The Mutual Fund Director's Forum wrote a news brief yesterday entitled, "Congress Questions SEC About Floating NAV for Money Market Funds," we learned from Attorney Joan Swirsky. The independent fund director's organization writes, "In a letter dated August 12, 2011, House Financial Services Chairman Spencer Bachus and Subcommittee Chairman Scott Garrett, joined by 14 other committee Republicans, questioned SEC Chairman Mary Schapiro about the SEC's consideration of floating NAV money market funds. The letter was sent in response to her testimony before that subcommittee on June 24, 2011 that the SEC was "actively discussing floating NAVs" as a way to ensure that we do not have a "run on money market funds." The letter asks Chairman Schapiro to respond to nine questions, all of which appeared designed to highlight the dangers of floating NAVs for money market funds."
The letter from the U.S. House of Representatives' Committee on Financial Services says, "On June 24, 2011, the Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing entitled, "Oversight of the Mutual Fund Industry: Ensuring Market Stability and Investor Confidence." This hearing ... included extensive discussion of the numerous issues facing the mutual fund industry."
It explains, "One of the issues discussed during the hearing was the advisability of requiring money market mutual funds to have floating net asset values (NAVs). On this issue, the majority of the witnesses cautioned against such an approach. For example, Professor Mercer Bullard of the University of Mississippi School of Law stated that "requiring [MMMFs] to float their NAVs would eliminate an investment option chosen by tens of millions of investors as the best option for their safe money, only to re-create precisely the same problem in floating NAV funds that these funds were intended to solve." Paul Stevens, the President & CEO of the Investment Company Institute, also expressed skepticism ... stating that "[t]here is compelling evidence that a substantial portion of money market fund investors either would be unable or unwilling to use a floating NAV money market fund" and "the primary effect of requiring money market funds to float their NAVs would be a major restructuring and reordering of intermediation in the short-term credit markets, which would not reduce -- and might well increase -- systematic risk."
The Bachus and Garrett letter continues, "Given the testimony received by the Subcommittee on June 24, it was somewhat surprising when you told the Senate Banking Committee on July 21, 2011 that the Securities & Exchange Commission was "actively discussing floating NAVs" as a way to ensure that we do not have a "run on money market funds." To assist the Committee in reconciling the views expressed by many of the witnesses at our June 24 hearing with the Commission's active consideration of proposals to "float the NAV," we would appreciate your answers to the following questions."
The letter asks, "Do investors understand that money market mutual funds pose some risks and are not insured deposits? If not, could the SEC enhance existing disclosures which explain money market mutual fund risks? Do all investors know that a money market mutual fund's net asset value has the ability to fall below one dollar? Are there ways to increase transparency around a fund's net asset value without the floating NAV? Do all money market mutual funds pose the same risks to the U.S. financial system?"
It also queries, "What has been the success or failure of the SEC's 2010 reforms to the money market fund Rule 2a-7? Do investors and the capital markets have better information about the product as a result of the changes? Have the Rule 2a-7 reforms changed the behavior of money market mutual fund providers, boards and investors? What would happy to the long-term viability of money market mutual funds if the Commission required the net asset value to float? Would requiring money market funds to float their net asset values have negative consequences on the ability of both the public and private sectors to meet their short-term funding needs?"
Finally, the Committee asks, "What empirical evidence does the Commission have to support a floating net asset value for money market mutual funds? Could the Commission prevent future stress on money market mutual funds with enhanced oversight by using its authority to require a fund provider to de-leverage certain assets, or is the floating net asset value the Commission's only option to prevent a run on one or more funds?"
The letter concludes, "Money market mutual funds play a very important role in our economy, holding approximately $2.7 trillion in assets, and thus any action on the Commission's part to alter the composition of these products must ensure that the end result is a viable and stable market, and that U.S. companies and states and municipalities continue to have access to necessary sources of short-term funding. We look forward to receiving your responses to the above questions by August 26, 2011."
