L. Schapiro. At the time, Aguilar said more study was needed before proceeding with reforms. Without support from Aguilar and the commission’s two Republican members, Schapiro could not muster the votes needed and dropped the initiative in August.

But late last week, the SEC staff produced the analysis that Aguilar and the Republicans — Troy A. Paredes and Daniel M. Gallagher — had been demanding. Aguilar said he can now make a more informed decision when the SEC puts forth another proposal.

“The study was a needed tonic that provided a great deal of useful information,” Aguilar said in an interview Friday. “When the proposal arrives, I will be much more at ease about going forward even if it includes some of the proposals that were there this summer.”

The once-reliably safe money market fund sector nearly imploded in 2008 with the near collapse of the Reserve Primary Fund. That money market fund “broke the buck” when its value dropped below $1 a share. A run on money market funds ensued, severely disrupting the financial system and exacerbating the financial crisis. The government intervened by temporarily guaranteeing that investors would be repaid.

In 2010, the SEC adopted reforms to address some of the industry’s vulnerabilities.

But Schapiro said she would be pressing more dramatic changes and proposed them to the five-member commission in August. Aguilar said the proposal was put forward without explaining key issues, such as whether the 2010 reforms were enough.

“The study seems to indicate that the 2010 amendments were not enough,” Aguilar said. “It’s the first objective economic study that draws that conclusion.”

At least one of the Republican commissioners also has softened his opposition. Gallagher has said he could support letting the share of money market funds fluctuate, an idea promoted by Schapiro but vigorously opposed by the industry.

In a statement, SEC spokesman John Nester said the chairman’s support for the floating shares never wavered and that she’s “pleased she was able to keep this issue alive and that there is continued forward progress.”

After her initial proposal stalled in August, Schapiro pressed an umbrella group of the nation’s top financial regulators to intervene. The group, called the Financial Stability Oversight Council, responded by putting forth three options for the SEC to consider, two of which were part of Schapiro’s initial plan.

If the SEC does not adopt the council’s recommendations, the council warned that it could subject the industry to even tougher oversight by deeming individual funds systemically significant and having the Federal Reserve regulate them.

The council proposed having the funds set aside reserves as a buffer for times of crisis, restricting how quickly investors can redeem their money or allowing the value of a fund’s shares to fluctuate. The council said its recommendations are not mutually exclusive and could be implemented in some combination.

Treasury Secretary Timothy F. Geithner, who heads the group, has said he would prefer that the SEC propose its own set of options for moving forward.

With Schapiro stepping down as chairman next week, the SEC will be evenly split between Democrats and Republicans, with two commissioners from each party.

The government moved closer to revamping the $2.6 trillion money market fund industry when a key regulator said Friday that he feels “more comfortable” with changing the way the industry operates.

Luis A. Aguilar, a Democratic commissioner on the Securities and Exchange Commission, had refused to support a proposal put forward by SEC Chairman Mary L. Schapiro. At the time, Aguilar said more study was needed before proceeding with reforms. Without support from Aguilar and the commission’s two Republican members, Schapiro could not muster the votes needed and dropped the initiative in August.

But late last week, the SEC staff produced the analysis that Aguilar and the Republicans — Troy A. Paredes and Daniel M. Gallagher — had been demanding. Aguilar said he can now make a more informed decision when the SEC puts forth another proposal.

“The study was a needed tonic that provided a great deal of useful information,” Aguilar said in an interview Friday. “When the proposal arrives, I will be much more at ease about going forward even if it includes some of the proposals that were there this summer.”

The once-reliably safe money market fund sector nearly imploded in 2008 with the near collapse of the Reserve Primary Fund. That money market fund “broke the buck” when its value dropped below $1 a share. A run on money market funds ensued, severely disrupting the financial system and exacerbating the financial crisis. The government intervened by temporarily guaranteeing that investors would be repaid.

In 2010, the SEC adopted reforms to address some of the industry’s vulnerabilities. But Schapiro said she would be pressing more dramatic changes and proposed them to the five-member commission in August. Aguilar said the proposal was put forward without explaining key issues, such as whether the 2010 reforms were enough.

“The study seems to indicate that the 2010 amendments were not enough,” Aguilar said. “It’s the first scientific, economic study that draws that conclusion.”

At least one of the Republican commissioners also has softened his opposition. Gallagher has said he will probably support letting the share of money market funds fluctuate, an idea promoted by Schapiro but vigorously opposed by the industry.

If the SEC does not adopt stricter regulations, an umbrella group of the government’s top financial regulators said it would consider having the Federal Reserve oversee money market funds.

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