On Friday morning, Federated Investors hosted its latest quarterly earnings call, and, as usual, President & CEO Chris Donahue weighed in on a number of issues impacting the money market mutual fund business. (See call transcript here.) Donahue says in his remarks, "On the regulatory front, it has been reported that a document outlining new money market fund regulations is being circulated by the SEC Chairman to the other commissioners. While the proposal is not publicly available, prior comments from the Chairman indicate that the proposal includes the choice of floating the NAV or imposing redemption restrictions on money funds, in combination with capital requirement at the fund level. These ideas have been previously floated and even in their discussion form ... have drawn extensive negative reaction and commentary from money fund investors, issuers, businesses, state and local municipal finance authorities, various members of Congress, the U.S. Chamber of Commerce, the ICI and individual money fund management companies."
He continues, "The reason is ... because it's very poor policy. I have previously covered these proposals and won't go into a lot of detail today except to say, that so far as they violate the primary tenant of a money fund daily liquidity at par with a market yield, they will end money market funds as we know them if they are proposed and enacted. The consequences will be severe, including higher funding cost for states, municipalities and other government entities, leading to either higher taxes, cuts in services or more money moving into the largest, already too-big-to-fail banks, and money moving to far less transparent, and less regulated investments, including separate accounts, offshore accounts, and things perhaps we have not even thought of."
Donahue explains, "These draconian measures are based on demonstrably false premise that money funds are prone to destabilizing runs [and are] somehow backed by the taxpayers. There is no proof that either of these ideas is true. There is however the unparalleled 40 year record of successful money management providing real tangible benefits to our financial system. So again we advocate [that] the regulators study the positive impact of the 2010 Rule 2a-7 amendments and conduct a thorough and rigorous cost-benefit analysis of any further money fund regulation. The facts will then show that further rules are not necessary, and in fact are likely to do serious harm to our financial system."
He also tells analysts, "We just announced this week that Federated was awarded the contract to manage the $9.5 billion Massachusetts Municipal Depository Trust. The MMDT provides liquidity and bond management and provide these services for the state and several independent authorities and approximately 290 municipalities in Massachusetts. This is an important win for Federated and we look forward to providing Massachusetts with a range of high quality services. We expect to develop additional state pool opportunities to add to our market leading presence. We expect to begin managing these assets by year-end."
Donahue comments, "As regard acquisitions and offshore business, the integration of the recently closed London-based Prime Rate Capital Management operation is largely completed. Assets at quarter end were $4.2 billion. The Prime Rate Capital Management client reception continues to be outstanding and we are actively working on growing these relationships and adding additional business. We are looking for additional alliances to advance our business outside of the U.S. and we continue to work to organically grow our offshore business. In the U.S., we are on track to close the previously announced transactions with Fifth Third for their $5 billion money market business, and Trustmark for their $933 million money market, equity and fixed income business. Both are expected to close during the third quarter. We're looking forward for additional consolidation opportunities as well."
During the Q&A, he responds to a question about the election, "Well that there could be tactical changes [with a new administration], but overall when we've been fighting the Fed and the SEC on these kinds of businesses for four decades, or my whole career. It's hard for me to believe that any one political outcome or any one changing of the guard will eliminate what the regulators want to do, which is regulate these funds out of existence. So I think the threats will continue. Certainly a different SEC Chairman who was not totally fixated on money funds and was working stronger on all the other things that are in Dodd-Frank that are required to be done, would be better for us in terms of the money fund business."
Finally, Donahue responds to a question on possible reform options, "They are all very troublesome.... So we just continue to fight on. It's really hard for us to try and make predictions about how SEC commissioners will vote.... [W]e remain confident that the proper public policy and good public policy will win out, which means that money market funds will continue. The proof of that is our continuing attitude towards making arrangements to take on other people's money funds and to continue to increase our market share. So I can't give a specific answer as to how I think the SEC will come out or whether it will flop over into FSOC or what will happen there, but as I said in answer to earlier question, it seems like it is our career to continue to fight for the survival of money funds."