Paul Schott Stevens, President & CEO of the Investment Company Institute spoke yesterday in London at the Institutional Money Market Funds Association Annual Dinner on "These Great Masses of Money: Making Money Market Funds Even More Resilient." Stevens discussed the history and resilience of money funds, and dismissed the practicality of proposals to alter the fundamental structure of money funds.
Stevens said, "Now, ICI is not the only group that has been pondering the future of money market funds after the events of last September. No doubt you have heard some of the competing proposals, which would fundamentally alter the current regulatory or business model of American money market funds. Our Working Group found that the proposals are simply impracticable and could hurt the shareholders who depend on these funds, as well as issuers and other participants in the money market. Predictably, some of the ideas that surfaced -- such as regulating these funds as if they were banks -- are fading from the policy dialogue."
He continued, "One idea is hanging on, however -- the notion of eliminating the stable net asset value per share that has been characteristic of U.S. money market funds since their inception. This is a matter of serious concern, because our members tell us -- and our Working Group confirmed -- that the stable NAV is a crucial feature of money market funds, and a fluctuating NAV could destroy the value of the product. Because this is so important, let me take a moment to enumerate the problems with this idea."
"First, investors clearly desire a fixed NAV. A recent survey of major institutional investors in money market funds found that the majority overwhelmingly rejected the idea of floating the NAV. A money fund that strives to maintain a fixed value offers innumerable investor benefits -- ease of accounting and operational advantages. In the U.S., the fixed NAV simplifies a complicated tax treatment that would be required if the fund's capital gains and dividends were reported separately. And for many institutions, bylaws or investment policies require them to hold their ready cash in an instrument with a fixed value," he told the IMMFA dinner.
Stevens added, "What is the case for ignoring those benefits and forcing a floating NAV? Critics of the fixed NAV say that institutional investors respond to the small differences that can arise between a fund's 'shadow price' and the $1.00. This response, they argue, could destabilize a fund and set off a run. There are two problems with this theory. First, our long experience shows that very few institutions behave in that way, because most investors use money market funds to seek liquidity, not to arbitrage the difference between the shadow price and the NAV. Second, we looked specifically at the experience last fall of short-term bond funds and some European funds with floating NAVs. These funds saw sizeable outflows last fall -- exactly the outcome that the critics say they can prevent with floating NAVs."
Finally, he said, "Lastly, there is the factor that regulators sometimes overlook -- investor choice. If investors want a fixed NAV, and they cannot get it from the U.S. funds operated under Rule 2a-7, they will look elsewhere for alternatives. And there are many alternatives that do or could offer a fixed NAV. So if regulators mandate a floating NAV for U.S. money market funds, they may well simply drive trillions of dollars into funds to be managed elsewhere, in some cases with less regulation and oversight -- hardly a desirable outcome."
