While we're still waiting for the final release of the full text of the SEC's recently passed Money Market Fund Reforms, we wanted to spend a little time dissecting the various SEC Commissioners' speeches and comments from last week's Open Meeting. The reforms, which passed with a vote of 4-1, were supported by Commissioners Elisse Walter, Luis Aguilar, Troy Paredes, and Chairman Mary Schapiro. Commissioner Kathleen Casey voted against the new money market fund rules.
Chairman Schapiro said, "I believe one of the key lessons of the financial crisis is the need for strong liquidity buffers in money market funds. Today's rules for the first time, will establish liquidity standards for money market funds. These new liquidity standards will require money market funds to have enhanced reserves of cash, and securities that can be readily converted to cash, so that they can meet heightened investor demand for redemptions, as occurred in September 2008. Under the new liquidity standards, money market funds would have to meet both daily liquidity requirements of 10 percent of assets in cash and cash equivalents, and weekly liquidity requirements of 30 percent. The rules also will impose a requirement to have 'know your customer' procedures in order to identify the potential for large redemptions and have sufficiently liquid securities in place to meet them."
Commissioner Walter commented, "Money market funds have become a very important part of our financial markets. Investors use these funds primarily to pursue a conservative investment strategy or temporarily invest excess cash.... [I]nvestors currently have over $3 trillion invested in money market funds. By way of reference, that is more than the gross domestic product of France. For more than three decades, our laws governing money market funds have provided a regulatory foundation that has helped make such funds a popular investment vehicle for investors. However, the market turmoil that began in 2008 has shown us areas where we can improve.... The amendments I hope we adopt today will help to ensure that the laws governing money market funds will continue to serve investors, and our markets, for decades to come."
Aguilar's comments, entitled, "Fortifying the Money Market Framework Upon Which Investors and Issuers Rely," included, "The amendments being adopted today decrease the likelihood that money market funds will go through a similar crisis. Even as we adopt the additional safeguards being considered today, however, investors in money market funds need to realize that, as with almost any investment, these investments have risk. Nonetheless, it seems clear that our actions today will make the funds safer and will serve to better align the funds' ability to maintain a net asset value, typically at $1.00 per share, with the expectation of investors that one (1) dollar in means one (1) dollar out. This may be the most important expectation that investors have when they invest in money market funds. It needs to be protected."
Finally, while four Commissioners strongly supported the proposals (and money funds), Casey strongly opposed the measure. She said, "While I appreciate many of the reform proposals set forth in today's adopting release, such as the enhancements to liquidity and maturity, they simply do not go far enough. Some are good; others go in the wrong direction; and collectively, they do not address fundamental issues at the heart of rule 2a-7. Absent more fundamental changes to the rule and their structure, money market funds will remain susceptible to runs and we would be furthering the view that these funds are implicitly guaranteed or insured by the U.S. government.... If we are to address these concerns, one of two logical paths lies ahead: either money market funds will require recourse to dedicated liquidity facilities ... or they should move to a floating NAV."