WASHINGTON -- The chairman of the Securities and Exchange Commission last week told Congress that new rules are being contemplated to help head off problems similar to those resulting from the seizure of Mutual Benefit Life Insurance Co.
In a letter to House Energy and Commerce Committee Chairman Rep. John Dingell, D-Mich., SEC Chairman Richard Breeden said the agency had adopted rules in February that were aimed at improving the credit quality of securities purchased for taxable money market funds and that the SEC is studying extending the rules to tax-exempt funds.
Agency sources said the SEC could propose the new rules as early as December.
Mr. Breeden was responding to a letter Rep. Dingell sent to the agency in July that asked what legislative or regulatory changes should be considered as a result of the Mutual Benefit "debacle." Rep. Dingell also asked what steps were being taken to ensure that the bonds do not go into default and that a trading gridlock in the bonds does not impair significantly the municipal bond market.
The seizure of Mutual Benefit profoundly affected tax-exempt money market funds holding variable-rate issues guaranteed by the firm. The securities, containing weekly puts, were suddenly rendered long-term issues by the inability of remarketing agent Lehman Brothers to "make a market," or find investors interested in the jeopardized paper.
The matter is of concern to regulators, including Mr. Breeden, because by definition the money market funds are no longer holding short-term securities. In offering documents, money funds generally restrict themselves to securities maturing in less than a year. The Mutual Benefit variable-rate notes now have no defined maturity.
Approximately $244 million of Mutual Benefit's $600 million outstanding bond guarantees are for variable-rate demand notes, some of which were held by several tax-exempt money market funds, Mr. Breeden said.
Mr. Breeden said the seizure of Mutual Benefit reinforces the principle that the existence of a credit enhancement does not obviate the need for complete and current disclosure. But he warned that improved disclosure practices would not prevent defaults on bonds insured by Mutual Benefit or other companies and that enhanced disclosure would not by itself result in a liquid market for such bonds.
The SEC's chairman noted that because insurance company regulation has historically been left up to the states, rules and the degree to which they are enforced vary widely. He said any new standards are best addressed by Congress.
