The Investment Company Institute, the trade group representing the mutual fund industry, recently submitted an extensive comment letter to an international group of securities regulators. The document, listed under "ICI Submits Information to IOSCO on Money Market Fund Reform" is titled, "Submission by the Investment Company Institute Working Group on Money Market Fund Reform Standing Committee on Investment Management International Organization of Securities Commissions." It says, "In connection with the International Organization of Securities Commissions' Standing Committee on Investment Management's review of money market funds, the Investment Company Institute is pleased to offer the following submission. Our submission focuses on U.S. money market funds and explains why in light of the effectiveness of the U.S. Securities and Exchange Commission's recent amendments to the regulatory program for money market funds under the Investment Company Act of 1940, no further reforms are necessary."
ICI writes, "Since ICI's inception in 1940, we have been active participants in the development of laws and regulations that have been instrumental in the growth of fund investing in the United States and worldwide. Most recently, we have been deeply engaged in the development of laws and regulations responsive to the recent financial crisis, including mechanisms to counter systemic risk and to make money market funds more resilient in the face of adverse market conditions, such as those caused by the widespread bank failures in 2008. Indeed, in recognition of the importance of money market funds to the global economy and to investors, we share the goals of regulators and other policymakers -- strengthening the regulation of these funds and making them more robust under adverse market conditions. We have devoted significant time and resources to this end."
The letter explains, "Since the worst of the 2008 banking crisis, the SEC and the fund industry have made a great deal of progress toward their shared goals of bolstering money market funds. In March 2009, ICI issued the Report of the Money Market Working Group, an industry study of the money market, of money market funds and other similar participants in the money market, and of recent market circumstances. The MMWG Report included wide-ranging proposals for the SEC to enhance money market fund regulation."
ICI continues, "Incorporating a number of the MMWG Report's suggestions, the SEC, in 2010, approved far reaching rule amendments that enhance an already-strict regime of money market fund regulation. The new rules make money market funds more resilient by, among other things, imposing new credit quality, maturity, and liquidity standards and increasing the transparency of these funds. The SEC indicated that the amendments are designed to strengthen money market funds against certain short term market risks, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share. In fact, these reforms were tested this past summer when money market funds met, without incident, large volumes of shareholder redemptions during periods of significant market turmoil, including a credit event involving the historic downgrade of U.S. government debt."
They add, "This experience reinforces our belief that the SEC's current program for regulating and supervising money market funds is sufficient to meet the challenge of even adverse market conditions. The 2010 regulatory reforms are working, and further changes are not necessary. In particular, replacing this program of money market fund regulation with a model that would fundamentally alter the product and/or impose inappropriate bank-like regulation on money market funds would not enhance the stability of these funds -- or of our global financial system -- and, in fact, could have the opposite effect of increasing risk worldwide."
ICI's letter to IOSCO continues, "It also is important to consider the SEC's 2010 amendments to money market fund regulation within the context of other reform efforts to strengthen the resilience of the international financial system. Since the onset of the global financial crisis, the G20 has established core elements of a new global financial regulatory framework that are intended to make the financial system more resilient and better able to serve the needs of the global economy. Through the efforts of the FSB, which is responsible for coordinating, monitoring, and reporting to the G20 regarding its reform efforts, the national authorities and international bodies have further advanced the G20/FSB financial reform program through various policy reforms. These include reforms designed to, among other things, improve the soundness of the banking system, address the risks posed by systemically important financial institutions, strengthen the regulation and oversight of the "shadow banking" system, improve the over-the-counter and commodity derivatives markets, develop "macroprudential" frameworks and tools to identify and monitor systemic risk, strengthen and converge global accounting standards, strengthen adherence to international financial standards, and reduce reliance on credit rating agency ratings."
It also says, "In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act provides regulators with an array of new tools to address abuses and excessive risk taking by financial market participants, and to detect new buildups of risk in the financial system. Through these coordinated efforts, the FSB has found that "a comprehensive standard for reform has now been established that, when fully implemented, will enable authorities to resolve failing financial institutions quickly without destabilizing the financial system or exposing taxpayers to the risk of loss."
ICI adds, "Notwithstanding these global reform efforts, including the proven success of the SEC's 2010 amendments, the calls for more money market fund reform continue. Unlike the 2010 amendments, however, the reforms now being considered would drive funds out of business, reducing competition and choice, and alter the fundamental characteristics of money market funds, thereby destroying their value to investors and the economy. Rather than making our economies and financial systems stronger, such reforms have the potential to increase systemic risk."
Finally, they say, "It is therefore imperative that before any further regulatory action is taken, all market participants better understand the singular benefits money market funds provide to investors and the economy. With this in mind, our comments below begin with an overview of the U.S. money market to provide context (Section I). Next, we describe the regulation of U.S. money market funds, including the SEC's recent reforms (Section II). We then examine each of the reform options currently under serious consideration in the United States and describe how they would undermine money market funds' value to investors, effectively destroying these funds and disrupting the supply of credit to businesses, state and local governments, and consumers (Section III)."
