The most recent Comment on Money Market Fund Reform to be posted on the SEC's President's Working Group webpage comes from Charles Schwab Investment Management Executive Vice President Marie Chandoha. She writes, "Charles Schwab Investment Management, Inc. ("CSIM") appreciates the opportunity to provide additional perspective on the ongoing debate over money market mutual fund reform. CSIM is one of the largest managers of money market fund assets in the United States, with 3.2 million money market fund accounts and $160 billion in assets under management as of December 31, 2011. Approximately 85% of those assets are in sweep funds, with the remainder in purchased funds. Sweep accounts automatically invest idle cash balances while providing investors with convenience, liquidity and yield. The Charles Schwab Corporation also offers other cash options for clients, including bank deposits through Charles Schwab Bank, which currently holds more than $60 billion in deposits. The firm believes clients prefer having the option of choosing from among a variety of options for managing their cash."
Chandoha explains, "CSIM is extremely concerned about reports that the Commission is considering additional proposals to regulate money market funds. Of particular concern is the fact that little analysis appears to have been undertaken to analyze the effectiveness of the 2010 amendments to Rule 2a-7, which significantly enhanced the stability, resiliency and transparency of money market funds. Without an in-depth study of the impact and effectiveness of these recent reforms, we question whether the Commission has a sufficient basis upon which to take further action. We offer in this letter evidence that those reforms have been effective, and urge the Commission to undertake a larger study of the 2010 amendments before proposing additional reforms."
She says of "The 2010 Amendments to Rule 2a-7," "In 2009, when amendments to Rule 2a-7 of the Investment Company Act of 1940 were first proposed, CSIM expressed its strong support for many aspects of the proposal. Indeed, in our comment letter of September 4, 2009, we stated that "the Commission has taken a thoughtful and measured approach to modifying Rule 2a-7, seeking to enhance investor protection while retaining the many benefits money market funds provide to retail and institutional investors alike." The Commission approved the Rule 2a-7 amendments on January 27, 2010, and they went into effect on May 5, 2010. The 2010 amendments were a specific response to the market crisis of 2008, during which a combination of unprecedented market conditions and unusually large redemption requests put pressure on numerous money market funds and contributed to a single fund "breaking the buck" by failing to hold its share price at $1.00 per share."
Chandoha continues, "As the Commission considers whether additional reforms are needed, we believe it is critically important that a careful analysis of the 2010 amendments to Rule 2a-7 be completed. The key questions are whether the risks have been reduced to an acceptable level and whether money market funds are better able to withstand market volatility and potential spikes in redemptions. The Commission then must consider whether the benefits of additional regulation are significant enough to outweigh the intended and unintended consequences to the users of money market funds. To assist the Commission with its analysis, we provide data from CSIM funds that we believe demonstrates that the 2010 Rule 2a-7 amendments have been enormously effective in strengthening money market mutual funds. We hope that the Commission finds this information useful as its deliberations continue."
She explains, "The 2010 amendments to Rule 2a-7 made a number of major changes to the regulatory environment for money market funds, but perhaps none were more significant than the implementation of new liquidity standards. Where there were previously no liquidity requirements at all, the amendments now require that at least 10% of a prime fund's assets be convertible to cash within one day, and at least 30% of any fund's assets be convertible to cash within one week.... Together these changes have made the funds significantly more resilient to volatile market conditions by requiring portfolio managers to respond proactively to changing market conditions. We believe this combination of strong regulatory oversight and prudent portfolio management enhances investor confidence and ensures that the fund could weather even the most extreme market circumstances -- including circumstances that go well beyond the crisis of September 2008."
Schwab tells the SEC, "To illustrate further the real-world implications of the Commission's 2010 reforms, we examined the net asset values of each CSIM money market fund during the year 2011, as well as the monthly flows in and out of CSIM money market funds during the same period. Last year represented a real test of the 2010 amendments to Rule 2a-7. It was a year of unusual volatility in the markets, with several market events that caused concern to investors, notably the ongoing EuroZone crisis, the uncertainty of the U.S. debt ceiling debate in the summer, and the first-ever downgrade of U.S. debt by Standard & Poor's on August 5, 2011. As a result of these and other market events, there were several periods during 2011 in which redemption requests were higher than normal. Figure 3 illustrates the average shadow NAV of all CSIM money market funds. As can be seen, the chart shows remarkable price stability, even during periods of enormous volatility. The average shadow NAV for prime funds, for example, reached its peak in April at $1.000185, and its trough in September with a price of $0.999938. The total price fluctuation from high to low, over the course of one of the most volatile market years in history, was less than two and a half hundredths of a penny."
She adds, "This data provides evidence that the 2010 reforms have contributed greatly to the strengthening of CSIM money market funds. During 9 of the 12 months in calendar year 2011, CSIM prime money market funds experienced outflows. But all CSIM funds were able to satisfy all redemption requests without significant impact to any of the funds' NAVs. Moreover, the amount of redemption requests was considerably lower than the fund experienced during 2008, a reflection, we believe, of the investor confidence in money funds. During a period of instability in the market, money market funds performed with remarkable stability."
Chandoha concludes, "CSIM believes that our recent experience demonstrates that the reforms of Rule 2a-7 in 2010 have accomplished and are accomplishing the goals of making money market funds more transparent, more resilient and more resistant to sudden changes in redemption behavior. Investors are demonstrating confidence in the product, not only by continuing to keep more than $150 billion in money market funds at CSIM, but by not overreacting to market volatility with large redemption requests. CSIM also believes that some of the additional reforms under consideration at the Commission have the potential to devastate the product, reducing choice for individual investors and limiting options for short-term financing for businesses, municipal issuers and non-profit organizations. Proposals such as requiring money market funds to float their net asset values or imposing a mandatory holdback that would prohibit investors from having immediate access to all of their assets are unworkable for funds and for individual investors. Perhaps more importantly, it remains far from certain that these proposals would provide any additional benefit, beyond the substantial benefits provided by the 2010 reforms, to funds in addressing their ability to withstand redemption pressures in extraordinary markets."
Finally, she adds, "Before considering such proposals, it seems only logical that the Commission undertake a rigorous, industry-wide analysis of how money market funds have behaved since the 2010 reforms were implemented. In fact, we believe doing so is a necessary step before any additional reform is contemplated. We believe that the experience of our funds is representative of the entire industry, but only a broad study can confirm that. We strongly urge the Commission to conduct a broad study of the effectiveness of the 2010 reforms before proposing any additional reforms. Should the Commission's analysis reveal specific areas of weakness or concern, we would be happy to work with the Commission staff on targeted reforms that address specific issues raised in a study. We thank the Commission for the opportunity to add our perspective to this important debate. We would be pleased to provide additional information or respond to any questions from the Commissioners or the staff."
