SEC Testimony Banking Committee.pdf - Testimony on...

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1Testimony on “Perspectives on Money Market Mutual Fund Reforms” by Chairman Mary L. Schapiro U.S. Securities and Exchange Commission Before the Committee on Banking, Housing, and Urban Affairs of the United States Senate June 21, 2012 Chairman Johnson, Ranking Member Shelby, and members of the Committee: Thank you for the opportunity to testify about the Securities and Exchange Commission’s regulation of money market funds.1The risks posed by money market funds to the financial system are part of the important unfinished business from the financial crisis of 2008. One of the seminal events of that crisis occurred in September, after Lehman Brothers filed for bankruptcy and the Reserve Primary Fund “broke the buck,” triggering a run on money market funds and freezing the short-term credit markets. Although the Commission took steps in 2010 to make money market funds more resilient, they still remain susceptible today to investor runs with potential systemic impacts on the financial system, as occurred during the financial crisis just four years ago. Unless money market fund regulation is reformed, taxpayers and markets will continue to be at risk that a money market fund can “break the buck” and transform a moderate financial shock into a destabilizing run. In such a scenario, policymakers would again be left with two unacceptable choices: a bailout or a crisis. 1The views expressed in this testimony are those of the Chairman of the Securities and Exchange Commission and do not necessarily represent the views of the full Commission.
2My testimony today will discuss the history of money market funds, the remaining systemic risk they pose to the financial system even after the 2010 reforms, and the need for further reforms to protect investors, taxpayers and the broader financial system. BackgroundMoney market funds are important and popular investment products for millions of investors. They facilitate efficient cash management for both retail and institutional investors, who use them for everything from making mortgage payments and paying college tuition bills to the short-term investment of cash received through business operations until needed to fund payrolls or pay tax withholding. Money market funds bring together investors seeking low-risk, highly-liquid investments and borrowers seeking short-term funding. With nearly $2.5 trillion in assets under management, money market funds are important and, in some cases, substantial providers of credit to businesses, financial institutions, and some municipalities who use this financing for working capital needs and to otherwise fund their day-to-day businesses activities. Money market funds are mutual funds. Like other mutual funds, they are regulated under the Investment Company Act of 1940. In addition, money market funds must comply with Investment Company Act rule 2a-7, which exempts money market funds from several provisions of the Investment Company Act – most notably the valuation requirements – to permit them to

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