As we approach the SEC's September 17 comment deadline (see their "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" page), some serious feedback is beginning to appear. The latest, a comment from Lance Pan, CFA, Director of Investment Research and Strategy, Capital Advisors Group offers what could become the blueprint for the final regulations -- a dual floating or market pricing alongside a penny-rounding transaction regime. Pan writes in "Capital Advisors Group's Comments on the Recent Money Market Fund Reform Proposal by the Securities and Exchange Commission, "We commend the Commission for tackling the tremendous task of analyzing mountains of data before putting forth the reform alternatives for public comment. We seek to weigh in on the subject from the perspective of an institutional asset manager.`We support the mandatory daily disclosure of market-based NAVs as the published share prices and penny-rounded NAVs for shareholder activities <b:>`_. In our opinion, floating NAVs provide no more informational value than market-based NAVs."
The letter says, "If the basis point rounded NAV approach is adopted, we propose a NAV stability band between $0.995 and $1.005 beyond which fees and gates may be imposed. This approach provides tax and accounting justification for maintaining the funds' current distinction and preserves some operational attractiveness.... We view fees and gates as ineffective because of probable shareholder expectations that the tools will not be deployed due to fund sponsors' self-preservation motives."
Pan explains, "We propose an emergency redemption price of market-based NAV plus a 1% liquidity fee when thresholds are breached (defined as weekly liquidity < 30% or market-based NAV < $0.995).... We are strongly opposed to the use of gates. However, if gates must be implemented, we propose allowing redemptions of up to 50% of remaining balances.... We propose making sponsor support explicit, committed and disclosed prior to an event occurring."
He tells us, "Most institutional investors use money market funds as cash management vehicles, and often consider them to be close substitutes for bank deposits without explicit government support.... Institutional investors tend to demand a very high level of certainty regarding available liquidity since the money market funds are the source of cash for expenditures.... While naturally desiring higher levels of income, institutional investors will not rationally violate the first two objectives of capital preservation and liquidity in pursuit of higher return potential."
Pan adds, "When the first two objectives cannot be satisfied simultaneously, investors may be willing to pay for liquidity, albeit reluctantly, under extreme market conditions. However, the costs must be commensurate with the expected returns of the associated instruments.... The high concentration and interdependence of institutional shareholders requires an understanding of each shareholder's assessment of others' likely behaviors in times of market distress. They often are also cognizant of the potential for a fund advisor, as an agent, to place its self-preservation interests before the interests of shareholders -- individually or collectively."
He also writes, "We think that the credit, liquidity and other measures enacted following the 2010 amendment are generally adequate for normal to moderately stressed market conditions. Additional reforms should primarily address emergency situations.... We believe that the Commission's primary objective should be the stability of the short-term financing market. hareholder or sponsor interest is secondary.... Runs in a single fund from idiosyncratic causes should not be the primary reform objective. Instead, preventing runs in other funds should be the focus.... We think that lower systemic risk in money market funds should not result in higher systemic risk elsewhere, including in less regulated private liquidity funds or more concentrated fund sponsors."
Finally, Capital Advisors says, "We agree with the Commission that influencing shareholder expectations and behavior is important, but we believe the proposed changes are too stringent.... We recognize that the final rule revisions likely will be imperfect, as there are pros and cons for all conceivable alternatives. The final rule should represent the best balance between long-term funding market stability and the utility of money market funds."
