Yesterday morning, Karrie McMillan, General Counsel of the Investment Company Institute gave the Opening Remarks at the ICI and FBA's "Mutual Funds and Investment Management Conference" in Palm Desert, Calif. The talk, entitled, "Sunlight Through the Clouds: Emerging from the Financial Storm, mentioned money market funds in several sections. McMillan says, "What I can't promise you is certainty. Many of you were with us in Phoenix in March 2008, when Bear Stearns collapsed just before this conference started. Since then, our financial world has been in turmoil." (Note that ICI also reports that Director Eileen Rominger says the SEC and FSOC will hold a money fund roundtable in May.)
She continues, "I don't need to remind you of the events, the seemingly endless loop of crisis and response that we have endured since then -- who wants to remember all that? But clearly, this global financial crisis was a very real stress test for the funds you counsel. We've come a long way in the past three years. We rallied together, as an industry, to address the threats and find ways to continue to serve our shareholders, under enormous strains and pressures.... [W]e have definitely seen progress."
McMillan says, "The financial markets have regained their footing. The Federal Reserve has significantly reduced its emergency facilities. The SEC has adopted its amendments to Rule 2a-7 for money market funds. And Congress has weighed in with the passage last July of the Dodd-Frank Act. But certainty about our future? That's still a distant dream. Think about it -- we face a host of questions that will affect our businesses for years to come."
She asks, "Which financial institutions are going to be deemed 'systemically significant'? The new Financial Stability Oversight Council -- or 'FSOC' -- is aiming soon to start designating businesses outside of the banking world as SIFIs -- 'systemically important financial institutions.' We've been through two rounds of comment on how the FSOC will make these designations, and there's still not much that we can say for sure about which companies will be designated. Nor has the Fed developed the standards it will apply to SIFIs. Uncertainty."
McMillan also asks, "What's going to happen with money market funds? The President's Working Group has issued its Report on Money Market Fund Reform Options. ICI is pursuing its proposal for a liquidity facility -- a private-sector solution, created and financed by prime money market funds and their sponsors. We believe that such a facility could provide the liquidity backstop that funds may need if we ever again see market conditions like those of September 2008. We've presented the blueprint, in great detail, to the SEC, the Treasury, and the Federal Reserve -- and now we're still in wait-and-see mode. No certainty there."
The Opening Remarks add, "We also know that the debate on key issues has been robust. On such important questions as designation of systemically important financial institutions, commenters from a wide range of interests have weighed in with their views and analysis about how to identify and evaluate financial risk. Academic papers and conferences have been devoted to broadening the debate on these topics. That's how the policymaking process should work -- another cause for hope. We know that America's lawmakers continue to believe in our funds."
McMillan tells us, "And one more key thing we know. Even though we're living in an uncomfortable state of uncertainty, our investors have maintained their confidence in funds. We've seen that confidence clearly expressed in the debate over money market funds. Groups representing businesses, government, financial services, and consumers have stepped forward to register their support for the fundamental aspects of money market funds, particularly the stable $1.00 net asset value. This widespread endorsement has supported our efforts to avoid proposals that would seriously undermine the value of money market funds for fund shareholders."
She adds, "We see this confidence in the behavior of households, who continue to turn to funds to help them meet their financial goals. From 2008 through 2010 -- despite the worst financial crisis since the 1930s -- households' net purchases of funds totaled $900 billion. Put another way, 85 cents out every dollar that households invested in financial assets, on net, flowed into mutual funds, exchange-traded funds, variable annuities, and closed-end funds."
McMillan states, "As ICI's chairman, Ed Bernard of T. Rowe Price, likes to say -- the people who invest are a lot calmer than the people who just write about investing. Clearly, investors have faith that the foundations of our industry remain strong. And that brings me to some things that I can say with absolute certainty -- even in these times of questions and doubts. The model of fund investing that is enshrined in the 1940 Act -- transparent, diversified, with limited leverage, and subject to strict pricing disciplines -- demonstrated its worth during the financial crisis, serving both funds and their shareholders well."
Finally, she says, "So we'll face many questions and concerns in the months ahead. We won't have all the answers -- either here in the next three days or when we go back to our offices. But we always have the bedrock belief in our mission and our service to investors. And that, together with the faith they entrust in us, will ensure a strong future for us all."
