This month, MFI interviews Paul Schott Stevens, President & CEO of the Investment Company Institute (ICI). Stevens has been with the mutual fund trade association for 20 years and has been involved in the fund industry for even longer. We discuss his storied career, and ICI's crucial involvement in the development of money fund regulations. Our Q&A follows. (Note: The following is reprinted from the May issue of Money Fund Intelligence, which was published on May 7. Contact us at info@cranedata.com to request the full issue or to subscribe.)
MFI: Tell us about your background and history. Stevens: The ICI is 80 years old this year. We started in 1940 at the time that the Investment Company Act was passed, and the SEC needed an industry group to work with as it began to develop implementing regulations. If you look at what our mission is, it's been the same over those 80 years.... It's to advance the interests of funds and their investors and the constituencies that make fund investing possible, the advisers and boards. Funds are complicated financial instruments in many respects for people and so, trying to provide public information about them has always been a part of our mission.... The third part is, trying to promote high ethical standards. That is incredibly important in an industry that serves 100 million individual investors here in the United States.
Outside of ICI, I've spent 15 years in private law practice.... I had my first money market fund related assignment, I think probably in 1979. So, my involvement with this industry goes back -- can it possibly be that long? -- over 40 years.... It has been an interesting and varied career. But I'll tell you, no challenge of that career, no position that I'd ever held, has been quite as satisfying as leading the ICI. Very few lawyers actually get the chance to move out of the law and into a CEO role. I found meeting the challenges of our organization, working with our members and the incredible staff we have to be among the most gratifying things that I've done.
It has been a pretty challenging period.... When I came in in 2004, we were in the midst of our late trading and market timing situation. No sooner did we get out of that when we entered the phase of the great financial crisis, with a preoccupation about money fund issues lasting over five years and two cycles of SEC rulemaking. In 2011, our board said we want you to refashion the ICI as a global organization. We’ve been working on that ever since.... And now, dealing with this global pandemic and having to adopt completely new ways of working. It has been one extraordinary challenge after another.
MFI: What is your biggest priority? Stevens: The recent issues have been unlike the issues that we saw in many respects during the financial crisis. The issues then were at their heart credit problems. The ones that we've been seeing now are really the result of the government ordering the economy shut down and the demands of investors of all kinds for safe haven assets and ready liquidity to meet unexpected needs.
Early on our focus was clearly on trying to make sure that we could respond to the problems caused by markets that just simply froze up. The good news is that in fairly short order, the Federal Reserve began to establish programs that have greatly, I think, helped markets recover. In just a matter of days, they put together the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, followed by a whole bunch of others. And if you look at the amounts that have actually been utilized in those facilities to date, they're small by comparison to the size of, say, the money market fund industry. But just the fact that they’re there provided a sense of renewed confidence to the markets. I think that the Federal Reserve, the SEC and the Treasury Department deserve very high marks for what they did.
The other thing that's different this time around is that we didn't have money flowing as much out of prime funds into government funds. What we had was money coming from other sources, hugely into government funds.... People are looking to these funds as safe haven assets ... at a time when that liquidity is absolutely essential.
Our focus has been also on continuing with ordinary business, and that’s one of the important things to emphasize. The SEC, very much to its credit, has not just simply stopped everything to focus on coronavirus issues, it's continuing with other very, very important work. It just issued a rule proposal concerning fair valuation of securities held by funds. They're continuing to do work on the derivatives proposal, on proxy voting proposals, on a whole raft of other things. So our normal work process is very much continuing even against the background of the implications of the pandemic.
MFI: Your proudest accomplishment? Stevens: Well, I'll mention a couple of things that I'm particularly proud of. After the great financial crisis, there was an inclination on the part of bank regulators, both the United States and elsewhere, to want to fasten on our business, the regulated fund business, a regulatory model which was completely inappropriate, to treat us like banks, and to have the central bankers begin managing us in a prudential fashion, the way they manage banks. Fighting that off, I think was one of the most important challenges that we met during my time at the ICI.
We have always welcomed effective regulation, and we were as deeply committed to maintaining financial stability as any other part of the system. What the bank regulators saw is that asset management, the regulated fund business, was growing in importance at the same time that the banking business was decreasing, relatively speaking, in importance. So, they wanted to begin regulating us. But the capital markets form of regulation is far more appropriate, so we fought to try to sustain an appropriate model of regulation for the industry, and I think we largely succeeded in doing that.
Now, that's a battle that continues. And in a sense, it's a conversation that's been going on with our industry and central bankers for probably generations.... We had to fight that battle not only domestically here in the United States with the FSOC and the Federal Reserve, but we had to do it with the Financial Stability Board and central bankers and finance ministry officials on a global basis as well.
The second accomplishment, as I mentioned earlier, is leading the charge to refashion the ICI as a global trade organization. That was a completely new organizational challenge for us. And I think it's one that we've risen to very, very effectively. That global dimension now informs everything that we do.
MFI: Talk about the ICI Money Market Working Group. ICI didn't wait for regulators last time, right? Stevens: That’s absolutely correct. It's very consistent with the way the ICI has conducted itself.... We knew when the Reserve Primary Fund broke a buck and the Treasury Department chose to introduce a guarantee program that our world had changed overnight. I suggested and the board and leadership, like Jack Brennan of Vanguard, readily agreed that we had to turn to and think about what was appropriate and necessary by way of reforms. We worked very, very hard at that working group. I think we came up with a report and recommendations for the SEC that were substantial. I know that [the SEC's] Mary Shapiro appreciated them at the time, although she concluded at a later point that more needed to be done.
In truth, money market funds were the very first part of the financial system to be reformed in the aftermath of the crisis, and that was largely because of the initiative that we took at ICI. So that was a very proud moment for us, and it's not much different from other things that we've done. I could name governance standards for the fund business that we helped to raise on our own initiative, standards on personal investments by portfolio managers and a variety of other things as well.
MFI: Talk about investors. Stevens: Well, if you think about our investors in the retail space, they’ve reacted in this crisis more or less the way they have historically. There have not been precipitous outflows from our funds and we follow those trends on a daily and weekly basis. You did not see the same reaction in the retail prime funds that you saw in the institutional prime funds.... That's just been our experience with one of these market events after the other. It suggests that people look at these funds as long-term propositions.... They look at money market funds ... as a store of liquidity that's there available for them should they need it.
MFI: Can you talk about expenses, waivers and consolidation? Stevens: I think that the wildcard here to some degree is what happens with interest rates. Negative interest rates will be a challenge for the money market fund business. I think the fee waivers are something that have become commonplace over the years. There's obviously this very, very strong commitment by fund sponsors to continue their money market fund offerings because they’re such an important arrow in the quiver for their clients.
The general trends in fees and expenses that we've documented now for a generation are very clear. They are declining. The other trend is that distribution and other costs, the cost of help and advice, are being separated from the costs of the funds.... You don't see classes or shares with loads or 12b-1 fees and that sort of thing. Those share classes that have those associated expenses are really dwindling in the industry. Those costs are being externalized and charged separately.
The other great trend that you see across the industry is consolidation. And again, this is something that we've followed closely. The flows into the industry have been strong, but they’re not shared equally by all the players. Some are getting much bigger. I think it’s a tougher proposition for smaller and medium sized enterprises. Scale is an extraordinarily important thing. That certainly would be the case in the money market fund world. So those dynamics are ones, I think, that are very clear and likely to continue into the future.
MFI: What about the future? Stevens: I've been ICI president for 16 years. If you cast your mind forward 16 years further to 2036, what will the fund investing world look like? I suspect that it will be an even more distinctly global phenomenon, and you’ll have major centers of fund investing in China and elsewhere that will go through a period of growth and maturity similar to what our domestic fund sector has gone through during my lifetime. I think the future is bright.
