Thursday, U.S. Securities and Exchange Commission Chairman Mary L. Schapiro presented, "Testimony Concerning the State of the Financial Crisis Before the Financial Crisis Inquiry Commission." She discusses money funds at a couple different points in her comments, and provides an update on the status of the President's Working Group Report and the SEC's Money Market Fund Reforms.
Under "Enforcements," Shapiro's comments discuss "Reserve Primary Fund." She says, "On May 5, 2009 the SEC charged the managers of the Reserve Primary Fund for allegedly failing to properly disclose to investors and trustees material facts relating to the value of the fund's investments in Lehman-backed paper. The Reserve Primary Fund, a $62 billion money market fund, became illiquid when it was unable to meet investor requests for substantial redemptions following the Lehman bankruptcy. Shortly thereafter, the Reserve Primary Fund declared that it had 'broken the buck' because its net asset value had fallen below a $1.00. In bringing the enforcement action, the SEC sought to expedite the distribution of the fund's remaining assets to investors by proposing a pro-rata distribution plan. On November 25, a federal judge in New York endorsed the SEC's approach, which should result in an estimated return of at least 99 cents on the dollar for all shareholders who have not had their redemption requests fulfilled, regardless of when they submitted those redemption requests."
Shapiro comments in section "IV. Regulation of Financial Products" under "Money Market Funds," "Money Market Funds Are Not Risk-Free and Can Be Subject to Runs. As discussed above, in the wake of the Lehman Brothers bankruptcy in September 2008, the net asset value of the Reserve Primary Fund, a money market fund, fell below $1.00 a share, or "broke the buck." At the time of the announcement of the Lehman Brothers bankruptcy, the Reserve Primary Fund held 1.2 percent of its assets in commercial paper issued by Lehman Brothers. This event, combined with the general paralysis of the short-term credit markets and a concern that other financial institutions might fail, revealed the potential of money market funds to be subject to runs, i.e., broad-based and large-scale requests for redemptions that challenge money market funds' ability to return proceeds at the anticipated $1.00 value."
She continues, "This event also revealed the general lack of appreciation by many investors that money market funds could return less than the $1.00 per share originally invested. In addition, the demise of the Reserve Primary Fund and the money market fund run that followed highlighted the benefit of halting redemptions once a money market fund has broken the buck. It also revealed the importance of providing an orderly wind-down of the fund's operations in order to preserve shareholder value and avoid a larger contagion in the short term credit markets."
Shapiro says, "The run on money market funds during the week of September 15, 2008 was stemmed in part by the announcement of the Treasury Temporary Guarantee Program for Money Market Funds, which provided a guarantee to money market fund investors up to the amount of assets they held in any money market fund as of September 19, 2008. On the same date, the Federal Reserve Board announced the creation of the Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). This program also helped to create liquidity and stem the run on money market funds by extending credit to U.S. banks and bank holding companies to finance their purchases of high-quality asset backed commercial paper from money market funds. The Treasury Temporary Guarantee Program expired on September 18, 2009, and the AMLF is set to expire on February 1, 2010."
She explains, "The SEC has taken a number of steps to reduce the risks posed by another money market fund run.... In June 2009, the SEC proposed rule amendments to significantly strengthen the risk-limiting conditions of our money market fund rules. In particular, the SEC proposed rules to tighten the credit quality and maturity requirements for money market funds. In addition, the SEC for the first time proposed liquidity standards for money market funds that would mandate that these funds meet both daily and weekly liquidity requirements."
Shapiro says, "The rules also would: require periodic stress testing of money market fund portfolios to identify potential problems; require monthly disclosure of portfolio information and periodic disclosure of more specific net asset value information; and permit funds to halt redemptions if a money market fund 'breaks the buck' in order to stem the motivation for runs. Our proposal also requested comment on a number of other areas relating to the fundamental structure and disclosure requirements of money market funds, including whether funds should disclose their daily mark-to-market net asset value (NAV) (in addition to their $1.00 price); whether to mandate redemptions-in-kind in times of financial crisis to reduce run risk; and whether money market funds should have floating NAVs instead of the current stable $1.00 NAV."
Finally, she says, "Going forward, we expect to consider adoption of our first set of money market fund reforms in early 2010, with consideration of more fundamental changes to the structure of money market funds to follow. In addition, the SEC has been working closely with the Federal Reserve Board and President's Working Group on Financial Markets (PWG) on a report assessing possible changes to further reduce the money market fund industry's susceptibility to runs. The SEC will continue to work with the PWG to chart a course toward further reducing the vulnerabilities of money market funds to runs while preserving the benefits they provide participants in the short-term markets."
