Our recent Money Fund Symposium in Pittsburgh was keynoted by Federated Investors President & CEO J. Christopher Donahue. He addressed a number of topics, including the history of money funds, the effort to roll back recent regulatory reforms and money funds overseas. We excerpt from the speech below. (Note: This article is reprinted from the July issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue.)
Donahue comments, "There was one Pittsburgher who wanted to make a difference, and 50 years ago he began his program talking to children. I'm talking about 'Mr. Rogers' Neighborhood <b:>`_.' Interestingly enough, we, my wife and I, live in Mr. Rogers' house in Pittsburgh where he raised his children.... 'What can Mr. Rogers teach us about money market funds?' Far more than we thought." Mr. Rogers said, "'It's the knowing that we can be trusted, that we never have to fear the truth.' That is the bedrock of our very being. Peter Crane has also asked me a number of questions, which we will cover in this discussion."
He explains, "We'll begin with a little history to see how whether we can be trusted and see whether we have to fear the truth. A short history, a very neighborly history began in '74, when the SEC decided to grant three funds, Fidelity, Federated, and Dreyfus, effective [orders] for their money market funds.... We wanted the name Federated Cash Management, but the SEC told us, 'You can't have that name because you cannot manage cash.' Glen Johnson [then] chose the name Money Market Management."
Donahue tells us, "Then, a bad neighbor appeared on the scene. The bad neighbor was the Comptroller of the Currency. They said, 'You cannot delegate cash management to a fund. This is a violation of fiduciary duty.' Well, with client support, good legal work, and with Gene Maloney of our company learning how to spell 'fiduciary,' we got [approval] and we were back in business."
He continues, "Another bad neighbor washed up on the beach. The SEC decided to have a hearing on amortized cost. That was [at] the instigation of some of our competitors in the industry to have that hearing. Once again with user support, excellent legal work, and my Dad's testimony -- the founding father of the company -- the good guys won. And guess what happened, everyone joined the neighborhood of amortized cost and dollar-in, dollar-out money market funds. This was over 40 years ago."
The Federated CEO states, "Paul Volcker, another bad neighbor coming to the party, testified later that he thought he had the votes in 1982 when the Garn-St. Germain [banking legislation] was passed to kill money market funds. But instead that did not happen. Banks paid 22% rates and you all know the story of the '80s. In short, I have gratitude for our industry."
Like Mr. Rogers would do, he paused for a minute, saying, "Spend that time in full gratitude [thinking about] who helped you with your career, who helped you to get here, and how you are thankful for that.... Why the resiliency in our money market business? Because the people you thank are dedicated to making this business go. It is the very beauty of money funds, the utility of money funds, the good neighbors that we have all been. Money market funds may not be perfect, but they are doggone close. In 2012, as Peter pointed out, I called money funds the 8th Wonder of the World, and many people were wondering whether they should continue to exist. The shareholders love the dollar in, dollar out, the issuers love the competition and the low rates, and the capital markets thrive on them because it is the very spear of the fixed income markets right at the point of short interest rates."
"What Mr. Rogers said was that real strength has to do with helping others. Empathy, stepping into the other person's shoes, as Rogers was very big on shoes. There was a great good neighbor who helped us get out the 2010 amendments. This was perhaps the highest number of unity and neighborliness in the money market fund business. All got together to enhance the resiliency of money market funds. We worked on maturity, liquidity, and disclosure, and one of the most important [changes] that came out of that was that if you had a problem, you had to go to four decimal places. The custodians had to be set up to do it, and the investment advisors had to be set up to do it.... Notice in this scenario, you don't get punished for sins you haven't committed ... only if you have a problem."
He continues, "There was an example, however, of some bad neighborly policy.... In 2014, the regulators had that kind of 'circle of life' attitude [on] money funds. [T]he SEC [basically] said, 'We are not going to kill you, but we are going to waterboard you.' ... You know the result, $1.2 trillion out, and the greatest regulatory-forced run that I know of. It was the greatest crowding out ever because $1.2 trillion went from private markets into government securities. Peter Crane called it 'The Big Sort.' But it all worked because of the resiliency of MMFs."
He discussed waivers, saying "Waivers were a great good neighbor exercise.... [For Federated] over $2.2 billion was waived, $1.6 billion for intermediaries and $600 million for Federated. There were also other unintended consequences that came out.... Municipalities ... saw borrowing costs skyrocket." He adds, "So what did Mr. Rogers say?, 'Listen to your neighbor and when the time comes respond in the most helpful way you can.'"
Donahue asks, "How are deposit sweeps being used? We have this delicious concept now called deposit beta. It is a real fancy term for what you are going to share with your clients of the increase in rates. The way the analysts look at it, the less you share, the better. Again, not exactly a Rogerian concept. The average [paid out] is in the 0.20% [range] in a 2% environment. The betas are lower than they were in the last several cycles because of lower rates, lower gross rates.... But I think it will be a positive for the money market funds because when they spring back, when the customers and competition and the marketplace demand real interest, I think you are going to see a lot of money coming back into money funds."
He adds, "Another question [is], 'How is the best interest rule proposed by the SEC applied? Well that's very interesting. I will read you a little quote from the SEC release. 'When a broker-dealer recommends a more remunerative security or investment strategy over another reasonably available alternative offered by the broker-dealer, the broker-dealer would need to have a reasonable basis to believe that putting aside the broker-dealer's financial incentives, the recommendation was in the best interest of the retail customer.' ... I think the best advice that we got from some smart lawyers is that both of these concepts of fiduciary and suitability are in eclipse and are overlapping [with] what is the best interest for clients. We think the best interest is a real good way to go on this subject. I think it is better for the mutual fund industry and for the industry in general."
Donahue also comments, "Mr. Rogers also got enraged. Imagine that? But why would you get enraged? His quote was, 'When those things that we care about so deeply become in danger, we become enraged. And what a healthy thing that is! Without it, we would never stand up and speak out for what we believe.' The 2014 [SEC] amendments divided the neighborhood. They preserved, thank goodness, retail money market funds, but SIFI fears and other ideas caused people to throw the institutional prime and muni funds under the bus. Now it is time to restore the full neighborhood."
He says, "No more Wall, no more East Germany, and no more having to follow exactly what the SEC determines to be product development. We are so grateful for our great business and a great asset class that we want to get back to the way it was. Hence our support for Senate Bill S.1117 which is known conveniently as 'The Consumer Financial Choice & Capital Markets Preservation Act.' It restores us to the thrilling days of yesteryear -- to the 2010 amendments. It allows the 2014 amended products to exist. But, the marketplace is open, and people don't have to do the funds they disdain. For the SIFI worriers in the crowd, I say [embrace] the 2010 funds and work on your SIFI designation issues instead of opposing this neighborly effort."
"So who is for Senate Bill 1117? Well lots of real good neighbors, hundreds of them. They include 26 local and state government associations, 29 individual counties, 48 individual, large cities, 74 public housing authorities, 55 institutions of higher education, 27 state and regional chambers of commerce, 64 regional or state economic development authorities, 9 large healthcare systems, 24 skilled construction trade unions, 28 state treasurers, many state legislators, 73 members of the U.S. Congress (co-sponsors), 27 U.S. Senators, and many national trade associations.... It has hurt them, and they see the beauty of a restored money market fund environment.... Who's against it? Some of the largest firms in the industry.... I still believe that the future is bright and we have an excellent chance of getting this bill through."
On global issues, he says, "The European regulations are difficult but not deadly. But they will take a lot of work and need a lot of supervision and perseverance to make them come out correct.... The repatriation money is good, but it is temporary. We found that money when it comes in already has a purpose."
Finally, Donahue tells us, "In conclusion, I am grateful and have a tremendous amount of thanks for an outstanding asset class, and for all of those of you who are dedicating your life. We realize you spend more time with your money funds than you do your family. The issuers, the shareholders, and the capital markets thank you too. So I enlist your support for S.1117. Or at the very least, don't oppose the return of these funds to our neighborhood. Mr. Rogers at this point would probably intone, but I would not, 'Would you be mine? Could you be mine? Won't you be my neighbor?'"
