As part of Ignites' Exchange webinar series, Crane Data's Peter Crane recently moderated a session entitled, "The Future of Money Funds," featuring Federated Investors' Debbie Cunningham and Goodwin Procter's John Hunt. Below, we excerpt from Hunt's comments on possible future regulatory changes and options. (Note: The full Exchange webinar is archived, available only to Ignites subscribers.)
Hunt asked, "Are there prospects for new regulations? I think it's very likely that there will be. I'll note that at the SEC's January 27th Open Meeting, Chairman Schapiro and other commissioners said as much. The SEC said as much as well in the adopting release to the recent money market fund rules. Exactly what those changes will be, however, is not really clear, and this is the portion of the program that involves the reading of tea leaves."
He said, "One change that the SEC is likely to propose will address the use of stable share prices for the purposes of sales and redemptions of money market fund shares. The SEC has been looking at this issue at least since it was raised in the Treasury's blueprint for financial reform.... [I]t has been a subject of discussion at the President's Working Group on Financial Markets, which includes representatives of the SEC. I think it's fair to say that changing the rules on the use of a stable share price will have a significant effect on money market funds, as well as the mutual fund industry. There are a number of people in the mutual fund industry that note the correlation of the growth of money market funds with the growth of mutual funds as a whole. As a result, any proposal that is perceived to have a significant and adverse effect on money market funds, I think will face extremely stiff resistance."
Hunt explained, "As I see it, any proposal to change the rules governing the use of stable share prices will likely involve one of two approaches. The first approach will be the nuclear option, and that is to ban their use entirely. As I said, this is likely to face stiff resistance. Another approach would be to create a two-tiered system of money market funds along the lines proposed by the American Bar Association in its comments to the proposed amendments last summer. Under this approach, one type of fund would be permitted to maintain a stable share price, but subject to strict risk-limiting conditions. The other type would be required to use the share price based on market value, but be permitted to adhere to more liberal risk-limiting conditions."
"Another change suggested by the Treasury's blueprint, which would be likely to come from outside the SEC, would involve required emergency liquidity facilities or some other type of credit support to money market funds. As I see it, changes along these lines could be a requirement that the funds' sponsor or adviser commit to purchase from the fund any security that is no longer an eligible security or which fails to meet certain minimal credit risk standards. Or it could be some other kind of support for the fund's share price if the shadow price falls below a specified threshold," he said.
Hunt told Ignites listeners, "I think a more likely option is some type of government support, either something like the government's temporary guarantee program established in October of 2008 in which most non-Treasury money market funds participated in, or some sort of insurance coverage for a specific dollar amount of an investor's interest in a fund, similar to FDIC insurance provided to bank deposits. A third option, which would be especially relevant I think for money market funds intended for retail investors, would require the funds to reorganize such as a special purpose bank as proposed by the Group of 30 in January 2008 with those banks receiving some kind of government backing."
Finally, he added, "In addition to those 'big picture' type of issues, I think there will be tinkering with Rule 2a-7 in the near-term and over the next several years.... I think there's a good chance that there could be additional guidance provided by the SEC on the new stress testing and know-your-customer requirements.... I think it's also possible that we could see further rulemaking to remove the references to NRSROs in Rule 2a-7 and related rules.... But you have to wonder whether they've given up on that prospect. Even if the SEC doesn't further limit or prohibit [second tier securities], I do think it's likely that in response to the new rules that there could be new kinds of products that are going to be designed for money market funds.... As these products start to test the limits of Rule 2a-7 ... I think it's likely that there could be further no-action relief."
Note: Hunt is scheduled to speak at Crane's Money Fund Symposium on July 26th on the topic of "Parent Backing, Bailouts, No-Action Letters."
