Dechert LLP's Financial Services Group published "The Debate Continues -- U.S. Money Market Fund Update" yesterday, written by Jack Murphy, Stephen Cohen, Justin Tait, and Aline Smith. The "OnPoint" paper says, "Since the U.S. Financial Stability Oversight Council ("FSOC") issued proposed recommendations to the U.S. Securities and Exchange Commission ("SEC") regarding additional reforms to money market fund ("money fund") regulation on November 13, 2012 ("FSOC Recommendations"), there have been a number of important developments, including: In December 2012, the SEC published for public comment a report prepared by the staff of the Division of Risk, Strategy, and Financial Innovation ("Staff Report"), which responded to questions that had been posed by Commissioners Aguilar, Paredes and Gallagher regarding the need for additional money fund reform; In January 2013, the Investment Company Institute ("ICI") released a study entitled "Money Market Mutual Funds, Risk, and Financial Stability in the Wake of the 2010 Reforms" ("ICI Study"), in which the ICI concluded that money funds' ability to manage both the Eurozone crisis and U.S. debt ceiling crisis in 2011 demonstrated the efficacy of the 2010 Amendments (as hereinafter defined); In January 2013, several large money fund complexes announced that they would be posting on their websites daily marked-to-market net asset values ("NAVs"), a move interpreted by some as an effort to dispel the need for further money fund reform; and, In February 2013, the comment period on the FSOC Recommendations ended and many commenters expressed their concerns regarding many aspects of the FSOC Recommendations, especially the FSOC's proposal for requiring certain money funds to convert to a "floating NAV."
Dechert explains, "These developments have added to the discussion in the ongoing debate over whether additional reforms of money fund regulations are necessary, but their effect on the SEC and the FSOC remains unclear. There are some indications that the SEC may take the lead to issue proposed reforms, based on public comments from SEC Commissioners who previously opposed additional money fund reform and have modified their positions. In addition, an SEC Commissioner recently expressed concerns over the FSOC's structure and its involvement in the money fund reform process. The nomination and potential confirmation of Mary Jo White as the new SEC Chairman may also lead to action by the SEC on money fund reform. However, at present, Ms. White's views on the advisability of further money fund reform or on particular reforms are unknown. This DechertOnPoint provides an update regarding these developments."
The piece tells us, "On December 5, 2012, the SEC published for public comment the Staff Report. The Staff Report sought to respond to questions posed by Commissioners Aguilar, Paredes and Gallagher regarding the need for additional money fund reform, and, in particular, the following three categories of questions: (i) whether a money fund "breaking the buck" outside of a period of financial distress would cause a systemic risk to the financial system; (ii) whether the 2010 Amendments had been effective in addressing perceived issues involving liquidity, credit risk and interest rate risk of money funds; and (iii) how future reforms might affect the demand for investments in money fund substitutes and the implications for investors, financial institutions, corporate borrowers, municipalities and states that sell their debt to money funds."
Dechert later says, "In January 2013, the ICI issued the ICI Study, which supports the view that the 2010 Amendments have been effective in addressing many of the issues that occurred in 2008. The ICI Study noted, in particular, the success of the shortened liquidity requirements, greater transparency, orderly liquidation and other features of the 2010 Amendments during two recent financial challenges -- the possible U.S. debt ceiling debate during the summer of 2011 and the issues relating to the Eurozone sovereign debt crisis.... The ICI Study concluded that the credit risk of prime money funds in 2011 remained minimal, even though the events of the Eurozone crisis led to small increases in credit risk."
On the subject of "Daily Posting of Marked-to-Market NAVs," the paper adds, "Also in January, several major money fund complexes independently announced plans to post daily the marked-to-market NAVs of money funds they manage, thereby increasing the transparency of those funds to investors. One press release announcing the decision stated that "[g]iven that much of the discussion about systemic risk has centered on the commercial paper fund market in the US, we have decided as a first step to disclose those funds' market value NAVs."
Dechert continues on "Comments on the FSOC Recommendations," "Many large money fund complexes submitted comment letters expressing their concerns regarding the FSOC Recommendations. Most of the commenters focused on the proposal to require the conversion to a floating NAV. Some commenters also expressed the view that the SEC, rather than the FSOC, would be the proper regulator to consider money fund reform. Many commenters supported the imposition of liquidity fees upon redeeming shareholders during times of market turmoil. Other commenters proposed the imposition of redemption gates as an alternative to a floating NAV and the other proposals in the FSOC Recommendations. In addition, many commenters suggested additional changes to Rule 2a-7 to further tighten up the risk-limiting requirements of that rule."
They explain, "Although the Staff Report did not provide definitive responses to the Commissioners' questions or analyze the potential impact of proposed reforms recommended in the Staff Proposals or by the FSOC, the Staff Report may assuage some concerns expressed by those Commissioners who had opposed the Staff Proposals in August. In fact, statements from Commissioners Aguilar and Gallagher indicate that their previous positions regarding additional reforms may be changing."
Dechert adds, "Commissioner Gallagher also recently stated that a proposal on money funds could be coming in the next few months. If this is the case, the SEC may consider additional reforms before the FSOC offers final recommendations that the SEC would be required to consider under Section 120 of Dodd-Frank. In a recent speech, Commissioner Gallagher also expressed concerns regarding the FSOC's involvement in money fund reform, noting the active role taken by the SEC in examining the need for further money fund reforms and questioning the FSOC's continued involvement in the process."
Finally, they say, "The nomination and potential confirmation of Mary Jo White as the new SEC Chairman may also spur further action by the SEC on money fund reform, although Ms. White's views on the advisability of further money fund reform or on particular reforms are, at present, unknown. If the events described above are any indication, we can expect that the debate over the future of money fund regulation will continue to be both lively and contentious going forward. Please look for future DechertOnPoints as we continue to cover this very important topic."
