The following was originally printed in the July issue of Money Fund Intelligence.... We wrote in the article, "SEC on Reform Proposals; Comments Due by 9/17," The Securities & Exchange Commission proposed new reforms to money market mutual fund regulations last month, including the option of either a floating NAV for prime institutional funds or a liquidity fee and gates regime, coupled with additional disclosures and tweaks. The Proposed "Money Market Fund Reform" was officially published in the Federal Register on June 19, and interested parties have until Sept. 17 to submit comments. (See http://www.sec.gov/rules/ proposed.shtml for the full 198-page proposal and to comment. No comments of substance have been submitted as of yet.)
We expect the fund industry, investors and issuers to strongly oppose the floating NAV option and to support the "gates and fees" alternative. We also expect many to complain about the costs and confusion of the tremendous amount of new disclosures the SEC may require. Initial indications are, though, that the SEC under Mary Jo White will remain reasonable and will continue to listen to the concerns and arguments of interested parties.
SEC Senior Special Counsel Sarah ten Siethoff, who participated in the "Regulatory Roundtable" at our Money Fund Symposium (with Federated's John McGonigle and Dechert's Jack Murphy), gave some color on the proposals in Baltimore last month. She says, "We tried to be very clear on this proposal, from literally the first page of it and all the way through, on what the goals were for this rulemaking. [W]e were seeking to preserve, as much as possible, the benefits of money market funds, while lessening the susceptibility [to] redemptions, reducing contagion effects and increasing transparency of their risks.... What we were seeking to do is to try to find the best way to make that balance."
She explains, "One of the reasons there are over 400 questions throughout, was to seek your input in what is the best way to reach that balance. That being said, we do recognize that there are going to be costs.... [S]o we try to get comments [on this]; the more detailed feedback the better. That is something I always encourage.... What helps us a lot more is exactly why it is going to be expensive or why it is going to be difficult."
Ten Siethoff adds, "If I can give a plea right now: the more detail you give, the more useful all of your comments will be to us. I know that puts a lot of work on you, because it is a very long proposal. But we hope that is work that will really pay off once we start to look [options]."
She continues, "I think we have a lot of agreement on some of the goals. There is ... room for different views in how you best meet those goals, and I think we try to reflect that there are, to be perfectly honest, two sides of the debate on every one of these different reform options. We try to lay out here what people have told us.... [W]e really have had ongoing commentary on this topic for years now, as everyone is aware."
The Senior Special Counsel also says, "I think John did a very effective job of laying out the benefits of what we call the fees and gates option. We do think that it really targets and more fairly allocates liquidity costs when liquidity is quite expensive in a way we think might be quite good for the markets ... but also for investors. [It gives] a more fair allocation of those liquidity cost between redeeming and remaining shareholders.... We think you can give great tools to money market funds to manage."
She continued, "We also think this is a very targeted reform. It could focus the reforms when [they] really can matter [in times of stress]. So those are some of the key benefits we see. But we recognize, as with any reform, there are costs.... I think everything we've proposed we recognize there are operational and implementation costs.... We recognize that ... people's liquidity may be lessened in times of stress because of this.... [W]e welcome comments, in particular, on the proposed trigger ... for when this restrictions could come into place. Have we gotten that right? Is that imposing potential restrictions on liquidity when it really could be dear?"
She tells us, "On the floating NAV, I think, the hope is that this does lessen the first mover advantage in money market funds by allowing redemptions to happen at the market price. The idea is that would hopefully lessen susceptibility of money market fund to runs. We've also tried to target that reform, as with the fees and gates options, by proposing exemptions for government money market fund and retail MMFs. On that one, we also recognize that there are a lot of costs. As John mentioned, there is a tax and accounting cost. We tried to suggest ways that hopefully those could be minimized. There are operational costs, and there are broader industry costs. We talk about all of those; we seek feedback on all of those."
Ten Siethoff adds, "We recognize that there are still liquidity costs in funds, and it doesn't necessary address that and there for are other better ways to handle that. On the flip sides on fees and gates, lots of people have raised concerns [saying] this will just have a magnet effect for runs and people would all try to get out before that gate can be imposed. We ask lots of questions around that."
Finally, she says, "[A]ll these options have ... benefits to offer, but there is no free lunch in this world. Everything can also have some potential costs. We try to lay those out the best we can, and we really seek comments from everybody to help us understand what those are and try to figure out what the best way of balancing [these proposals] is."
