With a second round of Money Market Reform proposals possibly imminent (we expect the meeting for the vote to be announced Wednesday), Arnold & Porter's John Hawke has submitted yet another comment letter to the SEC on behalf of Federated Investors. Hawke's latest missive, which was just posted to the President's Working Group Report on Money Market Fund Reform, does the service of condensing the 178 or so comment letters that have been submitted since the Jan. 10, 2011 PWG deadline into a 51-page summary. Hawke writes, "We have reviewed the various letters, surveys, reports and other data collected in the Commission's public file for the 2010 Report of the President's Working Group: "Money Market Fund Reform Options" (PWG Report). As you know, the initial public comments addressed specific options for money market fund (MMF) reform put forward in the PWG Report, including a "floating" net asset value for MMFs. Later comment letters have addressed two additional options for restrictions on MMFs: imposing a capital requirement on MMFs; and imposing a "holdback" or minimum balance requirement. In your recent Senate testimony and in earlier speeches, you expressed support for each of these three proposed restrictions on MMFs as a way to reduce MMFs "susceptibility" to runs. We understand the Commission currently is considering a draft proposing release containing these three elements."
Hawke continues, "As you know, the Commission is required by statute to consider the impact of a proposed rule on efficiency, competition, and capital formation, and its failure to do so has resulted in several reversals of Commission rules by the D.C. Circuit Court of Appeals, which has been highly critical of the Commission's failure to assess the economic impact of proposed new rules. The Commission has responded to these cases and to similar criticism from the Congress, the General Accountability Office, and the Commission's own Inspector General by developing internal guidance for economic analysis in rule proposals. That guidance requires, among other things, that an analysis of the "likely economic consequences" of any proposed rule be "substantially complete" even before a rule is proposed."
He says, "The depth and scope of data, surveys and other information from commenters in the PWG Report file gives the Commission a unique opportunity to conduct this analysis before moving forward with a rulemaking proposal on MMFs. We, therefore, submit the attached summary of the public comment file in an effort to assist the Commission in assessing the potential economic consequences of each of the three proposals."
Hawke explains, "In reviewing the public comment file, what is striking is the multitude of comments by users of MMFs who describe the essential role MMFs play across a range of cash management operations for businesses and public entities, as well as the essential role of MMFs as purchasers of corporate commercial paper and state and local government debt. While one might expect the fund industry to participate vigorously in the debate over potential new restrictions on MMFs and fund companies and the industry's trade association have done so here by providing substantial data, analyses and surveys -- the Commission also must give great weight to the fact that businesses, chambers of commerce, state and local governments and their associations across the country have written about the importance of MMFs in bringing efficiencies to their cash management operations and in substantially reducing their cost of funding. There is a consistent message from these users that they either will not use, or will sharply reduce their use of, MMFs if any of the three proposals are adopted, because the resulting product will no longer meet their investment needs. If that occurs, according to commenters, a shrunken MMF industry would result in increased cost of funding for businesses and governments and would be enormously costly for the economy. The public comment file also includes strong warnings that a flight of investors from MMFs to less regulated vehicles or to the largest banks would increase systemic risk and, therefore, bring about exactly the opposite result that proponents of the proposals desire."
He adds, "As described in the attached summary, there are a handful of letters in the comment file primarily from current or former bank regulators and academics -- supporting one or more of the three types of potential new restrictions on MMFs. To date, there is no data or economic analysis in the public file to support the view that any of the proposals would reduce MMF runs, and, indeed, there are some studies and reports suggesting that the proposals, if adopted, could actually precipitate runs. The benefits of the proposals, therefore, remain speculative, while the adverse economic consequences -- as articulated in the comments of MMF users -- could be devastating."
Hawke writes, "We, therefore, suggest that moving forward with a rule proposal, which itself would create substantial uncertainty in the markets at a time when we can ill afford it, is ill-advised. At minimum, if there is, as reported, a staff draft release containing economic analysis in support of various proposals, that analysis should be publically vetted before a proposal is formally released. This is particularly important given the overwhelming evidence in the public file to date arguing against the proposals."
Finally, he says, "We hope the attached summary is helpful. We also hope the Commissioners will take the time to read the studies, surveys, reports and other commentary in the comment file in full before considering further actions to impose restrictions on MMFs."