By Ross Kerber
BOSTON (Reuters) - A group including nine big-city mayors organized by the U.S. Chamber of Commerce came out on Monday against additional rules for money market mutual funds, ahead of a key regulatory vote like later this month.
The U.S. Securities and Exchange Commission is expected to vote on August 29 on a proposal aimed at bolstering the $2.4 trillion money fund industry, which suffered from a run of customer withdrawals at the height of the 2008 financial crisis. If approved, the proposal would be issued for public comment.
But the mayors, following previous objections raised by some corporations and other short-term borrowers, argued in a letter to the SEC that the changes would disrupt the market, driving up borrowing costs and pushing investors away from a popular savings vehicle. The fund industry is also vehemently opposed to the proposal.
"The regulatory changes under discussion at the SEC would significantly undermine the value and utility of (money market funds), discouraging corporate, municipal, and individual investors' use of these types of investment products," a copy of the mayors letter obtained by Reuters said.
Mayors including Stephanie Rawlings-Blake of Baltimore, Michael Nutter of Philadelphia, and Ralph Becker of Salt Lake City signed the letter, according to a list provided by the Chamber. Other signatories include San Diego Mayor Jerry Sanders and Pittsburgh Mayor Luke Ravenstahl. Pittsburgh is home to Federated Investors Inc, one of the largest money fund managers and an outspoken opponent of the rule changes.
SEC Chairman Mary Schapiro and other regulators backing changes worry the funds remain too vulnerable to runs given their key role in the financial system.
Under an SEC staff proposal, money market funds would be required to set aside some capital as a buffer against losses as well as restricting customer withdrawals in times of stress. Or, as an alternative, funds could allow their net asset value share price to float instead of the current practice of fixing the price at $1.
Cities rely on the funds both as vehicles to park their cash and as customers for the short-term debt they issue. In additional to the individual mayors, the letter was signed by 38 local Chambers of Commerce and other local business organizations.
On the five member SEC, Schapiro needs two more votes in addition to her own to have the proposed rules issued for public comment. After taking comments, the commission would next have to write and approve final rules before there would be any impact on the money fund industry. And that is not likely until well past the presidential election that could lead to a leadership change at the agency.
Other SEC commissioners have been skeptical about the need for reforms beyond rule changes made at the start of 2010 to make money funds more liquid and transparent.
With a regulatory decision approaching, all sides are ramping up their rhetoric. On August 15, for instance, William C. Dudley, president of the Federal Reserve Bank of New York, published a Bloomberg View column arguing for new rules "along the lines" proposed by Schapiro.
Fund companies led by Federated and Fidelity Investments of Boston have opposed the changes as unnecessary and likely to drive away investors. Their allies include various state and local government finance groups that worry changes would make the funds less attractive to investors and limit the funds' ability to buy short-term debt.
"Money market funds are the largest investor in short-term municipal bonds; with $288 billion in assets, tax-exempt money funds hold 57 percent of all outstanding short-term municipal debt," according to a March 8 letter opposing new rules, sent to Schapiro signed by the U.S. Conference of Mayors, the National League of Cities, and the National Association of State Treasurers, among other groups.
An SEC spokesman declined to discuss the status of the staff proposal.
(Reporting By Ross Kerber; editing by Aaron Pressman, Bernard Orr)