ICI Opposes SEC’s Attempt to Rein In Money-Market Funds

The CFTC has ‘sharply narrowed Rule 4.5—but just for funds and their advisors,’ ICI President Paul Schott Stevens says

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Paul Schott Stevens, president and CEO of the Investment Company Institute (ICI), pointed out Wednesday two initiatives the ICI is fighting: the Securities and Exchange Commission’s (SEC) further attempts to rein in money market funds, and the Commodity Futures Trading Commission’s (CFTC) amendments to Rule 4.5 on commodity pool operators and commodity trading advisors.

With “great reluctance,” Stevens said during his opening remarks at the mutual fund trade group’s annual meeting, “ICI has filed a legal challenge to the CFTC’s amendments of Rule 4.5. We are joined in this action by the U.S. Chamber of Commerce. This is a highly unusual step for us—and not one taken lightly.”

Paul Schott Stevens, President, ICIUnder Rule 4.5, the CFTC exempts many institutions from its oversight, Stevens (left) said. “The rule essentially says that if you sponsor a pooled investment, and you are well-regulated by another agency, such as the SEC, you don’t need a second layer of regulation from the CFTC.” Under Rule 4.5, “the CFTC has excluded insurance companies, banks and pension plans from its regulatory regime. And since 2003, the CFTC treated registered investment companies and their advisers the same way. After all—what financial product is more comprehensively regulated than mutual funds?”

The CFTC, Stevens said, has “sharply narrowed Rule 4.5—but just for funds and their advisors” by requiring “new tests that are so stringent that virtually every fund advisor will need to monitor its use of derivatives on a regular basis. Some will be subject to CFTC regulation atop their current SEC oversight—a redundant, costly regime that will harm their investors.” Others, he continued, “to avoid this regime, may choose to reduce their use of futures, options, and swaps—again, to the detriment of their investors. Either way, investors lose." 

As to the SEC’s attempt to rein in money-market funds, Stevens said that throughout the funds' history, the SEC “has carefully crafted rules that balance these funds’ competing objectives of convenience, liquidity and yield” which has allowed money-market funds to flourish, “to the great benefit of investors and the economy.”

Unfortunately, Stevens said, “the SEC—urged on by bank regulators—seems to be on a path to deprive investors, issuers and the economy at large of the manifold benefits of a robust money-market fund sector.” On its current path, he said, the commission “may abandon the regulatory regime under which these funds have maintained a stable $1-per-share value” and “force money-market funds to adopt a complicated regime of capital buffers and redemption restrictions.”

He cited a recent survey by consultants at Treasury Strategies which said that four out of five institutional investors would reduce their use of money-market funds if those funds were subjected to a floating NAV or redemption restrictions. “Based on these investors’ estimates, institutional assets in money-market funds would decline by 60% or more,” he said. “Undoubtedly, many individual investors would react similarly. We could expect a hemorrhaging of money fund assets.”

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