Voyageur Asset Management, which advises the RBC Money Market Funds (formerly the Tamarack Funds), has penned a 4-page report entitled, "`Proposed Money Market Fund Reform." The white paper says, "The much-publicized market events of the past year have drawn numerous calls for reform of the money market funds industry. Comments voiced by regulators and others express views about the lessons learned and recommendations to address perceived shortcomings with global financial markets, institutions, and regulatory oversight. The recommendations focus on the root causes of the financial crisis and measures to control systemic risk to financial markets and institutions in the future. This article discusses the key recommendations put forth and offers our thoughts on them."
RBC explains, "The Investment Company Institute's (ICI) Money Market Working Group recently issued detailed recommendations for the reform of money market funds. The recommendations relate generally to: a) tightening standards for liquidity, credit quality and maturity, b) making fund information more transparent to shareholders and regulators, c) modifying requirements for bail-outs by affiliates, and d) easing valuation issues and eliminating fund board responsibility for determinations that should be made by the adviser. The book-length report includes extensive detail and is expected to receive serious consideration from the Securities and Exchange Commission (SEC) and other regulators. While the recommendations are extensive, they generally do not involve fundamental changes to the operations or regulations of money market funds.
Voyageur's "View on Proposed Reform" states, "The general themes of the ICI's Working Group Report have at their foundation an assertion that the money market fund industry generally performed well through the credit crisis. While there may be a case to be made here, it is important to also understand that such an assertion would not be possible if not for the extraordinary steps taken by various governmental branches that stepped in to support an insolvent global financial system. Investment managers also played a critical role by providing financial support to money market funds under their management. Nonetheless, given the important role money market funds serve in the financial marketplace and the economy at large, reforms that seek to fundamentally alter or compromise the attractiveness of these types of funds to investors should be avoided, particularly at a time when the financial markets are fragile and market stabilization is of great importance to global economic recovery."
It continues, "One may assume that many of the recommendations the ICI studied were based on the premise that the lack of regulation in the money market fund industry caused the problems the industry experienced during the credit market crisis. However, money market funds are subject to far-reaching federal regulation, both explicitly through Rule 2a-7 of the Investment Company Act of 1940 and under other federal securities laws. Rule 2a-7 has historically provided a solid framework for money fund management. That being said, we believe a deeper review of some aspects of Rule 2a-7 is needed to ensure money market funds are better prepared for unprecedented market events in the future."
The paper continues, "We believe the best solutions for effective reform of the money market industry will result from more focused oversight in several important areas, not through wholesale regulatory changes, but through several key enhancements. Enhanced oversight could be provided in the form of tighter policies related to risk management and would address such topics as 1) suitable levels of liquidity and effective management of a fund's average maturity, 2) broader diversification of portfolio holdings and better transparency of fund participants, and 3) measures of a fund's ability to withstand periods of market volatility and heavy investor withdrawal demand. Additionally, we feel reform will have a better chance of success, if the rating agencies provide more effective credit risk analysis. Current 2a-7 regulation incorporates the reliance on credit ratings, and we therefore believe the agencies themselves should either have greater governmental oversight, or credit ratings activity should be consolidated under a governmental body."
Finally, RBC Voyageur concluces, "It is clear that money market funds have provided investors and the U.S. global economies with significant benefits since their inception in the 1970s. At their peak in 2008, the combined assets of money market funds represented $3.8 trillion, or nearly 40% of the entire mutual fund industry. We advocate for reforms to the oversight of the industry that balance the interests of retail and institutional investors with the need for enhanced safety and soundness of our financial institutions and markets. There are difficult policy decisions to be made that will be subject to significant lobbying by each of the affected constituencies. Hopefully, the facts will be reviewed objectively and solutions will be developed that best serve investor needs."
