On Friday, Federated Investors, the third largest manager of money market mutual funds with over $226 billon (according to Crane Data's Money Fund Intelligence XLS), held its third quarter earnings conference call, and, as usual, CEO and President J. Christopher Donahue weighed in on a number of issues impacting money market funds, including the SEC's Money Market Fund Reform Proposals. (See the transcript of the call from Seeking Alpha here.) He said, "Looking first to cash management. Period-end money market fund assets increased by $5 billion from Q2, while average money market fund assets decreased by $3 billion. We saw gains in government funds, partially offset by lower assets in Prime and Muni. Our market share was just under 9%. The impact of yield-related fee waivers increased in the third quarter as repo rates declined substantially from the prior quarter."
Donahue commented, "On the regulatory front, Federated filed a series of comment letters in response to the SEC's money market fund proposal, which was published in June. We were heartened to see that many of our clients and issuers that we invest with went on the record to express their strong concern with the measures proposed by the SEC. The overall response to the SEC has been broad based. Many individuals and groups representing literally millions of businesses, treasury and financial professionals, as well as state and local government finance professionals and investment officers have submitted their views for consideration. These responses overwhelmingly express opposition to Alternative One, the SEC's floating NAV proposal. In fact, over 98% of the more than 1,400 letters expressed opposition to the SEC's floating NAV proposal."
He continued, "Some of the noteworthy groups going on the record against the floating NAV proposal include the U.S. Chamber of Commerce, representing more than 3 million businesses and organizations; the American Bankers Association, the voice of the $14 trillion dollar banking industry; the Association for Financial Professionals, representing more than 16,000 treasury and financial professionals; the American Council of Life Insurers, representing 300 members and 90% of the assets and premiums of the life and annuity industry; and a host of government and municipal finance and investment organizations like the National Association of State Treasurers, the U.S. Conference of Mayors, the National League of Cities, and others."
Donahue explained, "Now approximately 90% of the comments supported Alternative Two, which is the voluntary gating and fees concept that was proposed. And many proposed to accept this, but with modifications. Given the significant issues raised by Federated and others, we expect a lengthy review process that is likely to go into 2014. We, and many others, find that the case has not been made for floating the NAV of a money fund as a remedy for the regulator's expressed concern about increased redemptions in periods of market stress. Floating the NAV would impose significant operational burdens, create extensive new tax and recordkeeping requirements and result in enormous new cost for system reprogramming and recordkeeping. Less efficient capital formation would add material cost for corporations and other issuers in a post-institutional prime money fund world."
He also said, "While the costs are large and burdensome, the benefits are illusory at best. We believe that there is no discernible, meaningful benefit that would be achieved by floating the NAV. And certainly, there would be no benefit in stopping so-called runs. In contrast with the floating NAV, gating, that is giving the fund's Board of Directors the option of imposing a temporary gate on redemptions in extremely rare occurrences of dysfunctional market conditions, promotes the equal treatment of investors and improves the financial markets by stopping a run dead in its tracks. It has proven to be effective in practice, recall the Putnam transaction in '08, and most importantly, preserves the critical features and benefits of money funds."
Donahue told the call, "Money funds continue to enhance our financial system and to operate effectively. The recent U.S. government debt ceiling crisis is only the latest in a series of tests that money funds have convincingly passed since the extensive regulatory changes were enacted in 2010. We expect that sound policy will win out, thereby preserving the crucial features of money funds that have made them so important to tens of millions of investors, to thousands of short-term debt issuers, including state local government entities and corporations."
In response to a question on the timing of final SEC regulations, Donahue added, "[B]ecause of the depth and the high quality of the comments, it would take them [SEC] a good bit of time to get through all that and we would be well into 2014. If you press me on it, I don't think they can get it done in the first quarter of 2014. And after that, that's up to the worker bees at the SEC. And don't forget, they did have a couple of weeks off. So it's impossible to exactly say when this will come about. But that would be about as close as I could guesstimate. And remember, I don't control it and I don't have any inside information."
Finally, Debbie Cunningham commented, "I'll just add one comment, and that is that for the 2009 proposals, that ultimately resulted in the 2010 amendment, there were slightly less than 200 pages in length and much, much less in the context of the actual potential changes that could be occurring. That was a 5.5-month process for the SEC to review those comments. This document is nearly 700 pages long. So I don't know whether you can interpolate from that or not, but just a comment."
