How acrimonious was the debate over money fund reform at the SEC? Well, it was sharp enough for the commishes to break ranks and engage in a public war of words.

The two Republican members of the Securities and Exchange Commission took to the Webs on Tuesday to explain their reasons for blocking regulatory changes to the $2.6 trillion money-market-fund industry. Their arguments: SEC Chairman Mary Schapiro's proposed reforms wouldn't have staved off investor runs in a crisis, reports the Wall Street Journal.

Daniel Gallagher and Troy Paredes, highlighted the friction among members of the SEC, saying they are "dismayed" by a statement issued by Schapiro last week that indicated that they are "not concerned with, or are somehow dismissive of, the goal of strengthening money funds."

"This is wholly inaccurate," they wrote in a six-page statement released Tuesday.

The WSJ stated that money-funds are seen by Schapiro and many top federal regulators as among the weakest links in the financial system, after one fund, Reserve Primary, in 2008 "broke the buck" by falling below the $1 a share value that the funds seek to maintain. Investors fled, and the U.S. Treasury Department and Federal Reserve intervened to backstop the industry.

Schapiro last week canceled a planned vote on tightening rules for the industry after three of the agency's five commissioners said they wouldn't support her plan. The rules come on top of 2010 reforms designed to make the funds more resilient to shareholder redemptions.

The issue likely moves now to the Financial Stability Oversight Council, set up by the Dodd-Frank bank overhaul to spot risks to the financial system.

According to the WSJ, Schapiro's proposal would have required money funds either to float their share prices like other mutual funds or to post capital against losses on their asset holdings. The capital buffer idea also included a 30-day holdback of a small portion of shareholder cash when they redeem all their money at once, to provide investors a disincentive to flee at the first sign of trouble.

But Luis Aguilar, a Democrat and key swing vote on the commission, said Schapiro's plan could have too many unintended consequences and drive investors into other unregulated corners of the short-term market.

In their statement Tuesday, Gallagher and Paredes said "neither of the Chairman's restructuring alternatives would in fact achieve the goal of stemming a run on money-market funds, particularly during a period of widespread financial crisis such as the nation experienced in 2008." 

Edited by: Tommy Fernandez


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