Money market mutual funds are bracing for the possible arrival this week of a report from the President's Working Group on Financial Markets, but it appears that the SEC's finalized Money Market Fund Reform Proposals won't be appearing any time soon. The PWG report, which had been originally expected Sept. 15, is expected to comment on the SEC's proposed changes to Rule 2a-7 and on the possibility of a floating NAV and a private liquidity facility. While we've received no word on whether the PWG report is still on schedule, we have heard that the SEC is rolling back its timetable on final 2a-7 amendments to the first quarter of 2010. (Comments from the SEC indicate that there may also be a second round of proposals later in 2010.)
We described the original President's Working Group mandate in our June 18 News, "Treasury's 'Financial Regulatory Reform: A New Foundation' on MMFs," "[The report] says under the section, "Reduce the Susceptibility of Money Market Mutual Funds (MMFs) to Runs," "The SEC should move forward with its plans to strengthen the regulatory framework around MMFs to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs.... The President's Working Group on Financial Markets should prepare a report assessing whether more fundamental changes are necessary ... such as eliminating the ability of a MMF to use a stable net asset value or requiring MMFs to obtain access to reliable emergency liquidity facilities from private sources."
We also quoted from the SEC's proposal in our July 2 News, "The severe problems experienced by money market funds since the fall of 2007 and culminating in the fall of 2008 have prompted us to review our regulation of money market funds.... [We] are proposing for public comment a number of significant amendments to rule 2a-7 under the Investment Company Act.... Commission staff has consulted extensively with other members of the President's Working Group on Financial Markets, and in particular the Department of Treasury and the Federal Reserve Board.... We have consulted with managers of money market funds and other experts to develop a deeper understanding of the stresses experienced by funds and the impact of our regulations on the readiness of money market funds to cope with market turbulence and satisfy heavy demand for redemptions.... We have also drawn from our experience as a regulator of money market funds under rule 2a-7 for more than 25 years and particularly since autumn 2007."
As we said in our September Money Fund Intelligence, and still believe, "We're confident that the SEC (and PWG) will reject a floating rate NAV outright, and we think they [the SEC] will modify the maximum WAM to 75 days from 60, will allow government securities to be included in the 1-day and 7-day liquidity buckets, and even will allow some continued investment in illiquid and second tier securities." We haven't heard whether there has been any progress on a "liquidity exchange bank" or liquidity facility, but one person told us that this concept may have hit some roadblocks. We'll keep you posted, but for now, it appears that the regulatory status quo continues to have the upper hand.
