A press release entitled, "SEC Investor Advisory Committee Announces Meeting Agenda, List of Participants, was sent out late yesterday. It says, "The Securities and Exchange Commission's Investor Advisory Committee today announced the agenda for its public meeting to be held on May 17, 2010. The Committee was formed by the SEC in 2009 to advise the Commission as to its regulatory priorities." One of the issues to be discussed is "money market fund 'net asset value' calculation, which is scheduled for 2:00-2:45 p.m. on Monday. The entry says, "Discussion with Staff: Money Market Funds and Net Asset Value" with Staff Presenter: Robert Plaze, Associate Director of the SEC's Division of Investment Management. The meeting will be webcast.
A 6-page Statement of the Investment Company Institute has been posted on the SEC's website. It says, "The Investment Company Institute, the national association of U.S. mutual funds and other investment companies, appreciates the opportunity to offer its views to the Investor Advisory Committee of the Securities and Exchange Commission on money market funds and the issue of net asset value, an agenda item for the May 17 Committee meeting.... [T]he money market fund industry understood the need to make money market funds more resilient under extreme market conditions. Indeed, the SEC and the fund industry already have made significant and important progress toward making money market funds more secure."
It says, "Earlier this year, the SEC approved final amendments to Rule 2a-7 that will raise credit standards and shorten the maturity of money market funds' portfolios -- reducing credit and interest rate risk. They require more frequent disclosure of money market funds' holdings, so both regulators and investors will better understand funds' portfolios. The SEC amendments also directly address the liquidity challenge. They impose for the first time explicit liquidity requirements that will require taxable money market funds to maintain daily liquidity of 10 percent of their assets, and all money market funds to maintain weekly liquidity of 30 percent of their assets. Funds also must adopt 'know your investor' procedures to help them anticipate the potential for heavy redemptions and adjust their liquidity accordingly."
The comment also says, "The search for ways to make money market funds even more secure under the most adverse market conditions, however, has not stopped. Indeed, the fund industry remains open to a wide range of ideas on reform of money market funds. As discussed below, however, we strongly oppose the notion of forcing money market funds to abandon their objective of maintaining a stable per-share value. The steady NAV -- typically $1.00 per share -- is a fundamental feature of money market funds. A somewhat related idea to a floating NAV that we also oppose is the suggestion that money market funds be required to publicly disclose market-value based information on a real-time basis. We believe that such disclosure would not be helpful to fund shareholders and very well could, in fact, increase systemic risks."
Under "The Case for Stable NAV Money Market Funds," the statement says, "Some observers believe that a simple solution to the challenges faced by money market funds during the financial crisis is to force these funds to float their per-share value. By their account, the amortized cost accounting that allows a money market fund to seek to maintain a stable NAV makes these funds more vulnerable to runs. They argue that investors are prone to sell stable-value shares when there are small drops in the value of the funds' underlying securities below the fixed $1.00, but wouldn't sell if the shares' value floated routinely. After a careful review of this proposition, however, we have concluded that, in light of market data and investor behavior, the notion of forcing money market funds to float their value would wreak havoc on our markets -- without any offsetting benefits."
The statement continues, "Indeed, we have concluded that: (1) a floating NAV could lead to substantial and far-reaching negative consequences for the money market; (2) a floating NAV is unlikely to reduce systemic risk; and (3) a $1.00 stable NAV provides far more benefits to money market fund investors than a floating NAV. If money market funds were required to float their NAVs, this very likely would lead to many investors -- both retail and institutional alike -- ceasing to use these funds in favor of alternative products that offer a stable NAV, albeit without the market-based returns (bank products) or regulatory protections (private or offshore pools) that money market funds provide. Significantly decreasing the value of this product would have negative consequences to the economy as well, by increasing systemic risk, reducing the supply of short-term credit to corporations, or severely restricting the supply of credit to municipalities."
It adds, "Another solution that some observers have suggested to help reduce systemic risk is to force money market funds to publicly disclose their market-based NAV per share ('shadow price') and/or the market-based prices of their portfolio securities on a real-time basis. These observers believe that this information would enable money market fund investors to understand the fund's exposure to distressed securities and the risk that the fund may be unable to maintain a $1.00 stable NAV. On the other hand, we believe that such disclosure would not be helpful to fund shareholders and could, in fact, introduce greater market instability. Indeed, there is little evidence that requiring funds to disclose either shadow prices or market-based prices of portfolio securities would be informative. For example, a sample of shadow prices provided on a confidential basis to ICI by a number of the largest institutional money market funds indicates that shadow prices deviated very little from $1.00 in the run-up to September 2008."
Finally, the letter says, "ICI appreciates the Committee's attention to this important issue for money market funds, their shareholders, and our economy. We urge the Committee to carefully consider the implications of forcing money market funds to float their NAVs or requiring such funds to publicly disclose market-value based information on a real-time basis. Instead, we urge the Committee to consider other efforts to further strengthen money market funds. For example, ICI and its members have responded to an idea advanced by the Treasury Department's June 2009 white paper on financial regulatory reform, which called for exploring measures to require money market funds 'to obtain access to reliable emergency liquidity facilities from private sources.' Indeed, ICI is moving forward rapidly to complete a blueprint for such a liquidity facility."
