We continue to highlight Comment letters on the SEC's Money Market Fund Reform Proposal that we think merit reading. Today, we link to one from John Gerstmayr and Bryan Chegwidden, Ropes & Gray LLP. It says, "We are writing to offer our comments on the Securities and Exchange Commission's proposed rules relating to money market fund reform. The undersigned have many years of collective experience advising sponsors, advisers and trustees of money market funds. We witnessed firsthand the tumultuous days that followed the failure of Lehman Brothers on September 15, 2008. During that period we advised many of our clients in connection with their efforts to deal with the unprecedented conditions in the financial markets, including the particular challenges faced by money market funds. Our comments represent our personal views only and do not necessarily represent the views of others at this firm or the views of our clients. As indicated below, we are not taking a position on the fundamental question of whether regulatory change is warranted at this time for money market funds. However, we are offering a number of suggestions that we believe may be helpful to the Commission in the event it determines that change is necessary. Finally, we defer to industry commentators on the many questions posed by the Commission regarding the operational practicality and costs of its various proposed changes. 1. The lack of clear evidence regarding the reasons for money market fund redemptions during this period or their effect on the financial crisis warrant a cautious approach to new regulation. The apparent premise for this regulatory initiative is FSOC's conclusion that the current fixed NAV method of operating money funds presents an unacceptable systemic risk to the financial system. This conclusion is based on the unproven assertion that redemptions in prime institutional money market funds following the failure of Lehman were driven primarily by the fear that funds would "break the buck" as opposed to (i) a flight to quality in the face of possible failures of financial institutions and (ii) a need to access liquidity to meet pressing obligations, such as collateral calls. The November 30, 2012 report prepared by the Commission's Division of Risk, Strategy and Financial Innovation in response to questions posed by Commissioners Aguilar, Paredes and Gallagher indicated that during the month that followed the Lehman failure, prime money market fund assets fell by $498 billion while government money market fund assets increased by $409 billion. The bulk of this activity was focused in institutional funds. The report stated: "Many potential explanations exist for the money market flows during this period. Since the explanations are not mutually exclusive, it is not possible to attribute shareholders' redemptions and purchases to any single explanation." The report identifies various possible explanations, including a flight to quality and a flight to liquidity, which strike us as highly plausible explanations in the circumstances. The report also notes that the "structural design of money market funds may have accelerated investor redemptions in September 2008," presumably referring to the so-called "first mover effect" discussed in earlier FSOC and Commission proposals. Nowhere is it suggested that this effect was a predominant or even a major cause of the institutional fund flows that occurred during the early days of the crisis. The report portrays retail money market fund flows as largely insignificant during this same period. We defer to the Commission's judgment on the question of whether changes in the current regulatory structure for money market funds are warranted at this time. However, In light of the limited evidentiary support for the proposition that the fixed-NAY structure permitted by Rule 2a-7 played any meaningful role in the financial crisis, we urge the Commission to proceed cautiously and in a measured way as it considers possible structural changes in a highly successful financial product that has brought great benefits to consumers for almost four decades."
