SEC Chair Mary Jo White spoke on "The SEC in 2014" early Monday at the "41st Annual Securities Regulation Institute. She discussed "Money Market Funds" in one segment, saying, "Even when a product is not as new as an over-the-counter derivative, the use of the product may reveal previously unanticipated risks that suggest an evolution in our regulatory approach is warranted. The recent financial crisis provided an unwelcome laboratory for a number of these products. Money market funds, for example, have for decades been an important part of the financial marketplace. As we saw in the financial crisis, however, they can be exposed to substantially heightened redemptions if investors believe that a fund is about to lose value. The resulting instability in their value can harm investors as well as the entities that turn to money market funds for financing."
White continues, "In 2010, the SEC took a first step to address this heightened redemption risk by making the funds more resilient. The rule amendments adopted by the Commission in 2010 were designed to reduce the interest rate, credit, and liquidity risks of money market fund portfolios. The Commission said at the time that it would continue to consider whether further, more fundamental changes to money market fund regulation is warranted."
She tells us, "Currently, the Commission is considering two significant proposals for additional reform that were put out for comment last June. One is a floating NAV for prime institutional money market funds -- the type of fund that experienced problems during the financial crisis. The other proposal would require money market funds under certain circumstances to impose a liquidity fee and permit the imposition of redemption gates. This proposal is designed to stop a "run" and limit the resulting instability. These proposals could be adopted alone or together."
Finally, White explains, "We have received hundreds of letters on the proposals with a wide range of differing views that we are reviewing closely. Completing these reforms with a final rule is a critical priority for the Commission in the relatively near term of 2014."
Another SEC Commissioner, new member Michael Piwowar, also commented on money funds Monday at a Chamber of Commerce event. Fox Business News reports in "Tighter Money Market Funds Regulation Needed: SEC Member", writes, "Money market funds still remain vulnerable to runs by investors, and should be subject to further regulation to reduce such risks, one of the newest members of the U.S. Securities and Exchange Commission said Monday."
They quote Piwowar, "More should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions.... There also remains a need to provide investors with more timely information about funds' holdings, including the value of those holdings." (See the full Piwowar speech "Advancing and Defending the SEC's Core Mission" here and watch for more excerpts tomorrow.)
In other news, Federated Investors' CEO Chris Donahue spoke Friday on the company's latest earnings call (see the Seeking Alpha transcript here). He comments, "On the regulatory front, the SEC continues to digest the voluminous comments filed in response to their money market fund proposals, with 98% of the commenters opposed to the fluctuating NAV for money funds, including leading organizations of government and private sector financial professionals, business representatives, state and municipal leaders and many others. It is clear that money market issuers and investors understand the negative impact and the lack of benefits from the floating NAV."
He adds, "Additionally, approximately 90% of the commenters supported Alternative Two, which is the voluntary gating and fees concept, as proposed with some modifications, which would provide fund boards with the tools to deal with regulators' stated goal: stopping runs. Congress is also monitoring money market fund regulations. In fact, consideration of the concerns of money market fund stakeholders and the negative consequences of impairing, restricting the use of money funds, was specifically listed as an expectation of Congress in the conference report to the large spending bill just recently signed into law."
