Daily Links Archives: September, 2013

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."

The New York Fed issued a "Statement to Revise Terms of Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise" says, "As noted in the September 20, 2013 Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has been conducting daily, overnight fixed-rate reverse repo operations as part of an operational readiness exercise. Beginning with the operation to be conducted on Friday, September 27, the Desk intends to increase the allocation limit from the current level of $500 million per counterparty per day to $1 billion per counterparty per day. All other terms of the exercise will remain the same. As an operational readiness exercise, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."

A recent SEC comment letter from David Hirschmann, CEO, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce says, "While the debate over additional money market fund regulation has continued among financial regulators despite the Commission's extensive amendments to Rule 2a-7 in 2010, CCMC believes that this rulemaking is an opportunity for the Commission to take a well-balanced and data-driven approach to strengthen MMFs and preserve the critical role they serve for U.S. businesses, state and local governments and for the economy as a whole. Failure to do so will impose significant costs and inefficiencies upon U.S. businesses, and the SEC will fail to fulfill its legal mandate to promote efficiency, competition and capital formation.... If the Commission's goal is to preserve the viability of MMFs while addressing the risk of heavy redemptions during times of severe market stress, for the reasons we explain below, we believe that the Proposal's Alternative 1, the floating net asset value, does not advance this goal. Indeed, CCMC is greatly concerned that certain regulatory changes described in the Proposal would seriously degrade the benefits of money market funds for U.S. businesses and that the predictable dislocations that would follow from these changes would impose substantial costs on job growth and the U.S. economy generally, in terms of less efficient cash management, less competition in markets for cash management and short-term financing, and higher costs of day-to-day financing for U.S. corporations. CCMC believes that these economic consequences are reasonably quantifiable. The adverse effects that Alternative 1 would have on competition, efficiency, and capital formation are discussed in detail in the accompanying report."

A comment letter from Joe Benevento, Managing Director; Joe Sarbinowski, Managing Director; and Kevin Bannerton, Managing Director; Deutsche Investment Management Americas Inc. says, "Deutsche Investment Management Americas Inc., an affiliate of Deutsche Bank, A.G., appreciates the opportunity to submit this letter in response to the request for comments made by the Securities and Exchange Commission in the Release. We commend the Commission for engaging in such a comprehensive and thoughtful review of the proposal for money market funds with the objective to make the industry become even more resilient and sustainable. We are especially pleased that the Commission heeded input from industry participants and opted not to include a proposal that would include capital buffers, an option that DIMA strongly opposes. Given the scope of the Release, we have chosen to focus our comments on segments of the proposals where we believe either that we possess specific knowledge or that our unique perspective on a specific topic would be helpful to the Commission. For other topics, we have been actively engaged with various industry associations and service providers to ensure that our circumstances and clients' sentiments have generally been captured in their comment response letters that they have separately submitted to the Commission. After assessing the two alternatives presented in the Release, DIMA believes that the Liquidity Fee/Temporary Gate proposal alone would be the most effective option to achieve each of the Commission's stated policy concerns. We believe the Liquidity Fee/Temporary Gate proposal would be the least costly and disruptive to the markets and provide the most flexibility for investors, especially for the majority of investors that remain in favor of the preservation of the Stable NAV, to choose the money market fund structure that best suits their investment goals. DIMA strongly believes that the two alternatives proposed should not be offered in combination, as it would limit investor choice and alienate a large number of money market fund investors. `We also feel strongly that if a money market fund chooses not to adopt the penny rounding accounting methodology and instead offers a prime money market fund that values securities based on market prices and has a "floating" NAV, those investors should not be subject to the prospect of the Liquidity Fee/Temporary Gate proposal. We believe that the Floating NAV money fund, by design, mitigates a key incentive for large-scale redemptions (embedded losses) and also is designed to distribute realized losses to redeeming shareholders (market price) and treat shareholders equitably. It is our opinion that due to these features, the application of the Liquidity Fee/Temporary Gate to a money market fund that adopts a "floating" NAV would not be necessary and the costs would significantly outweigh any incremental benefit. Additionally, DIMA believes that the "two-fund" solution would be preserved with market acceptance achieved under the Liquidity Fee/Temporary Gate proposal set forth in the Release. We continue to believe that a "two-fund" solution that includes both Stable NAV money market funds and Floating NAV money market funds can be achieved through market evolution whereby investors make rational investment choices that consider the characteristics they desire to achieve and the tradeoffs among the features, benefits and risks of available investment products. DIMA believes that a partial gate, rather than a full gate, may be more useful in times of stress."

A letter from Timothy W. Cameron, Managing Director, SIFMA Asset Management Group says, "The Securities Industry and Financial Markets Association (“SIFMA”) respectfully submits these comments on the proposed new and amended rules and forms relating to money market funds in the Release (the "Proposed Rules"). This letter has been prepared by the Asset Management Group of SIFMA and the Private Client Group of SIFMA, working together with SIFMA's Municipal Securities, Operations and Technology, Accounting and Taxation divisions. We appreciate the opportunity to provide our views to the Securities and Exchange Commission.... As an initial matter, we express our support for the Commission as it fulfills its role as the primary regulator of money market funds. In November 2012, the Financial Stability Oversight Council (FSOC) issued proposed recommendations to the Commission for reform of money market funds. These proposals were premature and potentially unhelpful, given the Commission's continuing exploration of money market fund reform. We continue to believe strongly, as set forth in our prior comments to FSOC in January 2013, that FSOC and its members should refrain from making recommendations to the Commission on money market fund reform while the Commission is fully engaged on the issue.... While we support the Commission's goals, we are very concerned that certain of the proposed reforms would either obstruct the operation of money market funds or alter their indispensable characteristics, harming shareholders who rely on them as a cash management tool and issuers who depend on money market funds as an important source of financing. Below we identify potentially harmful aspects of the reforms and recommend several modifications with the goal of better focusing the Proposed Rules towards strengthening the resilience of money market funds in the face of systemic pressures."

The Federal Reserve Bank of New York issued a "Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise Friday, which says, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (Committee). RRPs are a tool that can be used for managing money market interest rates, and are expected to provide the Federal Reserve with greater control over short-term rates. The Desk continues to enhance operational readiness through technical exercises that are limited in size and scope. This week, the Committee instructed the Desk to further examine how a potential overnight, fixed-rate full-allotment RRP facility might work and how it might affect short-term interest rates. In support of this goal, and within the context of a limited technical exercise, the Committee authorized the Desk to conduct a series of daily overnight, fixed-rate RRP operations beginning the week of September 23, 2013 and potentially extending through January 29, 2014. This exercise may be somewhat larger in size than past operational exercises and will be ongoing for at least a period of weeks to gain operational experience with larger transactional flows and to provide additional information about how such operations might improve interest rate control regardless of the size of the Federal Reserve's balance sheet. Like prior technical exercises, this exercise is not intended to materially affect the current level of short-term interest rates. To reinforce this, each eligible counterparty will be initially limited to a maximum bid amount of $500 million. In addition, the initial fixed rate for the RRP operations will be set at 0.01 percent (one basis point), which is below current market rates. The maximum bid amount and rate may vary over the life of the exercise, but as authorized by the Committee, will not exceed $1 billion and 0.05 percent (five basis points), respectively. Changes to the maximum bid amount and rate for these RRP operations will be announced with at least one business day prior notice on the New York Fed's public website. The operations will be open to all eligible RRP counterparties, will use Treasury collateral, will settle same-day, and will have an overnight tenor. The RRP operations will be held, at least initially, from 11:15 am to 11:45 am (Eastern Time). Like earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. The results of these operations will be posted on the public website of the New York Fed, together with the results for other temporary open market operations. The outstanding amounts of RRPs are reported as a factor absorbing reserves in Table 1 in the Federal Reserve's H.4.1 statistical release, their remaining maturity is reported in table 2 of that release, and they are reported as liability items in Tables 8 and 9 of that release." See also Barron's "Money-Market Reform: Nearing the End".

The comment letter from James A. McNamara, Managing Director, President, Goldman Sachs Mutual Funds and David Fishman, Managing Director, Co-Head of Global Liquidity Management, Goldman Sachs Asset Management says, "GSAM appreciates the Commission's view that additional reforms are needed to enhance the stability of money funds and to mitigate systemic risks. We share the Commission's concerns that one money fund's problems may cause serious problems for other money funds, their shareholders, the short-term funding markets and the broader financial markets and economy. In considering changes to the regulatory environment in which money funds operate, we urge that the Commission seek a balanced approach that permits some appropriate risk taking by money funds and that facilitates private and public borrowers' access to term financing in the short-term markets.... In addition, we urge the Commission to be attentive to the potential unintended consequences of rules it may adopt. If the Commission were to solve one problem and inadvertently create another, more serious problem, its goals will not be achieved and neither investors nor the markets would be well served. As discussed below, we are concerned that some elements of the Commission's Proposals could have just that effect. These comments reflect our underlying view that there is no perfect solution for money funds that eliminates all risk to investors and to the financial system. Indeed, wringing the last bit of risk out of an investment in money funds, as with any investment product, also would likely wring out the last bit of its economic value. For example, if prime money funds yield less than government money funds as a consequence of regulatory restrictions, there would be no economic purpose for prime money funds, thus eliminating an important source of short-term financing for many highly creditworthy companies. While investors have expressed differing preferences between stability and liquidity, they have consistently told us that a combination of Alternative I and Alternative 2 could render money funds unworkable for most, if not all of them, since the combination effectively would mean that money funds offer neither stability nor liquidity (nor, in current market conditions, yield). Without preserving one or both of the priorities of money fund investors, the combination, in our view, would lead to a mass exodus from money funds into alternative products."

A comment letter from "Robert Sabatino, Managing Director, Head of US Taxable Money Markets, UBS Global Asset Management (Americas) Inc. and Keith A. Weller, Executive Director & Senior Associate General Counsel, UBS Global Asset Management (Americas) Inc. explains, "UBS Global Asset Management (Americas) Inc. ("UBS Global AM") appreciates the opportunity to comment on the Proposal.... For the reasons set forth below, we strongly oppose Alternative 1 and believe that all money funds that meet the requirements of Rule 2a-7 under the Investment Company Act of 1940, as amended ("1940 Act"), should be allowed to continue to maintain a stable NAV per share. We also have concerns regarding Alternative 2 and recommend that, if the US Securities and Exchange Commission ("SEC" or "Commission") determines to adopt Alternative 2, it should provide money fund boards with broad discretion to tailor the specific terms of any liquidity fees and/or redemption gates to the circumstances of a particular money fund, its investors and the market events, without imposing an automatic weekly liquid assets trigger for such fees or gates. Finally, we strongly oppose the removal from Rule 2a-7 of the exemption that allows the use of the amortized cost method of valuation. We support changes to money funds that facilitate the orderly and equitable management of redemptions from funds experiencing significant redemption activity. As detailed below, we support the following approaches: granting fund boards enhanced authority to impose liquidity fees and suspend or gate redemptions, tailored as necessary to address a fund's particular circumstances prevailing at the time of the situation; enhancing website, prospectus and marketing disclosures; and enhancing money fund diversification requirements. Based on consultations with our clients, we believe that the Proposal would significantly decrease demand for money funds, substantially impacting competition, efficiency and capital formation in the economy. In particular, the Proposal would impose considerable costs on all money funds, which would be borne by money fund investors through higher expenses, resulting in lower yields. Additionally, if the Proposal is adopted, money funds would no longer be able to provide the key benefits to investors of offering same day and intra-day liquidity."

The U.S. House of Representatives' Committee on Financial Services will hold a hearing Wednesday at 10:00 a.m. on "Examining the SEC's Money Market Fund Rule Proposal." The description says, "This will be a one-panel hearing with the following witnesses: The Honorable Steven N. McCoy, Treasurer, State of Georgia, on behalf of the National Association of State Treasurers; The Honorable Sheila Bair, Chair, Pew Charitable Trusts, Systemic Risk Council; Ms. Marie Chandoha, President and Chief Executive Officer, Charles Schwab Investment Management Inc.; Mr. James Gilligan, Assistant Treasurer, Great Plains Energy, on behalf of the U.S. Chamber of Commerce; and Mr. Paul Schott Stevens, President & CEO, Investment Company Institute. This hearing will review the proposal put forth by the Securities and Exchange Commission (SEC) on June 5, 2013, to further reform the regulation of money market mutual funds (MMFs). Among the reforms proposed is a requirement that "prime" MMFs adopt a "floating" net asset value (NAV) per share instead of a stable $1.00 share price and a proposal to allow MMF directors to impose liquidity fees and redemption gates in times of market stress. "Prime" MMFs invest in high-quality, short-term instruments issued by corporations and banks, as well as repurchase agreements, certificates of deposit, and asset-backed commercial paper. By contrast, "government" MMFs invest in obligations of the U.S. government, the U.S. Treasury or federal agencies and instrumentalities, as well as repurchase agreements collateralized by government securities. During the financial crisis, "prime" MMF experienced heavy redemptions while "government" MMFs experienced heavy inflows."

Federated's Chris Donahue writes in Roll Call, "For Money Market Fund Reforms, the Answer Is Clear". He says, "Before the August recess, the House Oversight and Government Reform Committee sent U.S. financial regulators questions regarding the influence of the Financial Stability Oversight Council on the Securities and Exchange Commission's recent rule-making proposals on money market funds. The committee acted after the SEC released a 700-page document proposing amendments to the rules governing money market funds. We believe that aspects of the SEC's proposal, which will affect 56 million Americans, are a response to pressure from the FSOC. Specifically, Alternative One, a floating net asset value for prime money market funds, was among the three options the FSOC had earlier offered to the SEC. This concept could destroy money market funds, which for more than 40 years have been used by individuals, businesses, state/local governments and nonprofits for cash management and funding. Alternative Two, which comes from the SEC itself, gives a fund's board the option to impose redemption gates and/or fees to ensure that shareholders are protected in the event of a crisis. The SEC proposal provides these two alternatives for consideration and public comment. Now, as Congress looks to further hearings on money-market-fund regulation and the choice between the FSOC-driven Alternative One and the SEC's Alternative Two, there are five key questions that I believe need to be asked. Question 1: Which alternative preserves money market funds? This is the objective of the SEC, but the differences between the two are stark. A floating NAV: 1. will preclude the use of money market funds by many companies and public entities due to state regulations and investment policies. 2. will create unnecessary and unmanageable tax, accounting and administrative issues with significant costs. 3. may impact daily liquidity. 4. will cause a large portion of shareholders to exit the product. In fact, the Senate Appropriations Committee in July stated its concerns that a floating NAV will change the nature of money market funds, tighten capital availability and increase costs. Gating, on the other hand, maintains stable value and daily liquidity in all but the most extreme market conditions; creates no tax, accounting or administrative issues; and meets investor/issuer needs. Question 2: Which alternative prevents runs? A floating NAV does not stop runs as shareholders will still exit a fund given credit concerns or fear of losses. Gating, however, provides the ability to employ a temporary suspension of redemptions during times of extreme stress at the discretion of the fund board, staunching the potential for a run and protecting all investors."

A recent Comment letter to the SEC from Ernst & Young LLP says, "Many of the issues on which the SEC is seeking comment relate to the impact the proposed rules might have on investors and registrants that hold investments in money market funds. Our comments are limited to the possible accounting and auditing implications of the proposed alternatives. Current US GAAP explicitly states that money market funds are commonly considered cash equivalents. The main characteristics for an investment to be classified as a cash equivalent is that it is short term, highly liquid, "readily convertible to known amounts of cash" and presents "insignificant risk of changes in value because of changes in interest rates." We agree with the Commission that investments in money market funds with a floating NAV under amended Rule 2a-7 would continue to meet the definition of a cash equivalent because the fluctuations in value would be expected to be insignificant. We also concur with the Commission that the evaluation of whether an investment in a money market fund meets the requirements of a cash equivalent should be performed periodically. We agree with the Commission that investments in money market funds with both a floating NAV and fees and gates under the proposed amendments would continue to meet the definition of a cash equivalent. We concur that the potential suspension of redemptions for up to 30 days in contingent circumstances would not violate the requirement that a cash equivalent be "readily convertible to known amounts of cash." We also concur that the potential imposition of a liquidity fee of up to 2% in contingent circumstances would not violate the requirement that a cash equivalent present "insignificant risk of changes in value.""

U.K. publication Treasury Today writes, "Whither go European money market funds?" The article says, "In a move to address financial systemic instability, on 4th September the European Commission (EC) put forward a number of proposals to regulate the European money market fund (MMF) industry, in a similar way that Basel III's Liquidity Coverage Ratio (LCR) has put constraints on banks to ensure that they adequately manage their liquidity. The proposed regulation, which will apply to all MMFs domiciled, managed or marketed in the EU, affecting nearly E1 trillion in investor assets, requires: Certain levels of daily/weekly liquidity in order for the MMF to be able to satisfy investor redemptions -- MMFs are obliged to hold at least 10% of their assets in instruments that mature on a daily basis and an additional 20% of assets that mature within a week. Clear labelling on whether the fund is short-term MMF or a standard one (short-term MMFs hold assets with a residual maturity not exceeding 397 days while the corresponding maturity limit for standard MMFs is two years). A capital cushion (the 3% buffer) for constant net asset value (CNAV) funds that can be activated to support stable redemptions in times of decreasing value of the MMFs' investment assets. Customer profiling policies to help anticipate large redemptions. Some internal credit risk assessment by the MMF manager to avoid overreliance on external ratings.... As the proposals start moving through the political process, there is still time to influence the decision-makers. The IMMFA is working together with the Association of Corporate Treasurers (ACT) to ensure that the corporate voice is heard. Each member of the association will also be reaching out to its investors to get involved in the debate. [IMMFA's Susan] Hindle Barone recommends pointing out directly to local MEPs, as well as representatives from the Bank of England (BoE) and the Treasury how damaging these proposals could be. "We are encouraging anyone who cares about this to make their voices heard, whichever avenue that takes," she says. "We are trying to explain that this has a real impact on the broader economy and we struggle to get that message through."" (Note: Crane Data will be hosting its first European Money Fund Symposium Sept. 24-25, 2013, in Dublin. Treasury Today is a media partner of the event.)

Another recent comment letter comes from Geoffrey C. Beckwith, Executive Director, Massachusetts Municipal Association. He writes, "On behalf of the 351 cities and towns of the Commonwealth of Massachusetts, the Massachusetts Municipal Association appreciates the opportunity to offer comment on the proposed rule changes regarding the regulation of money market mutual funds (MMMFs). We respectfully oppose the proposed rule changes, and we are very concerned that the proposals would harm local governments by taking away an important cash management tool, increasing market instability, and making municipal bonds less attractive to investors. We urge the SEC to retain a fixed NAV as an important component of both established municipal financial practices and continued economic growth. We understand that the Securities and Exchange Commission (SEC) has proposed switching from a fixed net asset value (NAV) for MMMFs to a floating NAV, and has proposed implementing investor redemption restrictions. These proposed regulatory changes would require MMMFs to sell and redeem shares based on the present market-based value of the securities in their underlying portfolios, and would also make it more difficult for investors to redeem MMMFs.... The SEC has not proposed subjecting Treasury and government money market funds to further regulation, recognizing that these funds have largely different characteristics from prime MMFs. Municipal MMFs behave similarly to Treasury and government funds during times of market stress, maintaining high levels of asset liquidity. They did not experience the same runs during the financial crisis of 2008 that prime MMFs experienced. Given the highly negative consequences that would result, there is no compelling reason to regulate municipal MMFs as if they were prime MMFs, rather than regulating them similarly to the Treasury and government MMFs with which they share numerous characteristics."

The just-released "Minutes of the Financial Stability Oversight Council" (from their July 16 meeting) show that a "MMF Reform Update" was on the agenda. The minutes say, "The Chairperson turned to the next agenda item, regarding an update on the SEC's proposal on MMF reform, and asked Mary Jo White, Chair of the SEC, to introduce the topic. After Chair White's introduction, Norm Champ, Director of the Division of Investment Management at the SEC, and Craig Lewis, Chief Economist and Director of the Division of Economic and Risk Analysis at the SEC, gave a presentation. Mr. Champ provided an overview of the SEC's June 5, 2013, proposed rule for MMF reform. He explained that the proposed rule set forth two alternatives for amending the rules that govern MMFs. The first alternative proposal is floating net asset value, and would require MMFs to sell and redeem shares based on the current market-based value of the securities in their underlying portfolios, rounded to the fourth decimal place. The second alternative proposal is liquidity fees and gates, and would require an MMF to impose a liquidity fee (unless the fund's board determines that it is not in the best interest of the fund) if the fund's liquidity levels fall below a specified threshold and would permit a fund to suspend redemptions temporarily under the same circumstances. Mr. Champ stated that the SEC is seeking public comments on each alternative standing alone, as well as on the possibility of combining the two alternatives. Following the presentation, the members of the Council asked questions and had a discussion." See also, recent Comment letters to the SEC.

A Reuters story entitled, "Settlement reached in Reserve Primary Fund lawsuit," tells us, "Money market pioneer Bruce Bent and others involved in the management of Reserve Primary Fund have reached a settlement worth at least $54.5 million in a shareholder lawsuit stemming from the fund's collapse at the height of the financial crisis. The accord, disclosed in papers filed late Friday in U.S. District Court in Manhattan, comes less than two weeks before the five-year anniversary of when the one-time $62 billion fund "broke the buck" after the bankruptcy of Lehman Brothers Holdings Inc.... The class action lawsuit was filed soon after Reserve Primary Fund disclosed on September 16, 2008, that its net asset value fell below $1 per share. The drop followed losses incurred on more than $785 million in investments in commercial paper and other debt issued by Lehman, which had filed for Chapter 11 bankruptcy protection the day before.... The fund subsequently entered into liquidation. The U.S. Securities and Exchange Commission meanwhile sued Bent, his son Bruce Bent II, and two Reserve corporate entities, accusing them of making false statements to investors. A federal jury in November 2012 cleared the senior Bent on all charges. Bruce Bent II was cleared of violating securities fraud laws but was found liable for a single negligent violation.... The class action, which was led by Third Avenue Institutional International Value Fund LP, named as defendants both Bents as well as Arthur Bent III, another of the senior Bent's sons, and three corporate entities including Reserve Management Co. U.S. District Judge Paul Gardephe in September 2012 dismissed claims under state law and the Investment Company Act, but allowed various claims the defendants violated other federal securities laws to move forward."

A new comment letter on the SEC's MMF Reform Proposal from John D. Hawke, Jr., Arnold and Porter, LLP on behalf of Federated Investors asks for a 60-day extension on the comment period. It says, "We are writing on behalf of our client, Federated Investors, Inc. and its subsidiaries ("Federated"), regarding the Securities and Exchange Commission's (the "Commission") proposed rules on money market fund ("MMF") reform (the "Release"). We note that the Release is 698 pages long and includes well over 1,000 questions and requests for data. In view of the very large number of questions and the amount and complexity of the cost data and other information requested, we respectfully request that the Commission extend the comment period. The changes proposed in the Release are fundamental to the nature of MMFs, and would have wide-ranging implications across the economy. An extension of the comment period for an additional 60 days would permit Federated and others to complete efforts to assemble data and to respond more fully to the questions and requests for information in the Release."

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $4.86 billion to $2.639 trillion for the week ended Wednesday, September 4, the Investment Company Institute reported today. Taxable government funds decreased by $3.71 billion, taxable non-government funds decreased by $2.70 billion, and tax-exempt funds increased by $1.55 billion." In other news, see Bloomberg's oddly-titled, "Money Fund Lehman Moment Lurks as New Protections Stall", which contains quotes from frustrated former regulators, and WSJ's even odder "Money-Market Cynicism" editorial, which unbelievably criticizes the European Union's money fund reform proposal for not going far enough (because it allows them to keep a stable NAV if they fund a 3% capital buffer).

The Wall Street Journal writes "Ultrashort Bond Funds: Are They Ultrasafe?". The article says, "With short-term interest rates remaining locked near zero, yield-starved investors have been to "ultrashort" bond funds as a safe place to stash their cash. Attracted by yields on ultrashort funds ranging mostly between 0.2% and 1.3%, investors shifted $9.6 billion into the group during the first seven months of 2013, according to Morningstar Inc. Fund companies, meanwhile, have been rolling out new offerings, including ultrashort exchange-traded bond funds. These funds, which invest in bonds typically maturing in less than one year, are likely to suffer smaller losses than other bond funds when interest rates rise. Yet investors need to remember that they can lose money; they're not a money-market substitute. And within the group there's a range of strategies carrying different risks. Some investors with a long memory may recently have gotten a reminder of how ultrashort bond funds can fail to protect investor money: Last month, Charles Schwab Corp.'s fund unit filed with regulators to offer a series of ultrashort ETFs. The Schwab YieldPlus mutual fund lost 35% during the financial crisis in 2008."

Federated's "Month in Cash: Light at the end of the tunnel" says, "In a month that saw continued albeit choppy economic improvement, the most significant news in August from the money market's perspective emanated from an event that actually occurred in July. That's when Federal Reserve policymakers wrapped up their latest meeting, the minutes of which weren't released until Aug. 21. Notable in the Federal Open Market Committee (FOMC) comments were two things: committee members appeared wedded to finalizing a framework for ending quantitative easing (QE) when they next meet on Sept. 17-18, with a tapering of the $85 billion in monthly Treasury and agency mortgage-backed securities purchases likely starting in October. Secondly, and more significantly from our viewpoint, the minutes indicated policymakers expect to use overnight reverse repos to help manage the Fed's exit from its extraordinary monetary accommodation of the past five years. What does this mean for savers and money fund investors? After living with extremely low interest rates since 2008, some relief may loom on the not-too-distant horizon. To be sure, events between now and the September meeting could forestall immediate movement by the FOMC. Fed Chairman Ben Bernanke et al have made clear that whatever decisions they make will be driven by the data, the bulk of which so far is suggesting the economy is strong enough to stand on its own.... Still, with housing off the floor, unemployment trending down and the consumer pretty well situated, the Fed appears set to act sooner rather than later."

The Financial Times writes "Brussels tightens noose on money funds". The article says, "The European Commission is set to push ahead with a series of controversial reforms that will effectively "kill off" the continent's E450bn fixed value money market fund industry. A draft law expected to be unveiled by Brussels on Wednesday will call for so-called "constant net asset value (CNAV)" funds to be forced to hold a 3 per cent cash buffer to help avert a repeat of the "runs" some funds suffered during the financial crisis. With fees for such funds -- which invest in high-quality, short-term money market instruments and trade at a fixed Eor $1 a share except in extremis -- as low as 8-10 basis points, industry figures said the proposal was uneconomic, even with a lengthy phase-in period. The Commission estimates the 3 per cent buffer would raise fees from 21bp to 30bp but help insulate investors from losses." The FT quotes Susan Hindle Barone, secretary-general of the Institutional Money Market Funds Association, "This would be a de facto abolition of CNAV funds. A requirement to hold 3 per cent is simply uneconomic. We expect that most CNAV providers will convert their funds to variable NAV." The piece adds, "."