The Investment Company Institute and the Federal Bar Association's 2010 Mutual Funds and Investment Management Conference, which ends Wednesday morning in Phoenix, featured several important and timely discussions focused on money market mutual funds. Yesterday, we excerpted from ICI President Paul Stevens' Monday speech, "Weathering the Worst: Making Money Market Funds Even Stronger." (See Crane Data News "ICI's Stevens Defends $1 NAV, Reveals Liquidity Facility Blueprint".) Today, we quote from U.S. Securities and Exchange Commission Commissioner Luis Aguilar's speech, entitled, "Making Sure Investors Benefit from Money Market Fund Reform. (Look for coverage of the Tuesday panel, "Impact of Government and Regulatory Policies on the Money Market and Money Market Funds," which featured Crane Data's Peter Crane, ICI's Brian Reid, Reed Smith's Stephen Keen, and the SEC's Bob Plaze in the next Money Fund Intelligence newsletter.)
Commissioner Aguilar said on Money Market Funds Monday, "Now I would like to focus on money market funds, without question one of the most successful products the industry has ever developed. Today, a money market fund industry that started with one fund in 1971 now has over 750 funds with more than $3 trillion under management. Money market funds are interwoven into the fabric of the American economy. They are relied on by investors and intermediaries of all kinds. These funds are attractive to retail and institutional investors alike, both small and large.... Issuers, in addition to investors, also rely heavily on money market funds."
He continued, "Obviously, the credit crisis has been challenging for money markets and managers and has affected their profitability. Persistent low yields and the outflows of assets has resulted in various managers either quitting the business, or reducing the number of money market funds through mergers, liquidations or sales. Nonetheless, even in this environment, money market funds remain an integral part of the fabric by which families and companies manage their financial affairs. Many attribute the popularity of money market funds to their ability to maintain a stable net asset value -- typically at a dollar per share."
On the recent "Money Market Fund Reforms, Aguilar said, "It was with investors in mind that I supported the amendments to Rule 2a-7 to strengthen portfolio quality, maturity, and liquidity requirements by limiting the types of investments funds can make, as well as by adopting new requirements, such as the daily and weekly liquidity requirements that a fund hold investments it can readily turn to cash. The amendments went to the heart of how a money market fund is organized, operated, and liquidated. The changes to Rule 2a-7 recognize the integral role these funds play and are designed to fortify and strengthen the entire money market fund framework by making funds more resilient in the face of credit, liquidity, and interest rate risk."
He said, "I recognize that these amendments limiting investment choices and risk taking represent a trade-off between making money market funds more resilient investment vehicles and the cost in potential yield that investors can expect. Taken as a whole, however, they strike an appropriate balance. The new requirements of 2a-7 decrease the likelihood that money market funds will go through a crisis like we experienced in late 2008 -- and they will serve to better align the funds' ability to maintain a net asset value, typically at $1.00 per share, with the expectation of investors that one (1) dollar in means one (1) dollar out. This may be the most important expectation that investors have when they invest in money market funds. It needs to be protected."
Aguilar continued, "Money market funds have been very successful. They have been so successful that the Commission recognized in the mid-1990s, that 'investors generally treat money market funds as cash investments.' Moreover, the phenomenal success of these funds combined with the fact that until 2008 only one fund had ever 'broken the buck,' has reinforced the public perception of the safety of these vehicles. I understand the serious conflict that investors view money market funds as safe -- when, in fact, these funds are not guaranteed. To make sure that investors were clear on this fact, the Commission, in the early nineties, began to require a money market fund prospectus to clearly delineate on its cover, and in its sales literature and advertisements, that 'an investment in the fund is not guaranteed or insured by the U.S. government and that there is no assurance that the fund will be able to maintain its stable net asset value.'"
"However, the federal intervention of 2008 to halt the beginnings of a money market run may have raised public expectations that the federal government will step in if another crisis occurs. As result, investor confusion may be expected. Even though money market funds have had an enviable track record of safety -- and even as they are made more resilient -- investors in money market funds need to realize that, as with almost any investment, these investments have risk. I encourage the industry to make sure that its marketing efforts, particularly oral representations to investors, underscore that potential risk rather than exacerbate investor confusion," he said.
Aguilar's speech continued, "Notwithstanding the substantial reform recently made as to Rule 2a-7, more may be in the works. Besides what may be contained in the pending money market fund report by the President's Working Group on Financial Markets, the Chairman as well as senior staff at the Commission have telegraphed a desire to see more fundamental structural change in the money market fund industry. In particular, the staff is examining the merits of a floating, mark-to-market NAV for money market funds, rather than the stable one-dollar price. Other ideas under consideration include real-time disclosure of the shadow price; mandatory redemptions-in-kind for large redemptions (such as by institutional investors); a private liquidity facility to provide liquidity to money market funds in times of stress; and a possible 'two-tiered' system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements, among others."
He added, "I believe that any consideration of future reforms should be careful not to jeopardize the tremendous value money market funds bring to investors. As the Commission considers further money market reform, I believe two fundamental priorities must be at the forefront of our consideration. The first priority should be to recognize that money market fund investments have historically worked well for all investors, particularly for retail investors. All contemplated proposals should take retail investors into account and make sure that they are able to continue to participate and benefit."
Finally, Aguilar said, "In addition, any further reform should not be so 'transformational' that the money market fund is no longer an economically attractive product. Future proposals should be rigorously analyzed to determine the consequences that would result. One consequence no one wants to see is a flight of trillions of dollars to unregistered vehicles that have no regulatory oversight or accountability. As a second round of reform is contemplated, there needs to be serious consideration given to what other reforms should be made regarding unregistered vehicles to insure that there is no regulatory end-run."
