Last week, the Securities & Exchange Commission held an "open meeting" to discuss pending new proposals to "strengthen the regulatory requirements governing money market funds." As we said last Wednesday, the SEC has proposed making money funds less risky by improving liquidity, shortening maturity, and by increasing credit quality. We previously reprinted the SEC's release to press, "Making Money Market Funds Less Risky. Today, we excerpt some further comments from last week's Webinar and from the posted remarks of the various SEC Commissioner's. (The proposals were passed but have yet to be posted in their entirety.)
SEC Chairman Mary Shapiro said, "[T]he Commission is considering proposals that would strengthen money market fund regulation to help avoid the types of events experienced last fall. Most significantly, the proposals we are considering would enhance the risk-limiting requirements of rule 2a-7, the rule that principally governs the operations of money market funds.... The proposals would establish new liquidity requirements for money market funds, so that the funds are required to hold specified percentages of their assets in cash or highly liquid securities.... The proposals also would enhance the quality of money market fund investments by strengthening the credit quality and portfolio maturity requirements of rule 2a-7. In addition, the proposals would ... require money market funds to disclose their portfolio holdings on a monthly basis."
The SEC's Andrew Donohue said, "I am very pleased this morning to present to you the recommendations of the Division of Investment Management. These rule changes are designed to strengthen the regulatory framework for money market funds. Many of these changes are intended to address the issues that came to light during the market turbulence of the past two years. All of the changes are designed to help protect money market funds from future instability, to improve their operations, and to increase the amount of information available to the Commission and to investors about potential risks in money market funds."
He added, "Of course, no fix that the Commission adopts will guarantee that a money market fund will never break a buck in the future. Investment entails risk, and accidents will happen. No design standard for a ship will prevent it from striking an iceberg.... A ship encased in armor might survive a collision, but it also might sink under its own weight. In crafting our recommendations, we have tried to keep in mind that seaworthy means safe as well as useful, competitive, and easy to maneuver."
Commissioner Kathleen Casey said in her introduction, "I am quite pleased with the overall approach of the release. Once again, the Division staff has done a wonderful job. In particular, I should highlight their recommendations with respect to the rule's liquidity and maturity requirements, as well as those relating to the processing of transactions, exemption for certain affiliate purchases, and liquidation mechanisms. I also would like to credit the staff for suggesting robust questions about the use of tier two securities, an issue that deserves close scrutiny as we move forward. One area of rule 2a-7 that gives me grave concern, however, is the continued reliance on NRSRO ratings."
Elisse Walter, like all of the Commissioners, expressed strong support for money market funds, the SEC's oversight, and the proposed regulatory changes. She said, "[I]n proposing rules to strengthen the money market fund regulatory structure, we must recognize both that the system in place historically has served investors quite well, and that there are enhancements that we should consider in order to reflect the problems experienced by money market funds during the financial crisis and our experience with The Reserve Fund.... These enhancements should make money market funds more resilient to certain short term market risks, and provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share."
Commissioner Troy Paredes, however, expressed strong reservations on two fronts, saying, "The proposal goes to great lengths to reduce the risk that money market funds will break the buck. The proposed Rule 2a-7 amendments, for example, shorten portfolio maturities and impose new liquidity requirements. The amendments also would permit money market funds that have broken a buck to suspend redemptions to facilitate orderly liquidation. Although I support the proposal, I do have significant reservations about two features of the Commission's release. First, the proposal eliminates entirely Second Tier securities as a category of investment for money market funds.... Second, in proposing certain portfolio disclosures, the release discusses and seeks comment on the possibility of requiring money market funds to disclose their market-based net asset value per share."
Finally, during the Q&A, the SEC's Bob Plaze said, "Investors won't notice a change in money market funds if these rules are adopted." The SEC estimated that the new regulations "might reduce yield by 2-4 basis points." When asked about funds adapting to the new proposals, which will go through a comment period, then a transition period, Plaze said, "One gets the sense that funds are already there."
In other news, see also ICI Reports Money Market Mutual Fund Assets, which says money fund assets increased by $34.22 billion to $3.709 trillion in the week ended June 24. Money fund assets broke a 3-week losing streak but remain down by $121 billion, or 3.2%, year-to-date.
