On Friday, the Investment Company Institute released a response to the SEC's recent media campaign to highlight past instances of money fund sponsor support, and Sunday ICI posted yet another paper attacking the "myths" regulators are spreading about money market funds. The first "Viewpoints" piece, "The SEC's Data Dump on Money Market Funds Is Misleading, from Paul Schott Stevens, says, "The Securities and Exchange Commission (SEC) has finally delivered on Chairman Mary Schapiro's June promise to give Congress data to back up her claim that money market fund sponsors "have voluntarily provided support to money market funds on more than 300 occasions." Regrettably, the full list exposes just how flimsy the SEC's claims are. The tabulation reveals that the dramatic figure -- previewed in an interview with the Wall Street Journal two days before the hearing -- was more showmanship than science. After the figure was disclosed with such fanfare, it took the SEC fully six weeks to provide any documentation. Even so, the final list lacks crucial detail and appears concocted to create a misleading impression on a vital matter of public policy."
Stevens explains, "To make matters worse, the SEC frames the list as representing that "sponsor support" was necessary in each instance to rescue a fund on the brink of failure. In Chairman Schapiro's own words: "We know that funds come close to breaking the buck and that's why so many times sponsor support has been needed." That contention takes on added weight with regulators' frequent suggestion that any incident of breaking the dollar is likely to set off a destabilizing run on all money market funds."
He continues, "We're still in the preliminary stages of our analysis. Our lawyers and economists are chasing down SEC filings and calling fund sponsors for details to test the SEC's allegations -- in short, doing the work that the SEC staff should have done before giving the number to the media, making it the centerpiece of the Chairman's Senate testimony, and providing this data to the Senate Banking and House Financial Services committees. But we have already uncovered many, many problems."
Stevens writes, "The first: numerous incidents on the list don't match the claim that sponsors "provided support" to their funds. In at least 60 cases during the 2007–2008 financial crisis, funds applied for and received permission to provide sponsor support -- but never put a dime into their funds. Those funds don't belong on a list of sponsor support -- particularly not a list in which every fund was inaccurately portrayed as on the brink of breaking the dollar.... In fact, in September and October 2008, the SEC staff encouraged ICI to inform sponsors that the agency would grant liberal permission to support their money market funds in the face of unprecedented market illiquidity."
He says, "Now, the relief that the SEC staff so liberally afforded to funds is being used as a hammer to bludgeon our industry. That's a pattern throughout this list. It includes sponsors that faced heavy pressure from senior SEC officials to "top up" their funds before new portfolio disclosures were unveiled in early 2011. And the list is padded with funds whose sponsors were virtually ordered in 1994 to buy out specific securities -- "interest rate floaters" -- after the SEC declared those securities inappropriate holdings."
Stevens adds, "As those examples show, even when funds got actual support, the reason for the support often had little to do with any risk that the fund might break the dollar. Just take the six funds listed as receiving support in 2010. In three cases, the sponsor bought downgraded securities out of the funds' portfolios to maintain the funds' AAA ratings. In three other cases, the sponsor bought the funds' holdings of British Petroleum securities to limit risks to investors in the middle of the Deepwater Horizon oil spill. None of those six funds was in danger of breaking the dollar."
Finally, he says, "Yes, in some instances sponsor support does prevent a fund from breaking the dollar. But there are two key things to remember. First, the fact that one fund breaks the dollar isn't likely to set off destabilizing runs -- just as the failure of a fund in 1994 had no impact at all on other funds. Second, the sponsors who provided liquidity for their money market funds in 2008 helped keep the financial crisis from getting even worse.... [O]ne thing is clear. Such slipshod data provides no basis for the sort of drastic changes in money market funds that Chairman Schapiro has been urging."
In another "Viewpoint" piece, ICI's Mike McNamee writes "Correcting the Record on Money Market Funds, "Bad information can't give rise to good policy. Unfortunately, the regulators who are campaigning for structural changes in money market funds are building their case on information that is deeply flawed at best. In testimony, speeches, and other statements, officials from the Securities and Exchange Commission (SEC), the Federal Reserve, and other agencies have made assertions about money market funds that distort the record, exaggerate the impact of these funds on the financial crisis, and reveal profound misunderstandings about money market funds, their investors, and their role in the financial markets. These misstatements aren't just incidental mistakes -- they're the foundation of the regulators' case for fundamental changes to a vital financial product. As scores of comments filed with the SEC have documented, those changes would severely damage the value of money market funds for investors and the economy."
He explains, "Because we believe the truth can trump misinformation, we're going to use this space to correct the record, focusing primarily on SEC Chairman Mary Schapiro's latest testimony before the Senate Banking Committee. Sadly, there are a lot of misstatements. Let's start with the myth that money market funds are "susceptible" to runs.... In the 40-year history of money market funds, two funds have "broken the dollar," or failed to maintain their stable $1.00 net asset value. In one case -- in September 2008 -- investors did pull back from other prime money market funds. In the other -- in 1994 -- the world yawned because there was no impact on other funds or the markets. That 50/50 record hardly suggests that money market fund investors are prone to running. Something else must have happened in 2008."