The Investment Company Institute kicked off its annual General Membership Meeting Wednesday in Washington, and unsurprisingly money market mutual funds are a hot topic of conversation. ICI President Paul Schott Stevens discussed them at length in his Opening Remarks on an "investor-centered" organization with an "affirmative approach to regulation". He says, "Investor interests also motivate and inform our activities to preserve money market funds and the great value they provide to shareholders and the economy. We cannot envision a future in which American mutual funds are foreclosed from providing our investors tools for effective cash management through which they can access current money market returns."
He explains, "For 56 million individual investors, money market funds offer the only way to achieve a current money market yield and the safety of a diversified, professionally managed portfolio. Since 1990, retail investors have earned $242 billion more in returns from money market funds than they would have earned in competing bank products. For millions of institutional investors who need to balance daily income and outflow, money market funds offer greater flexibility, diversification, and liquidity than either bank products or direct investments in money market instruments."
Stevens tells the GMM, "Looking beyond our investors for a moment, I'd point out that the $2.6 trillion entrusted to money market funds is put to valuable uses throughout the economy -- financing commercial paper, short-term municipal debt, asset-backed commercial paper, bank CDs, Treasury bills. In short, money market funds help keep the lifeblood of the economy flowing. This is a remarkable success story -- but not just for our industry. It is one of the great success stories of modern financial regulation. Throughout the history of money market funds, the SEC has carefully crafted rules that balance these funds' competing objectives of convenience, liquidity, and yield. Under this regulatory regime, money market funds have flourished and innovated—to the great benefit of investors and the economy."
He continues, "Unfortunately, the SEC -- urged on by bank regulators -- seems to be on a path to deprive investors, issuers, and the economy at large of the manifold benefits of a robust money market fund sector. On its current path, the Commission may abandon the regulatory regime under which these funds have maintained a stable $1.00 per-share value. Alternatively, it may force money market funds to adopt a complicated regime of capital buffers and redemption restrictions. In a recent survey by consultants at Treasury Strategies, four out of five institutional investors said they would reduce or eliminate their use of money market funds if those funds are subjected to a floating net asset value or redemption restrictions. Based on these investors' estimates, institutional assets in money market funds would decline by 60 percent or more. Undoubtedly, many individual investors would react similarly. We could expect a hemorrhaging of money market fund assets."
Stevens tells us, "In another study which we will release soon, ICI Research will examine the impact of requiring money market fund sponsors to provide capital buffers. This change would fundamentally alter the nature of the business. Requiring advisers to put up capital places them in a first-loss position for their funds -- a risk that advisers are not being paid to assume. It's hard to imagine fund sponsors taking on such a burden. Instead, many would prefer to leave the business, directing their skills and systems to managing similar products that are less regulated and less transparent. The Institute is also preparing a paper on the operational challenges that funds and financial intermediaries would face in implementing the SEC's contemplated asset freezes for shareholders who redeem their money market fund shares."
He says, "We are talking about retirement plans ... financial advisers ... bank trust departments ... insurance companies ... sponsors of sweep accounts ... the whole range of intermediaries that depend upon the convenience and liquidity of money market funds to provide useful and economical services to investors. The impacts are, quite simply, mind-boggling. Thousands of intermediaries will be faced with a stark choice: invest millions of dollars in new systems to manage redemption freezes, or find a different product to meet investors' cash needs. We expect many -- if not most -- will opt for other products, even if those products are less regulated, less transparent, and riskier. Investors will be the losers."
Stevens speech continues, "The interests of our investors, the interests of the economy, and the interests of the financial system -- these are powerful motivators as ICI and its members work to preserve the fundamental nature of money market funds. How can we do that? Through research, we and our members are demonstrating the flaws in the SEC's contemplated changes. We are standing up for the success of the SEC's prior amendments to money market fund regulation. In January 2010, with the fund industry's strong support, the SEC adopted rule amendments that raised the credit quality, shortened the maturity, enhanced the transparency, and increased the liquidity of money market fund portfolios."
Finally, he adds, "These reforms were tested in the troubled markets of the last year -- and they passed with flying colors. Thanks to the 2010 amendments, money market funds are stronger today -- and today's money market fund is a very different product from its 2008 predecessor. It's ironic, but we seem more cognizant of what was accomplished than are the regulators themselves. The SEC should be proud that it achieved so much, so quickly, to strengthen money market funds -- without undermining their core principles or their role for investors and the economy."
