What keeps SEC chairwoman up at night? Money market funds

America’s top financial market regulator says the health of money market funds tops her list of worries.

Securities and Exchange Commission Chairman Mary Schapiro said Wednesday that “everything keeps me up at night,” but that her first concern is the structural weakness of money market funds, a popular place for individuals to park their savings in search of higher interest rates than most banks offer.

“I do feel a sense of urgency about the structural weaknesses that exist in money market funds,” she said at a Monitor-hosted breakfast for reporters, noting that the SEC took steps in 2010 “to improve credit quality and liquidity" of the funds. Those measures “clearly helped these funds weather a lot of the volatility of the European crisis this [past] summer,” Ms. Schapiro said.

Her second key concern, she said, is the need to further bolster the underlying structure of financial markets in the wake of the so-called “flash crash.”  That was the May 6, 2010, event when the Dow Jones Industrial Average plunged roughly 10 percent, only to recover rapidly after some blue-chip stocks briefly traded for pennies.

“The flash crash was a huge wake-up call for regulators about the frailty of our market structure,” Shapiro said. “I think we have done some very important things in that regard to bolster and shore it up. There is more to do.”

Shapiro was first named an SEC commissioner by President Ronald Reagan and was nominated by President Obama to be the panel’s chairman after heading the Financial Industry Regulatory Authority (FINRA). She told reporters that money market funds still have “a structural weakness that makes them prone to runs, and I feel like we need further debate and discussion around some concrete ideas there.”

The SEC has proposed two changes in how money market funds operate, neither of which is popular with the mutual fund industry. The first proposal would have money market funds abandon their traditional $1-per-share price and instead float in value. The second would require money market funds to build a reserve cushion to absorb potential losses.

Bloomberg News quoted Paul Schott Stevens, president of the Investment Company Institute, as saying earlier this month that the proposals “are neither constructive nor likely to make financial markets more resilient.” Mr. Stevens said he is concerned that “within the councils of government there are people whose agenda it is to kill money market funds.”

In addition to concerns about the money market industry, “I do worry about market structure questions” that were highlighted by the flash crash, Schapiro said. Investors need “a sense of fundamental fairness in the market” and companies need “a sense that they can go and have their stock traded in a place where it won’t go from $40 one minute to two cents the next minute that happened on May 6," she said. “That is the kind of risk investors should not have to bear.”

Avoiding such risks “is why I am so desirous of our being able to spend more time in the near future on market structure issues,” the SEC chairwoman said.