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ICI endorses money market fund reforms

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A proposal to reform money market funds to make them “more resilient in the face of extreme market conditions” was unanimously endorsed by the Investment Company Institute. The proposal was drafted by the Money Market Working Group, a committee made up of representatives from companies such as Vanguard, Fidelity Investments and Charles Schwab, and including Paul Schott Stevens, president and CEO of Investment Company Institute.

Among the working group’s recommendations were measures to ensure all shareholders are treated fairly should a “run” strike a money market fund:

  • Impose daily and weekly minimum liquidity requirements and require regular stress tests of a money market fund’s portfolio.
  • Tighten the portfolio maturity limit currently applicable to money market funds and add a new portfolio maturity limit.
  • Raise the credit quality standards under which money market funds operate by requiring a “new products” or similar committee.
  • Encourage advisors to follow best practices for determining minimal credit risks.
  • To encourage competition among rating agencies, advisors should be required to designate the credit rating agencies their funds will follow.
  • Prohibit investments in “second tier securities.”
  • Address “client risk” by requiring money market fund advisers to adopt “know your client” procedures and require them to disclose client concentrations by type of client and the potential risks, if any, posed by a fund with a strogly-concentrated client base.
  • Enhance risk disclosure for investors and the market, and require monthly Web site disclosure of a money market fund’s portfolio holdings.
  • Assure that when a money market fund proves unable to maintain a stable $1.00 NAV, all of its shareholders are treated fairly. For this purpose, a money market fund’s board of directors, or a committee of the board, would be authorized to suspend redemptions and purchases of fund shares temporarily under certain situations, and permanently for funds preparing to liquidate, in order to ensure that all shareholders are treated fairly.
  • Enhance government oversight of the money market by developing a nonpublic reporting regime for all institutional investors in the money market, including money market funds, and encouraging the SEC staff to monitor higher-than-peer performance of money market funds.
  • Address market confusion about money market institutional investors that appear to be — but are not — money market funds.

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