The Investment Company Institute recently published its "2010 Annual Report to Members," which contains a "Case Study" (pages 16-19) section on "Making Money Market Funds Even Stronger." It says, "The year 2010 brought great progress in achieving one of the top mutual fund priorities to emerge from the financial crisis: the quest to make money market funds more resilient in the face of extreme market conditions. A combination of initiatives by sponsors of money market funds and decisive action by regulators led to swift adoption of crucial and wide-ranging reforms. The Institute continued to build upon the leadership of its Money Market Working Group to advance creative ideas to strengthen these funds, while resisting proposals that would change their fundamental nature and undermine their value to investors."
The section continues, "The liquidity and credit crisis that threatened global financial markets in September 2008 battered virtually every part of the financial system. But the failure of Reserve Primary Fund to maintain its $1.00 net asset value (NAV) focused attention on money market funds. In response, ICI formed the Money Market Working Group, which in March 2009 proposed an array of measures to make money market funds more secure."
ICI says, "The Working Group's proposals anticipated a comprehensive set of reforms to Rule 2a-7 adopted by the Securities and Exchange Commission in January 2010. The rules further limit risks to money market funds' portfolios by raising the standards for credit quality and shortening funds' maturities. Significantly, the amendments require for the first time that money market funds maintain specified levels of liquid assets to ensure daily and weekly liquidity levels sufficient to meet redemption demands during times of market stress."
It adds, "The SEC also gave money market fund boards the necessary tools to cope with extraordinary levels of redemptions by allowing an orderly liquidation of a troubled fund. ICI strongly supported the new rules. 'These and other changes will provide significant additional protections and will benefit money market fund investors,' said ICI President and CEO Paul Stevens. 'ICI will remain in close dialogue with the SEC and other regulators while they consider further changes to money market fund regulation.'"
The Case Study also says, "ICI continues to pursue efforts to make these funds even stronger for their investors. After the issuance of its report and recommendations, the Money Market Working Group began to explore additional ideas for providing liquidity for prime money market funds when liquidity is scarce. At the Mutual Funds and Investment Management Conference in March 2010, Stevens described the outlines of a possible industry-supported facility dedicated to providing additional liquidity to prime money market funds in the event of severe market conditions."
ICI's annual report continues, "While supporting necessary changes to strengthen money market funds and the functioning of the money markets, ICI has continued to resist proposals advanced by regulators and others that would force money market funds to abandon the stable $1.00 NAV in favor of a floating NAV. In a number of speeches and comments, the Institute has pointed out the benefits of a stable NAV to shareholders regarding tax, accounting, and recordkeeping convenience, and stressed the potential damage that proposed changes could cause. 'Make no mistake: forcing these funds to 'float' their NAV will destroy money market funds as we know them,' Stevens told the March conference. 'It will penalize individual investors and exact a high price in the American economy. But it will not -- repeat, not -- reduce risks to the financial system. By any measure, it is a bad idea.'"
The section explains, "Users of money market funds and issuers in the money markets have voiced identical concerns. Groups representing state and local financial officials -- who count on money market funds to purchase almost two-thirds of their short-term debt -- have also been vocal: the Government Finance Officers Association adopted a policy statement pledging to oppose efforts to force money market funds to abandon their stable NAV, and the National Association of State Treasurers and the National Association of State Auditors, Comptrollers, and Treasurers both sent letters to Treasury Secretary Timothy F. Geithner supporting the stable NAV. Corporate users and issuers have written similar letters, led by the U.S. Chamber of Commerce, the National Association of Corporate Treasurers, Financial Executives International, and the Association for Financial Professionals. More than 40 individual companies have registered their support for a stable NAV."
Finally, ICI writes, "The issue will continue to be debated as regulators consider the report on money market funds issued by the President's Working Group on Financial Markets. While regulators and the fund industry made great progress in strengthening the resilience of money market funds in 2010, there is a consensus that more can and should be done. ICI will continue to work with regulators and members to strengthen money market funds and uphold their long-standing position as a preferred vehicle of cash management for individuals, businesses, nonprofit organizations, and government agencies. For more information about ICI's activities on money market funds, please visit www.ici.org/mmfs."
