From Money Fund Report®: The announcement this week that Mary Jo White will leave her post as Chair of the Securities and Exchange Commission in January wasn’t unexpected, considering the outcome of the presidential election on Nov. 8, sources told Money Fund Report®. Other similar announcements are anticipated in the weeks ahead. The new Trump administration may find, however, that keeping its promises to revise or rescind Obama-era financial regulation may be challenging, and one prominent observer contends that money-market-fund regulation, in particular, is here to stay.
"Money-market-fund regulation is an unusual, and probably atypical example of recent regulation that may be difficult to unwind," explained Robert Plaze, formerly deputy director of the SEC’s Division of Investment Management and currently a partner at law firm Stroock & Stroock & Lavan LLP. "First, working through the process of money-fund reform was a huge and multiyear undertaking, and almost certainly a painful one." Unlike many other recent regulatory initiatives, he noted, this one didn’t break along typical Republican-Democrat lines. "The two Republican commissioners and the two Democratic commissioners saw the issue differently and voted differently, leaving Chair White to cast the deciding vote." Considering the absence of an ideological split among commissioners, there may be less incentive to reconsider this particular regulation, Plaze said. "Doing so could open a wound that should be allowed to heal."
Two other considerations may argue against any effort to revisit money-fund reform by White’s replacement, the two sitting commissioners who opposed the final rule in 2014, and two commissioners to be confirmed to succeed departed members who voted with White to finalize the latest series of rule changes. "The first is that, in contrast to some other regulatory initiatives that are unfinished, money-market-fund reform is complete and took full effect in October," Plaze observed. "The Eagle has landed, so to speak, and considering the time and resources invested on all sides in complying with the new regulation and the likelihood that a newly-constituted SEC will have a new set of priorities, why would regulators or the fund industry want to go through again what they’ve been through over the past several years?"
The second consideration, Plaze noted, is that the industry isn’t likely to lobby for a change in a provision of money-fund regulation that it had suggested and supported. "It’s likely that in establishing its priorities, a newly-constituted SEC will want to take some signals from the fund industry about initiatives that the Commission under Chair White pursued that were problematical and that it would want to work with the industry in establishing those priorities," Plaze said. Money-market-fund reform was certainly problematical, he acknowledged, but as it turned out, it was less so because of the imposition of a floating NAV on prime funds – something regulators pressed hard for – than because of fees and gates, provisions Plaze observed were suggested and promoted by the industry. "The huge migration of assets from more profitable prime funds to less profitable government funds," which he said has transformed the industry, at least in the short term, "was largely the result of concerns about fees and gates, and therefore it would put the industry in a difficult position to advocate for amending or rescinding a key provision in money-fund regulation that it had supported," Plaze maintained.
About suggestions that, short of substantial reform, an industry-friendly SEC could moderate some provisions of money-fund reform, such as allowing some prime institutional funds to return to constant-net-asset valuation and operate without gates and fees, Plaze was circumspect. "It might be possible, but that suggestion and others like it exist now in a world of ideas where virtually everyone will suggest things that should be done – or undone." What we’re facing in the months ahead, he stressed, "is a world of pragmatic ‘regulatory reset’ in which a new SEC chair and new SEC commissioners will establish a list of priorities and get things in place to achieve them." Money-market reform, he noted, isn’t likely to be high on that list.
"With the election only a week or so behind us, there are more questions than answers about the future course of financial reform," Plaze concluded. "However, it’s good to ask the questions as we speculate about where we go from here. The important consideration is that it would be hard to unscramble the eggs of money-fund reform so soon after it took effect, and regulators may have other pressing issues on their plate."