The Investment Company Institute's Paul Schott Stevens responded to Monday's Wall Street Journal Editorial with a brief entitled, "Forcing Money Market Funds to "Float": Hurting Investors, Increasing Risk." Stevens writes, "It's rare to see the Wall Street Journal editorializing in favor of regulation for regulation's sake. But in repeatedly endorsing the Securities and Exchange Commission's campaign to force money market funds to "float" their per-share price ("`Republicans Against Reform," Review & Outlook, June 11), the Journal supports new rules that will harm investors without helping taxpayers or the financial system. The stable $1.00 net asset value (NAV) of money market funds reflects market reality, not accounting fiction. In fact, investors already know that money market fund portfolios can change in value. But money market funds consistently deliver a $1.00 share price by carefully managing their portfolios of short-term, high-quality assets."
He explains, "As a result, fluctuations in money market fund portfolios are miniscule: During the worst of the eurozone crisis in 2011, the prime money market funds with the greatest exposure to the eurozone saw their NAVs drop by 0.00009 percent -- less than one one-hundredth of a penny. Neither the SEC, the Federal Reserve, nor the Wall Street Journal has made an empirical case that forcing funds to "float" in such tiny increments would have any effect on investor behavior. Instead, what the floating NAV would do is force millions of individual and institutional investors to give up the convenience, stability, and liquidity of money market funds. It would force hundreds of billions of dollars into too-big-to-fail banks and into alternative funds that operate without the risk-limiting rules and transparency applied to money market funds. Rather than making the financial system safer, the floating NAV would increase risk in hidden pockets."
Stevens continues, "The Temporary Guarantee Program for money market funds, imposed by the Treasury Department in September 2008, earned taxpayers $1.2 billion in fees paid by funds, and didn't pay any claims. The program was small and temporary because the fund industry insisted on limits to prevent a destabilizing run from bank deposits to money market funds -- as the Journal's editors know from our conversations."
Finally, he adds, "Calls for structural changes to money market funds ignore the very real costs of this fruitless regulation -- damage to investors, damage to financing for business and state and local governments, and damage to the financial system through increased risk. Legislators who want the SEC to make its case before imposing those costs should be praised, not scolded."
In other news, the ICI also recently wrote a comment letter to the Office of the Comptroller of the Currency. (See Crane Data's April 11 News, "OCC Proposes Rules on 112 Billion Short-Term Investment Fund Market".) The ICI comment says, "The Investment Company Institute ("ICI") appreciates the opportunity to comment on the notice of proposed rulemaking that the Office of the Comptroller of the Currency ("OCC") has issued to revise the requirements imposed on banks pursuant to 12 CFR 9.18(b)(4)(ii)(B), the short-term investment fund ("STIF") rule ("STIF Rule"). We support the efforts of the OCC to improve investor protection by strengthening the resilience of STIFs and increasing the transparency of these products. ICI and its members have invested substantial time and resources in similar efforts to ensure the continued success of money market funds, another type of fund that also seeks to maintain a stable net asset value ("NAV")."
ICI General Counsel Karrie McMillan explains, "Since 1983, money market funds have been governed very effectively by the Securities and Exchange Commission ("SEC"), pursuant to Rule 2a-7, a carefully crafted rule under the Investment Company Act of 1940 that strictly limits the risks these funds can take. The framework of Rule 2a-7, combined with all the regulatory protections applicable to mutual funds in general, has made these funds, for more than 25 years, uniquely valuable to investors and an indispensable source of short-term financing in the U.S. economy."
She tells the OCC, "In 2010, the SEC approved far-reaching amendments to Rule 2a-7 that enhanced an already strict regime of money market fund regulation by imposing new credit quality, maturity, and minimum liquidity standards and increasing the transparency of these funds. These reforms proved their value last summer when money market funds -- without incident -- met large volumes of shareholder redemptions during periods of significant market turmoil, including a credit event involving the historic downgrade of the U.S. government debt."
The letter continues, "We are pleased that the OCC (also a member of the FSOC) in its proposal has recognized the significance of the SEC's 2010 amendments to Rule 2a-7. The Release suggests that the changes to the STIF Rule were "informed by" the SEC's actions. We urge the OCC to take full account of the reforms already implemented for money market funds as it changes its STIF Rule. Indeed, so far-reaching were these reforms that today's money market funds are dramatically different and more resilient to economic and financial shocks -- a fact that has largely been ignored by some in the regulatory community whose commentary seems predicated on the notion that the industry is unchanged since 2008. We therefore support efforts by the OCC to carefully study the money market fund regulatory regime, including the 2010 amendments, as part of its analysis of ways to improve investor protection by strengthening the STIF product."
