We learned from the website PreserveMoneyMarketFunds.org that six Senators recently wrote a letter to SEC Chairman Mary Schapiro urging her not to implement a floating NAV regime for money market funds. The letter was signed by Senators Michael F. Bennet (D-Col.), Patrick J. Toomey (R-Pa.), Mike Crapo (R-Id.), Jon Tester (D-Mont.), Mark Kirk (R-Ill.), and Robert Menendez (D-NJ). They write, "We write to express our concerns about proposals to float the net asset value (NAY) of money market mutual funds (MMMF) or to impose inappropriate bank-like requirements on these funds. It is our understanding that the Securities and Exchange Commission (the Commission) is currently considering such regulatory changes."
The Senators explain, "Since the financial crisis peaked in the fall of 2008, the Commission has implemented reforms designed to improve the ability of money market funds to withstand market turmoil and heightened redemption pressure. These 2010 reforms increase MMMF liquidity by requiring, among other measures, that 10% of a fund's holdings are liquid daily (e.g. , cash or maturing instruments) and 30% of its holdings are liquid within five business days. This additional liquidity proved helpful during the recent debt ceiling deadline and market volatility surrounding Standard & Poor's downgrade of U.S. government securities, even though MMMFs faced no unanticipated redemption pressure."
The letter continues, "The Commission's actions to date enhance the safety and liquidity of money market funds as you noted when you implemented the reforms. However, we are concerned about additional actions contemplated by the Commission that could have adverse consequences on both investors and the capital markets. Specifically, forcing money market funds to abandon their stable $1.00 per share price and "float" their net asset value will likely have significant consequences for retail investors, companies, and municipalities. A floating NAV, for instance, would make money market fund sales tax-reportable events, substantially increasing the tax and recordkeeping burdens of investors while reducing the product's viability."
The six Senators add, "If money market funds lose their stable value, retail investors who want a stable-value cash investment may have fewer opportunities to access money market instruments. [A footnote here says: Investors currently hold some $2.6 trillion in money market funds at virtually zero yield, which clearly demonstrates investors' confidence in these funds and the importance of these funds in their financial plans.] On the other hand, institutions that want or require stable value could turn to private pools, in the United States and overseas, that promise to maintain a fixed price. These alternatives would be subject to significantly less oversight than money market funds."
They state, "At the same time, if money market funds are forced to float their NAVs, the flow of hundreds of billions of dollars in both corporate and municipal financing would likely be severely disrupted. This would make it more expensive to raise capital while potentially costing jobs and exacerbating the budget woes of communities around the nation- which could lead to reduced municipal services, higher taxes, or both. Consumer lending may also become less available and more expensive. Without money market funds, it is not apparent how consumer, commercial and municipal financing needs would be met. There is no readily apparent substitute for today's money market funds. Moreover, the benefits of a floating NAV may be only illusory-experience with floating NAV money market funds abroad has shown that funds with a floating NAV are not immune to redemption pressures."
Bennet & Co. continue, "Similarly, adopting inappropriate bank-like regulations for money market funds may also cause significant disruptions to the financial system as the money market fund industry may be forced to consolidate. Such actions could increase the amount of assets subject to the Federal safety net, reduce investor choice, and produce large pockets of concentrated risk into a small number of funds -- ironically, inflating too-big-to-fail risk."
Finally, the six add, "We recognize the pressure that the Commission is under to effect additional reform in this area, particularly in light of the current uncertainty in the worldwide financial markets. In this vein, we are willing to engage in a dialogue on the relevant issues. We urge you, however, not to rush to adopt solutions that could potentially create disruptions in our fragile economy, impair the ability of businesses to raise capital efficiently, harm retail investors, and increase stress on municipal budgets. Any further proposals should preserve the utility of money market funds for investors and avoid imposing costs that would make large numbers of advisers unwilling or unable to continue to sponsor these funds. Thank you for your consideration of these important issues."
