While we're still transcribing Monday's SEC Investor Advisory Committee Webcast and awaiting the posting of the archived video and audio, we have managed to excerpt several interesting comments from Robert Plaze, the SEC's Associate Director for Regulation of the Division of Investment Management, who presented on "Money Market Funds and Net Asset Value." We also found some additional tidbits in a May 3 Memorandum from the IAC's Investor as Purchaser Subcommittee, which we quote below.
The May 3 Memorandum says, "The Subcommittee is placing the issue of the floating net asset value (NAV) for money market funds (MMFs) on the Commission's agenda for the May 17 meeting. The issue would be only for discussion at this time.... The SEC adopted certain MMF reforms on Feb. 23, 2010, but did not adopt the floating NAV proposal.... The President's Working Group, of which Chairman Schapiro is a member but which is predominantly comprised of banking regulators, has been asked to opine on the floating NAV issue and is expected to release its analysis soon."
It continues, "Industry and consumer groups have been virtually unanimous in their opposition [to] the floating NAV proposal, as illustrated by the attached Appendix.... In view of the dramatic consequences that a floating NAV requirement could have for America's retail investors and its short-term debt markets, the Subcommittee believes that it may ultimately be appropriate to make a recommendation to the full Committee on this issue, but not before obtaining the full Committee's initial views. One form of resolution that the Subcommittee would like the Committee to evaluate, but not vote on at this time, is as follows:"
"RESOLVED: Money market funds should not be required to use a floating NAV. Money market funds play a vital role as cash management vehicles for millions of Americans and as liquidity facilities for short-term borrowers. They have an extraordinary history of stability, with only two instances of failure in three decades of regulation under Rule 2a-7. If the Commission believes that the stability of money market funds can be improved, then it should consider appropriate prudential measures. Mandating a floating NAV, however, would put the continued viability of money market funds at risk and be detrimental to the interests of America's retail investors."
The SEC's Plaze gave a detailed history of money funds and events, saying, "What you had starting in 2007 was the first time where you had permanent losses as a result of investments in money market funds. First the SIVs, the structure investment vehicles, issued highly rated commercial paper as a way of gaining leverage managing a larger portfolio of securities. Most SIVs did not have a Sub-A mortgages, some did. They were buried and very small portions of the portfolios. But nonetheless what happened in 2007 is the market essentially rejected asset-backed vehicles because of the lack of understanding of what was in the portfolio and the lack of trust in that market place. Those SIVs had to unwind and not all of them could unwind fast enough to pay off the commercial paper. Therefore, you had your first money market fund crisis, ultimately leading to September 2008 when Lehman Brothers went down."
He added, "When you have a stable net asset value and you go to a floating NAV, which is something we have talked about and we are continuing to talk about as an option, it is not going to solve the essential problem of maturity transformation and the mismatch between assets and liabilities of a money market fund.... It's not a solution. People who think that moving to a floating NAV is THE solution and that it will all go away are just simply wrong."
Finally, Plaze says, "Going away from a stable net asset value presents a number of problems too.... We don't know to what extent of the $3 trillion dollars, how many people are going to walk away? Who will fund the short term needs of corporate America and commercial paper? Where will investors go? They are not going to get as good a yield as they are getting from money market funds. Who is going to buy the commercial paper? The commercial paper market will shrink. There is no solution. Second, how do you transition away from the stable net asset value?"
He continues, "Third, what about the institutional funds, why wouldn't they just reorganize an unregistered 3c-7 vehicles? If they did that, wouldn't you simply restructure the systemic risk in an unregulated, less transparent world? Maybe they wouldn't and maybe they would.... If you did go to a floating NAV, investors that [have been] conditioned to expect a stable NAV for 30 years now, how do they respond to the daily fluctuations?"
