One of the recommendations of the ICI's recently released "Report of the Money Market Working Group is to "Address market confusion about money market institutional [investments] that appear to be -- but are not -- money market funds." The report says, "During the market crisis, a number of press reports incorrectly identified various types of cash management vehicles as money market funds. As Crane Data reported exhaustively during the start of the crisis in August 2007, the false reporting of LIBOR-plus, enhanced cash, and other pools as "money market funds" was likely instrumental in triggering the turmoil in the money markets.
The ICI report continues, "Advisers to funds that are not registered under the Investment Company Act may hold themselves out in a manner that implies that they manage the funds to provide the same safety and stability as a money market fund. To address this regulatory gap, we recommend that the SEC adopt a rule under the Investment Advisers Act of 1940, applicable to advisers to unregistered funds, designed to reduce investor and market confusion about funds that appear to be similar to money market funds, but that are not required to comply with the risk-limiting provisions applicable to money market funds."
Under the section entitled, "Anti-Fraud Rule to Address Investor and Market Confusion," the ICI MMWG says, "The Working Group recommends that the SEC adopt another rule, providing that it would be a fraudulent or deceptive practice to advise a fund that is not registered under the Investment Company Act that either (1) uses the word 'cash' (or any variant of the word, such as 'money,' 'liquid,' etc.) in its name; or (2) holds itself out as seeking to maintain a non-fluctuating NAV of $1.00 per share, unless the fund also complies with the risk-limiting provisions of Rule 2a-7. The Investment Company Act contains two provisions that preclude registered investment companies from using names that could mislead investors into thinking that a fund is a money market fund when in fact it does not comply with the risk-limiting provisions that govern such funds. Rule 2a-7(b) provides generally that it is an untrue statement of material fact for a registered investment company to hold itself out as a money market fund or the equivalent of a money market fund, unless it meets the risk-limiting provisions of the rule."
The MMWG report says, "There is no corresponding prohibition on an unregistered fund, such as an enhanced cash fund, a bank collective fund, or other type of fund that holds itself out as maintaining a non-fluctuating NAV of $1.00 per share, from using a name that could lead an investor to believe that it was investing in a money market fund, or something that was designed to provide the same safety and stability as a money market fund. We believe that this gap could cause investors to be misled about the exact nature of their investments. As discussed in Section 6 of this Report, a number of enhanced cash funds dissolved, even before the events of September 2008. Securities lending pools similarly have experienced difficulties maintaining a market value of $0.995 per share or better, as money market funds are required to do under shadow pricing provisions."
"Our recommendation is designed to bridge the gap, to the extent possible under current law, between the protections afforded investors in money market funds under the Investment Company Act, which has clear limitations on how registered funds can represent themselves to the public, on the one hand, and the ways advisers to unregistered pools can represent their activities on behalf of the pool, on the other. We recognize that even this proposed rule would not completely mitigate investor confusion, as banks and bank holding companies are excluded by statute from the definition of investment adviser ... and the SEC has no authority over state employees managing state funds.... Congress may wish to consider whether managers of these pools similarly should be subject to this antifraud standard," says the report.
