Although we're mystified by their interest, the Sargent Shriver National Center on Poverty Law has posted the first serious comment letter in response to the SEC's recent Proposals on Money Market Mutual Fund Reform. (The other entries to date are all either nonsensical or overly sparse.)
The Shriver comment letter, written by Karen Harris of Chicago, Illinois, says, "We commend the SEC for initiating these proposed rules as an important first step in providing needed investor protections in financial products and services. As indicated in the proposed rules' commentary, there are more than 750 money market funds registered with the SEC which hold approximately $3.8 trillion in assets, including over one-fifth of U.S. households' cash balances. From 1998 to 2008 money market funds grew from approximately $1.4 trillion in assets to $3.8 trillion making money market funds' role in the capital market an extremely important one. For these reasons, the regulation of such funds is important for both fund investors and the nation's economy as a whole."
It continues, "Unfortunately, the recent economic crisis has demonstrated that the regulatory oversight needed to ensure such funds' financial stability and, thereby, investors' and the economy's stability, was insufficient. The results of such lax regulatory oversight are apparent and the SEC's proposed regulations are a welcome attempt to place investor protections and financial stability above financial profit. Yet, although welcome, the proposed rules can be strengthened to provide even more investor protections and financial stability as discussed below."
The Center novel take on NRSROs says, "[R]ather than revise Rule 2a-7 pursuant to the Credit Reform Act the act itself must be revised and SEC regulation of NRSROs strengthened.... [T]he SEC should require NRSROs to disclose conflicts of interest, differentiate between structured and unstructured debt and more clearly state the risks of financial products. Additionally, we would recommend that the SEC consider legislation which would prohibit NRSROs from providing any other products or services, including advice, other than rating.... Finally, and perhaps most importantly, the SEC should prohibit a customer requesting a rating from paying the rating agency. Instead, the customer should pay the SEC, who would then allocate/auction the individual rating activity among the competing rating agencies. Rating agencies, in turn, should be paid in part in the securities they are rating and be required to hold such securities to maturity and not hedge them."
On "Second Tier" securities, the letter says, "As the commentary on the proposed revisions to Rule 2a-7 explain, second tier securities were not directly implicated in the recent strains on money market funds and the economy. Thus, prohibiting funds from investing in second tier securities seems unnecessary at the moment." On many other issues, the Center either has "no comment on this proposal" or agrees with the SEC's suggestions.
Harris' letter closes, "Once again, we commend the SEC on the proposed regulations as an important first step toward ensuring the safety, soundness and investor protection of the US money market system. Many of the regulation's proposals offer hope for increased financial stability and investor protections. With the suggested revisions suggested herein, the proposed regulations can be made even stronger. Thank you for the opportunity to provide comments on the SEC's proposed regulations and please feel free to contact me if you have any questions regarding these comments by the Shriver Center."
Crane Data has yet to post our response, but look for it soon. We're still digesting and seeking feedback and input from our money fund and money market investor readership. While we support many of the majority of the SEC's recommendations, or rather consider them relatively harmless, we fear the overall weight of the proposal could tilt the playing field towards consolidation and concentration. This situation might weaken the money fund industry and overall money markets, rather than strengthen them. So we urge caution and temperance in making any changes.
