The first substantial comment letters on the President's Working Group Report on Money Market Fund Reform (Request for Comment) were recently posted to the SEC's website. (Click here to see the comment letters.) In what's sure to be a common theme when the bulk of comment letters get posted around the January 10 deadline, the National Association of State Treasurers spent its letter strongly opposing a floating NAV. Meanwhile, consulting firm Treasury Strategies took another opportunity to reiterate its opposition to Moody's recent ratings change proposals.
James Lewis, President of the National Association of State Treasurers writes, "The National Association of State Treasurers (NAST), the organization that represents the treasurers or chief financial officers of the fifty states, the District of Columbia, and Puerto Rico, wishes to go on record as opposing the proposal of the President's Working Group on Financial Markets that money market funds (MMFs) maintain a floating Net Asset Value (NAV), rather than a stable $1 per share as has been the standard. NAST believes that such a change would not be in the interests of either investors or debt issuers and could potentially destabilize the market."
The letter continues, "NAST further believes that a floating NAV could decrease investor demand and transform money market funds into, essentially, short-term bond funds. If this were to occur, it would negatively impact the current money market fund benefits by: Increasing investment risk, especially in volatile market conditions. Money market funds are currently well regulated by the SEC (Rule 2a-7). Money market investors understand there is some relatively small level of risk; Eliminating daily liquidity and lengthening the time to obtain cash; Increasing fund administrative costs, thereby decreasing net yield; Reducing diversification and perhaps even precluding certain public investors from using floating NAV money market funds."
It adds, "In addition, NAST believes that a floating NAV would push investors to less regulated or non-regulated markets increasing risk and increase accounting requirements of investors (e.g., mark-to-market). Finally, NAST believes that the floating NAV would reduce or eliminate a market for short-term public and non-profit debt. A floating NAV could lead to a contraction in short-term public financing capability as investors, especially institutional investors, move to other products. It would also increase short-term debt costs for states due to the reduction of placement options."
Finally, they write, "NAST has previously commented on some of the negative aspects of a floating NAV, and the organization still believes that it is a bad idea whose adoption would not have a positive result for either investors or debt issuers. It does not accept the Working Group's statement that investors believe that money market funds are 'risk-free cash equivalents' (p. 19). On the contrary, NAST believes that investors realize that money market funds have an inherent risk, albeit a small one. Furthermore, the Working Group itself states that moving to a floating NAV 'might motivate investors to shift assets away from MMFs to ... unregulated cash-management vehicles' (p. 19). This latter, we submit, would not be beneficial in any way. For these several reasons, the National Association of State Treasurers hereby goes on record as opposing a floating NAV for money market funds."
In another letter, Anthony Carfang, Partner at Treasury Strategies, writes to the SEC's Mary Shapiro, "Federal Reserve Chairman Bernanke, in a letter to me which I have enclosed, suggested that I share with you Treasury Strategies' concerns regarding a pending proposal by Moody's Investor Services that would rate money market funds based on an assessment of a fund sponsor's ability and willingness to support a financially stressed fund. Chairman Bernanke indicated that he too is concerned about Moody's proposal. Chairman Bernanke stated that the President's Working Group on Financial Markets, of which he and you are members, has recognized that discretionary financial support from sponsoring institutions raises a number of 'important policy issues.'" See also, Bloomberg's "Bernanke Backs Moody's Critic in Debate Over Money Fund Ratings".
