On Monday at the Investment Company Institute's 2009 Mutual Funds and Investment Management Conference, ICI President & CEO Paul Schott Stevens gave an address entitled, "Meeting the Challenges of Financial Crisis," a major portion of which addressed money market mutual funds.
Stevens said in Palm Desert, Calif., "First, money market funds: More than a year into the credit crisis, and after an unprecedented string of failures and government interventions, a single money market fund succumbed. Last September 16, the Reserve Primary Fund saw its net asset value fall below $1.00, becoming only the second money market fund in history to 'break a dollar.' By the end of that week, the Federal Reserve and the Treasury stepped in, taking several actions to shore up the money market in general and to calm money market fund investors in particular, including the Temporary Guarantee Program for Money Market Funds. This episode raised new questions about how the money market operates and how money market funds should be regulated within that market."
He continues, "As you probably know, ICI's Executive Committee formally chartered a Money Market Working Group, composed of senior industry executives, last November. We did not act out of any concern that money market funds pose a significant challenge to the stability of the financial system--quite to the contrary. In the 25-year history of Rule 2a-7, one-third of a quadrillion dollars has flowed in and out of money market funds. In that quarter of a century, until September of 2008, only one small fund had ever broken a dollar. But the events of last fall tested money market funds severely, with many sponsors offering support for their funds. So we had a responsibility to examine those events and to propose ways to make money market funds even stronger."
"Vanguard's Chairman Jack Brennan led an intensive examination of these issues. The Working Group's challenge was daunting: It had to preserve the characteristics that make money market funds so valuable to investors, to issuers, and to the economy, while increasing their resilience so that these funds can better withstand even the most adverse market conditions. It was an exhaustive effort. Supported by industry practitioners and ICI staff, the Working Group consulted broadly, with advisers to funds and other pooled investment vehicles, issuers, regulators, academics, institutional investors, and advisers to individual investors. The Working Group considered a wide range of ideas, including proposals offered by outside commentators since last fall."
Stevens continues, "With a 224-page report issued just last week, the Working Group literally 'wrote the book' on money market funds. We believe that they also have written the blueprint for the future of this vitally important product. The Report offers new and heightened standards for the operation of money market funds in every key area, including liquidity, credit quality, maturity, client concentration, and transparency. For example, the Working Group proposes imposing, for the first time in the history of Rule 2a-7, daily and weekly minimum liquidity requirements on money market funds.... The proposals would tighten limits on portfolio maturity by reducing the maximum weighted average maturity from 90 days to 75 days.... The Working Group also proposes barring money market funds from investing in Second Tier Securities. Significantly, the Report addresses a risk that current regulations overlook: 'client risk.'"
Finally, he says, "As these recommendations are adopted, tomorrow's money market fund investors will face even less risk than today's do. But the Working Group went further, to look at how to treat all investors in a fund fairly if that fund should break a dollar in a future financial crisis. They propose that the Securities and Exchange Commission authorize a money market fund's board to suspend redemptions of fund shares temporarily if the fund is facing a cascade of redemptions that it is unable to meet--and permanently for funds preparing to liquidate, in order to treat all shareholders fairly."
