Federated Investors refuses to rest in its battle against potentially threatening regulatory reforms. Earlier this week, the Pittsburgh-based advisor posted a "Response to Securities and Exchange Commission Statement," which summarizes a number of rebuttals to SEC Chairman Mary Schapiro's crusade to dramatically alter money market funds. Federated writes, "During the past nearly two years, Federated has submitted public comments to the SEC, posted numerous materials on the Money Markets Matters website, conducted media interviews and discussed with investors the Company's strong opposition to SEC Chairman Schapiro's proposals to radically restructure money market funds. In the face of a well-orchestrated drive by Chairman Schapiro, other regulators and their allies in the media, which sought to rewrite history and trafficked in storyline short on fact and long on fear, we have tried to set the record straight in a variety of ways, including regulatory filings, website postings, editorials, letters to the editor and media interviews."
They continue, "Chairman Schapiro abandoned her efforts in the face of opposition from a majority of her fellow SEC Commissioners but said she hopes other regulators take up the cause. The effort to eliminate money market funds as we know them may now be pursued in another regulatory venue such as FSOC and will likely be based on many of the same specious arguments. Therefore, we believe it is important to provide a point-by-point rebuttal to the formal statement that Chairman Schapiro released on Aug. 22. Where possible, we will also focus on the words of SEC Commissioners Gallagher, Paredes and Aguilar in their forceful and eloquent responses to their Chairman's statement."
Federated's response quotes from the "Statement of Chairman Schapiro," "The proposed structural reforms were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.... As we consider money market funds' susceptibility to runs, we must remember the lessons of the financial crisis and the history of money market funds. And, we must be cognizant that the tools that were used to stop the run on money market funds in 2008 no longer exist."
They then quote from the "Statement of Commissioners Gallagher and Paredes," "We were dismayed by the Chairman's Aug. 22, 2012, statement on the proposal she advanced to restructure money market funds. The current discourse about the Commission's regulation of money market funds is rife with misunderstandings and misconceptions.... The Chairman has recommended that the Commission approve a regulatory proposal that would have altered several fundamental features of money market funds. After careful consideration, we determined that the changes the Chairman advocated were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation's financial system."
Federated's piece quotes from the "Statement of Commissioner Aguilar," "I remain concerned that the Chairman's proposal will be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the dark, opaque, unregulated market.... I am also concerned that, given the current volatility of the capital markets and the fragile state of the economy, the timing of this proposal and its collateral consequences could be needlessly harmful."
On "MMF "Restructuring" Alternatives," Federated again quotes Schapiro, "This inability to absorb a loss in value of a portfolio security and the incentive to run at the first sign of a problem are the two structural issues we were seeking to address with the proposals under consideration by the Commission. These are issues that are inherent in the structure of money market funds which came to the fore in the financial crisis, but undoubtedly are still present.... First, that money market funds float the NAV and use mark-to-market valuation like every other mutual fund. This would underscore for investors that money market funds are investment products and that any expectation of a guarantee is unwarranted.... Second, and alternatively, a tailored capital buffer of less that 1% of fund assets, adjusted to reflect the risk characteristics of the money market fund. This capital buffer would be used to absorb the day-today variations in the value of a money market fund's holdings. To supplement that capital buffer in times of stress, it would be combined with a minimum balance at risk requirement."
They then excerpt from Commissioners Gallagher and Paredes, "Furthermore, we are concerned that the Chairman's proposal would, at a minimum, severely compromise the utility and functioning of money market funds, which would inflict harm on retail and institutional investors who have come to rely on money market funds for investing and as a means of cash management and on states, municipalities, and businesses that borrow from money market funds. Such adverse outcomes would undercut the SEC's mission.... The Chairman's approach would deprive investors of two fundamental benefits of money market funds: stability and liquidity.... [T]he capital buffer, even by itself, would seem to risk substantially crowding out the prime money market fund sector at the expense of both corporate borrowers and investors.... [T]he Chairman's proposal risks effectively ending prime money market funds as we know them.... We have consistently stressed that we should obtain the required data and undertake a rigorous analysis to determine whether any remaining risks associated with money market funds warrant fundamental structural changes like the ones the Chairman has urged. At present, we lack satisfactory answers to many crucial questions."
Federated comments, "Ms. Schapiro has recounted numerous times how either a floating NAV or a combo capital buffer/holdback will cure the ills she sees in MMFs. What either would actually do is kill an incredibly popular (even in a near-zero interest rate environment) $2.5 trillion product that 56 million investors, businesses, state/local government and non-profit organizations depend on for cash management and funding purposes. And, while the SEC's public comment file contains numerous studies, surveys and analytics detailing the harm these proposals will do to business, government and the economy, backed up by letters with real life stories of the importance of MMFs from those who depend on the funds, the Commission has not done any research of its own to determine the potential impact of these draconian proposals."
They again quote Gallagher and Paredes, "Our view of the complex issues involved has been informed by the input of a range of market participants, including the many retail and institutional investors who have implored the Commission not to deprive them of the choice to invest in money market funds, as well as the interests of states, municipalities, and businesses that rely on money market funds as a key source of financing.... MMFs, currently with $2.5 trillion in assets, are the preferred cash management vehicle for businesses, government agencies, non-profit organizations, colleges/universities and financial institutions. For 56 million investors MMFs provide the only means to access a market rate, rather than a bank-set rate. MMFs in turn provide short-term financing for businesses, banks and state/local government."
Finally, Federated concludes, "In the almost two years since the issuance of the President's Working Group report on money market funds, those who depend on money market funds have let their voices be heard. Over 2,000 investors, businesses, state/local governments, trade associations, non-profits and financial professionals have written the SEC to support money market funds in their current form. Federated will continue to be very active in the battle to save money market funds and we are pleased that we are part of a broad and diverse group that believes money market funds are well regulated and the system, particularly in light of the 2010 amendments, is running smoothly."
