The Investment Company Institute, which represents the mutual fund industry, released its 2012 Annual Report to Members this week. It contains a section entitled, "Standing Up for Money Market Funds and Their Investors," that reviews events of the past year and the current debate over money market fund regulatory reforms. It says, "Money market fund investors contended with a difficult environment in 2012, marked by record low interest rates, ongoing financial turmoil in Europe, and a high-profile global debate over the merits of potentially disruptive regulatory changes for these funds. Yet in this challenging setting, investors continued to demonstrate their reliance on money market funds -- and to show strong support for preserving these funds' current features under a robust regulatory structure. Their support played a crucial role as ICI and others -- political leaders, investors, and issuers in state and local governments, businesses, and nonprofit institutions -- raised their voices in the regulatory debate."
ICI explains, "That debate, of course, had been underway for several years. Since the financial crisis, ICI and its members have worked constructively with regulators from the Securities and Exchange Commission (SEC), Department of the Treasury, and the Federal Reserve System to pursue ideas that could strengthen the resiliency of money market funds without undermining their core features, their value to investors and the economy, or the competitive market that allows funds and sponsors to provide a wide range of choices to investors. The fruits of that work were evident in the substantial reforms to Rule 2a-7 governing money market fund regulation adopted in January 2010 -- reforms that were tested and proven in the European and U.S. debt crises during the summer of 2011."
They write, "Despite this success, regulators continued to press for another round of rulemaking. In November 2011, SEC Chairman Mary Schapiro announced that the Commission would pursue two alternative proposals for "structural" change: money market funds would be required either to abandon stable net asset values, or to maintain capital buffers and to impose redemption "holdbacks" that would deny redeeming shareholders full access to their cash for as long as 30 days."
ICI's Annual Report continues, "As they advanced these ideas, Chairman Schapiro and others -- primarily current and former banking regulators -- made speeches, gave media interviews, and published commentaries supporting the SEC's contemplated proposals. Federal Reserve officials were particularly active in promoting the notion that additional regulations for money market funds were necessary to address risks to the financial system. ICI and its members responded with empirical analysis and vigorous outreach to investors. The Institute made the case that either of the SEC's contemplated alternatives would render money market funds useless as cash-management vehicles for many individual and institutional investors. The proposals would increase costs for funds, intermediaries, and investors sharply; fail to address issues of financial stability; and drive hundreds of billions of dollars out of well-regulated money market funds into less-regulated, less-transparent alternatives."
They explain, "As ICI made its case, it began where it always has: with the facts. Following clear and rigorous methodologies, ICI researchers shed light on the substantial flaws of the ideas under consideration at the SEC. In May, ICI published The Implications of Capital Buffer Proposals for Money Market Funds, which found that requiring fund sponsors to provide capital would change advisers' business models fundamentally and probably would drive advisers to offer less-regulated products or exit the cash-management business altogether. ICI followed in June with Operational Impacts of Proposed Redemption Restrictions on Money Market Funds, which concluded that redemption holdbacks would drive up costs for funds, intermediaries, and investors. With surveys of investors showing that these restrictions also would shrink the market for money market funds, many advisers or intermediaries likely would decide that the product was uneconomical, and cease to offer it."
The report adds, "ICI Research also heavily informed the Institute's congressional testimony. In June 2012, Stevens had the opportunity to appear before the Senate Banking Committee to discuss money market funds. His 62-page written statement provided lawmakers with a thorough airing of the issues surrounding money market funds and solid data vividly illustrating how the 2010 amendments, such as new minimum liquidity requirements, have had, in Stevens's words, "a transformative effect on money market funds." Infusing the public discourse with solid facts was all the more important given the news media's troubling level of incorrect or incomplete reporting. All too often, news stories and commentary wrongly recast money market funds as a primary cause of the financial crisis; overstated the size of the government's temporary guarantee program for money market funds during the crisis; or failed even to mention the SEC's 2010 reforms."
It says, "To counter the misinformation, ICI made full use of its communications capability. The Institute's media relations team engaged continuously with journalists, providing facts and perspective. Upon publication of inaccurate reporting or commentary, ICI responded not only with conventional letters to the editor but also through social media, rapid-response comments to websites, and analyses posted to ICI Viewpoints. From September 2011 through September 2012, ICI Viewpoints published 46 items on money market funds. Beyond communicating its own positions, ICI also endeavored to make sure that the public and policymakers were aware of the remarkable array of citizens, businesses, local chambers of commerce, nonprofit institutions, and government officials who have voiced consistent support for money market funds. ICI showcased the depth and breadth of these views at its dedicated website, www.PreserveMoneyMarketFunds.org."
ICI tells us, "All this material, in turn, aided ICI's Government Affairs Department as it engaged in its dialogue with members of Congress. Fortunately, many lawmakers proved willing to listen to the voices of the economy. More than 100 members of the House and Senate, hailing from across the country and from across the political spectrum, expressed their concerns that the SEC's contemplated changes could destroy the value of money market funds for their constituents. Though Chairman Schapiro persisted in pursuing structural changes, she could not persuade a majority of the five-member Commission to issue the proposals as a potential rulemaking. In late August, Schapiro called off an expected SEC meeting to consider the staff proposal. In statements explaining their views, the three dissenting Commissioners all cited the need to study the impact of the 2010 reforms carefully. They also expressed concern that Chairman Schapiro's ideas might harm money market funds severely, to the detriment of investors and issuers."
They explain, "At the close of fiscal year 2012, however, the discussion around money market funds showed no sign of abating. In late September, Treasury Secretary Timothy F. Geithner wrote to members of the Financial Stability Oversight Council, which he chairs, urging it to use its authority to recommend that the SEC proceed with money market fund reform. Shortly thereafter, underscoring the global nature of this issue, the International Organization of Securities Commissions issued a number of recommendations, some of which mirrored those under consideration at the SEC."
Finally, ICI's annual report adds, "With the help of members and allies, ICI will remain highly engaged on money market funds in the coming year. "As we have for more than four years, ICI will continue to present empirical analysis to inform this regulatory debate, in the hopes that regulators will take an objective, fact-based view of the issues," Stevens said in September. "The role that money market funds play in the U.S. economy is far too important to proceed on any other basis."
