Today is the last day to comment on the SEC's Proposed "References to Ratings of Nationally Recognized Statistical Rating Organizations", which would "propose to eliminate references to ratings by amending rule 2a-7." As expected, the mutual fund industry has come out in force to oppose the measure, which would be seen as weakening the credit quality requirements of money fund regulations. The two most recent protests come from trade groups the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA). (See all the posted comments to date here; more should appear in coming days.)
The Wall Street Journal Online in "ICI Joins Opposition To Money-Fund Rule" wrote, "The Investment Company Institute, the Washington-based trade group that represents the mutual-fund industry, plans to send its concerns about the plan to the SEC Friday, the deadline for comments on the proposal. The SEC currently says money-market funds generally can only buy securities that get high ratings from the major bond-rating firms, but under the proposed plan, funds could buy securities that don't get those ratings."
"We strongly oppose removing the role of credit ratings in how money-market funds select their investments," WSJ quotes ICI general counsel Karrie McMillan. She tells the Journal, "Unless the SEC demonstrates this will fix what is broken, it should stick with what has worked for investors."
Deborah Cunningham, chief investment officer at Federated Investors and co-chair of SIFMA's Credit Rating Agency Task Force, says, "While we support the promotion of due diligence and independent investment analysis by market participants, we believe removing references to credit ratings from securities regulations will not achieve that objective. Credit ratings provide an important data point that is a useful component in an investor's risk analysis process and offer an objective minimum threshold in bright-line, rating-based compliance standards. Rather than undertake a sweeping regulatory reform which may potentially destabilize the market and harm investors, the Task Force encourages the SEC to instead continue to pursue its efforts to improve investor confidence in ratings."
SIFMA's press release adds, "The SEC proposal would amend portions of the Investment Company Act, the Investment Advisers Act and the Securities Exchange Act. In several instances, the proposals would remove an objective, ratings-based component of specific rules under these Acts and replace it with subjective standards. In its letter, SIFMA notes the potential for uncertainty, decreased transparency and market disruption caused by the new discretionary standards."
It continues, "For example, Rule 2a-7 of the Investment Company Act limits a money market fund's portfolio investments to those securities that have received a short-term rating in one of the two highest categories from 'the Requisite NRSROs' ... and have been determined by the fund's board of directors ... to present minimal credit risks. Among other changes, the proposal would eliminate the first requirement and rely solely on a fund's board of directors (or its delegate) to make minimal credit risk determinations. SIFMA strongly opposes this proposal."
"Removing the objective, rating-based standard under Rule 2a-7 increases the possibility that different funds will apply varying standards of risk assessment and has the potential to decrease the confidence investors have in the money markets," said Ms. Cunningham. "Rule 2a-7 has worked remarkably well for 25 years and we believe removing a valuable floor for assessing credit risks could have negative consequences for investors."
