Despite the deluge of comments opposing the Securities and Exchange Commission’s plans to soon issue a proposed rule to further reform money market funds, SEC Chairman Mary Schapiro insisted Thursday that the funds still have “structural flaws” that must be addressed.
“While many say [the SEC’s] 2010 reforms did the trick — and no more reform is needed — I disagree,” Schapiro said at the Society of American Business Editors and Writers (SABEW) Annual Convention in Denver. “The fact is that those reforms have not addressed the structural flaws in the product. Investors still have incentives to run from money market funds at the first sign of a problem.”
After the Reserve Fund broke the buck, the SEC, in 2010, adopted new rules that imposed robust liquidity requirements on money market funds and also required higher-quality credit, shorter maturity limits, and periodic stress tests, moves that Schapiro said made “money market fund portfolios stronger and more resilient.”
But, Schapiro continued, “when [the SEC] passed these reforms, I clearly stated that we needed to do more — that those reforms were just a first step. Because, despite changes in the assets they hold, money market funds remain susceptible to a sudden deterioration in quality of holdings and consequently, remain susceptible to runs.”
The next steps in money market fund reform, Schapiro reiterated, are either float the net asset value, so that a money market fund’s value goes up and down like any other mutual fund, or impose capital requirements, combined with limitations or fees on redemptions.
“These proposals are designed to, respectively, desensitize investors to the occasional drop in value or make it less likely that the funds will not be able to absorb a loss and cause a run,” she said.
The most vocal opposition has been on the proposal to float the NAV. As Scott Sullivan, senior analyst for the Securities and Investments Group at Celent, a division of Oliver Wyman, writes in his March white paper, “Money Market Reform: The Uncertain Future of the Money Market Fund,” a floating rate NAV “could negate the entire incentive that investors have to buy and sell these funds. Such a change could be particularly problematic at a time when both the domestic and world economies are in a fragile state.”
The money market fund industry has provided up to 36% of U.S. short-term business assets, Sullivan says. “The overwhelming majority of commentary submitted to the SEC has been opposed to the floating of a fund's NAV or capital cushion requirements.”
Sullivan cites data released by the Investment Company Institute in 2010, which found that money market funds managed 25% of short-term assets for business in the U.S., down from a high of 36% in 2008. “If the floating of these funds’ net asset valuation (NAV) were to disrupt this industry, the possible repercussions on investors and even the monetary system could be disastrous,” Sullivan writes.
Under the changes the SEC made to money market funds in 2010 under Rule 2a-7, Sullivan says that the SEC states, “Unlike other investment companies, money funds seek to maintain a stable share price, typically $1.00 per share. This stable share price of $1.00 has encouraged investors to view investments in money funds as an alternative to either bank deposits or checking accounts, even though money funds lack federal deposit insurance, and there is no guarantee that money funds will maintain a stable share price.”
In this statement, Sullivan says, “the SEC acknowledges that the primary motivation for money market fund investors is the stable share price of $1.00. In proposing a floating NAV, investors would need to look toward bank accounts or checking accounts.”