Today, we continue with our excerpts from Money Fund Intelligence's interview with Morgan Lewis's Buddy Donohue. MFI: What do you expect to see? What would you like to see? Actually what I expect to see is not that far different from what I would like to see. I think one proposal, and there could be multiple proposals that the Commission comes out with, but here is the proposal that I think has legs and one that I think would be beneficial. First, limit the ownership of shares of money market fund by an individual or its affiliates to less than 5%. You then have a decreased risk that an investor deciding to pull money from a money market fund can have a harmful effect on other shareholders.
Second, require greater transparency from omnibus and similar accounts, enabling the money market fund to better evaluate liquidity and other needs. If omnibus accounts don't provide that transparency then the omnibus account itself will be subject themselves to the 5% limit. We've heard that from several of the money market fund providers that if they're not going to have to maintain liquidity in excess to what they probably really need, they need greater transparency to into who the beneficial owners are of their funds.
Third, require money market funds which desire to maintain a stable $1.00 NAV to have two classes of shares. This is an idea I have been interested in for quite a period of time. I'll give you a concept that I think works, which is that you have income shares, and those would be your traditional money market fund shares that are now provided to investors and they would continue to have a stable NAV of $1. Then you'd have capital shares. These would be sold to the investment advisor, and would constitute a certain percentage of the fund.
The fund itself would be mark-to-market, so you wouldn't have the criticism that the total fund is not subject to the discipline that regime imposes on financial institutions. The proposal would enable the investment advisor to actually recoup capital that's committed to the fund to support the $1.00 NAV. During the crisis there considerable capital used to support money market funds, and the adviser (or an affiliate) would have to just write checks and had no ability to recoup it. With this new approach, if you're a capital share owner over time you have the opportunity to take capital gains and recoup some of your losses.
So that is one of the ideas, I think, that is out there. It's similar, in part, to the Squam Lake proposal, although if I recall correctly they didn't necessary have the manger having to own the shares. I thought the manager owning the shares is actually the best way to go.... It aligns the manager's interest with regards to how much risk they are willing to take for the fund. It limits the growth of the fund to the manager's capabilities of supporting it.... It has the capital support for the stable $1.00 NAV inside the fund, so you don't have to rely on anything or anybody outside of the fund make the fund income share owners whole. It happens automatically. I think it has a lot to argue for and of course if somebody doesn't want to do that, they can provide a floating net asset value fund for investors.
It addresses many of the concerns raised about stable NAV. It will enable money market fund investors to know how much support the fund has from the adviser, making the implicit support explicit. It significantly reduces the likelihood that a money market fund will 'break the buck'. It lessens the incentive for income investors to flee the fund, as there is a level of support for the investor shares provided by the capital shares and the adviser has a disincentive to allow hot money in the fund.
Something we all should be mindful about when evaluating the buffer proposal is that if the buffer is too great it's probably not economically feasible, and if it is too small it is probably more dangerous than not having any buffer. It may be providing a false level of security to investors and regulators. As I have indicated previously, I don't think there are any easy answers here but it is important that we address the issues in a manner that works, that is economical and that preserves the benefits that money market funds have provided to investors, issuers and the capital markets.
