Recent news reports have indicated that the five SEC Commissioners have been given 30 days to analyze a 337-page Money Market Fund Reform Proposal (or proposals) to decide whether to vote to allow the draft to become public, the letter posting barrage continues unabated on the SEC's President's Working Group Report on Money Market Fund Reform (Request for Comment) website. (See Crane Data's June 27 News, "Bloomberg: Money Fund Reform Proposal Presented to Commissioners".) We excerpt from several recent additions below. These include two additions from the prolific Melanie Fein of Fein Law Offices, including materials and presentation from the American Enterprise Institute's recent event -- "Money Market Funds, Systemic Risk and the Dodd-Frank Act and "Do Money Market Funds Create Systemic Risk?" Recent postings also include another comment from the U.S. Chamber of Commerce citing a `study by Georgetown University Professor James Angel, "Money Market Mutual Fund "Reform": The Danger of Acting Now" (click here for a link to the paper) and a letter from the Utah Association of Counties.
Fein's "Money Market Funds, Systemic Risk and the Dodd-Frank Act" study states, "This paper was prepared for a symposium sponsored by the American Enterprise Institute (AEI) entitled "Do Money Market Funds Create Systemic Risk?" The answer to the question is "no" for the reasons that follow.... Ironically, the risk-averse features of MMFs have attracted recent criticism by Federal Reserve officials and a handful of academic economists who have said MMFs are "subject to runs," a source of "systemic risk," and part of the "shadow banking system." This criticism stems from events during the financial crisis of 2007-2008 when the housing bubble imploded, major financial institutions failed, and investors lost confidence that the Fed had the ability to avert a total collapse of the financial system."
She explains, "Fed officials have created a narrative about the crisis that casts blame on MMFs for destabilizing the financial system and causing or exacerbating the financial turmoil. In furtherance of its narrative, which downplays the role of banks, the Fed has urged the SEC to adopt regulatory changes that would alter the defining features of MMFs that make them so agile and efficient. Industry experts have said that the Fed's proposals would make it impossible for MMFs to operate as they do now and bring about the demise of the industry. If the SEC does not adopt the Fed's proposals, reports are that the Fed will seek to exercise direct regulatory authority over them through the Financial Stability Oversight Council ("FSOC")."
Fein adds, "This paper argues that, contrary to assertions by the Fed, MMFs pose no systemic risk to the financial stability of the United States and require no supervision by the Fed. This paper shows that MMFs did not cause the financial crisis, are not subject to runs, and are not part of the "shadow banking system." To the contrary, this paper shows that MMFs are subject to more stringent regulation than applies to banking organizations, have a record of safety far superior to that of banks, and that the Fed's proposals to subject MMFs to bank-like regulation would increase, not decrease, systemic risk. Moreover, despite suggestions otherwise, the Dodd-Frank Act provides no legal basis for the Fed to supervise MMFs. MMFs are comprehensively regulated by the SEC and nothing in the Dodd-Frank Act suggests that any change in their regulation is needed. Congress did not intend MMFs to be treated as SIFIs supervised by the Fed and nothing in the language of the Act requires or permits them to be so treated."
Fein's other posting says, "As is clear from my papers, I believe that MMFs play an essential role in the U.S. financial system. It is unfathomable to me why anyone would want to eliminate a financial product that affords investors more safety of principal, more liquidity, more transparency, greater diversification, efficiency, convenience, and a market rate of return, than any other product in the financial system. One need only look at the regulation of MMFs to see that they are not the type of entity that creates systemic risk. They are regulated under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934."
The Chamber's latest letter explains, "The U.S. Chamber of Commerce, the world's largest business federation representing the interests of more than three million businesses and organizations of every size, sector, and region, believes that short-term financing and cash management are critical for businesses to operate and expand in a global marketplace. As the Securities and Exchange Commission continues to contemplate additional changes to money market mutual fund regulation, the Chamber would like to draw your attention to a study by Georgetown University Professor James Angel, Money Market Mutual Fund "Reform": The Danger of Acting Now, that demonstrates the potential adverse consequences of imposing unwarranted MMMF regulation."
They add, "The Angel Report shows that now is not the time to engage in further MMMF regulation because additional regulations could: increase costs in a low yield environment that could drive many MMMFs out of business; increase borrowing costs, which could impede capital formation and cash management for businesses; increase borrowing costs and restrict cash management for state and local governments; and concentrate and increase the threat of systemic risk."
Finally, the Utah comment letter states, "The Utah Association of Counties appreciates the opportunity to comment on the President's Working Group on Financial Markets Report on Money Market Fund Reform Options (PWG Report). The Utah Association of Counties is a non-partisan, non-profit that represents all 29 counties in the State of Utah. The Utah Association of Counties is concerned with the report option identified that money market mutual funds abandon their stable $1.00 net asset value and adopt a floating net asset value instead. This change would likely have a negative impact to county government by adversely affecting an important source ofdirect financing and cash management for county government."
