Testimony has been posted for this morning's House Committee on Financial Services Hearing on "Oversight of the Mutual Fund Industry: Ensuring Market Stability and Investor Confidence". The statements contain little information regarding recent concerns of a possible Greek default indirectly impacting money market funds (and instead rehash the recent regulatory debate), but today's discussion is expected to involve this issue. The hearing starts at 9:30am in 2128 Rayburn HOB on Capital Markets and Government Sponsored Enterprises. Check the "Live Webcasts" link on http://financialservices.house.gov/.
Among the testimony posted, Mercer Bullard, President and Founder of Fund Democracy, says, "My testimony focuses on correcting some of the misconceptions about the nature of MMFs and their regulation that threaten to undermine reasonable efforts to improve MMF regulation. In particular, the misguided proposal to prohibit MMFs from using a stable net asset value would unnecessarily eliminate an investment vehicle that has been chosen for decades by tens of millions of Americans as a safe place for their cash holdings. As is so often the case, retail investors' interests will have been virtually ignored, as pointedly illustrated by the participant list and discussion at the SEC's recent MMF roundtable."
He adds, "The current MMF debate has been replete with misleading characterizations of the actual performance of MMFs during their thirty-year history. For example, statements that MMFs are 'prone' or 'susceptible' to runs are patently false. There have been dozens of instances of market stress during the last three decades that have affected MMFs, but only two MMFs have failed. One failure was extremely small (and did not trigger a run).... The recent claims that MMFs are at risk because of their holdings of short term European banks are similarly misleading. There is no empirical basis for the assertion that these holdings pose a threat to MMFs' NAVs. The data on which these claims have been made are stale and inadequate to reach a reasonably informed judgment about the safety of MMFs individually or as a group."
Andrew 'Buddy' Donahue, Partner, Morgan Lewis & Bockius LLP, comments, "The next step in money market reform is extraordinarily important as the wrong choice might have considerable unforeseen consequences for the money market funds, the investors and the capital markets. Yet not doing anything might leave money market funds vulnerable to runs and the increased potential for 'breaking the buck'. I believe that commentators have provided the SEC with a wide range of choices from which an optimum solution might be crafted. One possibility is for there to be a required 'buffer' provided by the manager assuring that there are assets dedicated to maintaining the stable nav. That 'buffer' could be in the form of a special share class funded by the adviser that must be maintained at a certain prescribed level and which is designed to absorb any realized or unrealized losses or gains to enable the other share class to maintain a stable nav. This approach could be augmented with requirements for greater transparency from omnibus accounts and a limit on the maximum fund ownership by any one investor or group of investors (such as 5%). This approach might make explicit the implicit guarantee that investors and the industry seem to operate under and the increased transparency and ownership limits would enable money market funds to better assess and manage their vulnerability to runs."
Scott Goebel of Fidelity writes, "Fidelity has worked with others in the industry to develop the concept of a NAV buffer, whereby each money market fund would be required to retain a portion of the fund's income in order to build a buffer within the fund to absorb potential realized or unrealized future losses. When combined with the recent amendments to Rule 2a-7, which better position money market funds to withstand heavy redemptions, this mandatory buffer (which would grow over time) would strengthen the ability of money market funds to maintain the stable $1.00 NAV. The transparency and protection afforded by the NAV buffer also would increase investor confidence and reduce the likelihood of runs -- or large unexpected redemptions -- by investors on money market funds in the event of market volatility."
Paul Stevens, President & CEO of the Investment Company Institute, says, "Since fall 2008, the ICI and its members have dedicated enormous effort, in collaboration with regulators, to preserving the benefits that money market funds provide to the economy and to investors, while making them more resilient in the face of severe market stress such as that which followed the collapse of Lehman Brothers. During this period, both the SEC and the money market fund industry have made a great deal of progress toward this objective. Importantly, all money market funds now manage interest rate, credit and liquidity risks under stricter new SEC standards.... Notwithstanding the importance of these and other reforms to date, however, both regulators and the industry have continued to weigh additional measures to make money market funds even better prepared to weather the worst conditions, including ways to the enhance liquidity available to prime money market funds investing in the commercial paper market and to minimize the risks of a fund being unable to maintain a stable NAV."
Stevens adds, "We remain committed to working with regulators on these and other policy options. We submit that this process should be guided by two principles. First, we should preserve those features of money market funds (including the stable $1.00 per share NAV) that have proven so valuable and attractive to investors. Second, we should avoid imposing costs of a nature that will undercut the willingness or ability of large numbers of investment advisers to continue to sponsor these funds. Otherwise, we will put at risk the enormous benefits that money market funds provide to the economy."
