We were recently sent a brief comment entitled, "For Money Funds, Rule Proposal Comments Offer Few Clues to Industry Future," written by Larry Locke, Assistant Professor of Management at the University of Mary Hardin-Baylor McLane College of Business. Locke and research partner Blake Mariage write, "Last June the SEC released its long-awaited proposal for reforming the money market mutual fund industry. Money funds have been identified as a source of weakness in the financial markets and held partly responsible for the market break of September, 2008. This proposed rules release followed a failed effort from former Chairman Schapiro who worked on a previous set of proposals but was unable to secure the necessary three votes on the Commission to issue them."

The comment explains, "The proposal that was finally published under the leadership of Chairman White had little resemblance to Schapiro's. The almost 700 page current proposal puts forward two major options for revising the market, which might be promulgated independently or in tandem. The first is to force prime money market funds to adopt a floating NAV (net asset value). These funds would no longer be offered and redeemed for $1 per share but would instead be priced to the 4th decimal place so as to reflect very small changes in the value of the securities underlying the fund. Government and retail funds would be exempt from the new pricing requirements. The second alternative is to permit a fund's board of directors to place a temporary moratorium on redemptions (referred to as a "gate") when the fund finds itself to be illiquid, and to require the imposition of a 2% fee on shareholders who redeem during a period of illiquidity."

Locke tells us, "Comments on the proposal are still trickling in but one of my research partners here at the University of Mary Hardin-Baylor, Blake Mariage, and I have already run some numbers on the comments received. As of this writing, the proposal has drawn 1,428 comments, 1,219 of which were on six different form letters. Of the 209 non-form letter comments, approximately 169, or 81% of the letters were from institutions (based on an analysis of both the writer and the content of the letter). The remaining 40, or 19%, were from individuals."

He continues, "The overwhelming message of the commenters was a rejection of the first alternative and, perhaps, a grudging acceptance of the second. Again, not counting the form letter comments, 139 commenters (67%) addressed the floating NAV alternative in an unfavorable way. Commenters favoring the floating NAV alternative were 17 (8%) and 53 (25%) were neutral or silent on the proposal. The second alternative was received favorably, or more favorably than the first alternative, in 48 (23%) of the total comments, 54 (26%) commenters were unfavorable on the fees and gates alternative and 107 (51%) were silent or neutral."

Locke adds, "Under normal conditions, this kind of reaction to a regulatory proposal should provide strong evidence of the future direction of the rules. One would expect the SEC, if it were to move forward with either alternative, to adopt some version of the liquidity fees and gates proposal and shelve, at least for now, the floating NAV idea. But there are a couple of reasons why the expected outcome may not occur in this case. One is that at the same time that the SEC was collecting comment letters, SEC commissioners, including Chairman White, and SEC staffers engaged in a total of 38 private meetings on money market reform, exclusively with institutional or governmental players. The exact content of these meetings is not part of the public comment record and it is unknown whether the meetings were tilted more towards either of the SEC's alternatives."

The professor writes, "Commissioners and SEC staff meeting with institutional players in the money market industry is not the problem. Comments and discussions can be much more nuanced in face-to-face meetings than is possible in a comment letter. I would commend the Chairman for participating in 11 of those meetings -- providing leadership on this important issue. The problem is that because the content of the meetings is not readily available to the public, the SEC's reaction to those meetings and their content are unpredictable. While they may make for better, more informed rulemaking, private meetings make for a more opaque process and ultimately a less accountable Commission."

He continues, "The second reason the future of money fund reform remains unpredictable is that the comments of investors and issuers in this market may have little bearing on its future, no matter whether they were rendered in public comment letters or in private meetings. From the early calls for rule changes in October 2010 by the President's Working Group, money fund reform has been driven by governmental and regulatory bodies seeking to control systemic risk, not by participants in the market. In the world of money fund reform, the Financial Stability Oversight Council's view may be the only one that counts."

Finally, Locke tells us, "Money market participants, including large numbers of average Americans, now find themselves dependent upon Chairman White and the remainder of the Commission to chart a course reflective of their needs. While the public has had a chance to speak on the issue, its voice may be muted by private conversations and political pressure. Both industry participants and investors would like to begin the long task of preparing for a reformed money market product but they will probably be reluctant to head too far down that road until they know the final destination. Given the unpredictability of the SEC's ultimate decision at this point, all the industry and the rest of America can do is wait."

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