Comment letters continue to pour in in response to the Financial Stability Oversight Council's "Proposed Recommendations Regarding Money Market Mutual Fund Reform", even though the deadline for feedback was extended to Feb. 15 from last Friday. Today, we excerpt from Charles Schwab Investment Management's comment letter. President Marie Chandoha writes, "Charles Schwab Investment Management, Inc. appreciates the opportunity to provide comments on the November 2012 "Proposed Recommendations Regarding Money Market Mutual Fund Reform," issued by the Financial Stability Oversight Council. Schwab is one of the largest managers of money market fund assets in the United States, with 3.3 million money market fund accounts and $167.9 billion in assets under management as of December 31, 2012. Approximately 85% of those assets are in sweep funds, with the balance in purchased funds. Sweep accounts automatically invest idle cash balances while providing investors with convenience, liquidity and yield. They also allow for clients to use their cash to implement intra-day trades in their investment and retirement accounts. Schwab's money market fund offerings predominantly appeal to, and are used by, individual retail investors who use money market funds to help manage their cash."
The Schwab letter says, "Schwab has been an active participant in the debate over money market fund regulation since 2009. We were supportive of the 2010 amendments to Rule 2a-7, the rule that governs the funds, which we believe substantially strengthened money market funds, made them more transparent to investors, and reduced the risk of runs. We have continued to participate in the debate about whether additional reforms are needed, submitting multiple comment letters to both national and international regulatory bodies. In these letters, and in other venues, Schwab has expressed significant concerns with many of the reform proposals that have been put on the table, including requiring money market funds to float their net asset values (NAV), requiring the funds to have a capital buffer, and requiring funds to impose redemption restrictions on investors. These proposals, particularly if applied broadly across all types of funds, would have a devastating effect on the money market fund industry, render an enormously popular product much less appealing to individual investors and exacerbate systemic risk."
It explains, "In recent weeks, however, our position on the issue of a floating NAV has evolved. We continue to believe that a blanket shift of the entire money market fund industry from a stable NAV product to a floating NAV product would imperil the industry, deprive individual investors of a critically important cash management option, disrupt the larger economy, and potentially destabilize the financial system itself. But a more targeted approach, one that applies a floating NAV to the types of money market funds most susceptible to runs and the types of investors most likely to trigger runs, is an option worth considering. As articulated in a November 23, 2012, op-ed piece in The Wall Street Journal by Charles Schwab Corporation's Chief Executive Officer, Walter Bettinger, we believe that requiring prime money market funds that cater to institutional investors to float their net asset values is an approach that merits consideration as a possible solution to the regulatory impasse."
Schwab continues, "This letter has three major components. First, Schwab offers its perspective on the process by which the Council has inserted itself into the money market fund reform debate, and urges the Council to allow the Securities and Exchange Commission ("SEC") to continue with its own regulatory process before the Council considers taking any further action. Second, Schwab addresses its concerns with each of the three recommendations put forward by the Council. And finally, Schwab is pleased to offer a detailed explanation of our "modified floating NAV proposal," an alternative reform measure that was first outlined by Mr. Bettinger. We believe such a solution could address the concerns of regulators by targeting reform at the sector of the money market fund industry most likely to initiate a potentially destabilizing run, but do so without wreaking havoc on a $2.7 trillion product that is enormously popular with individual investors and plays a critically important role in the financial system and in the broader economy. We discuss the mechanics of such a solution in the hopes that the SEC will consider this more reasonable alternative prior to issuing a final rule."
The letter also says, "In late November 2012, two months after the Chairman of the Council first indicated that the Council would issue recommendations regarding money market fund reform, the SEC staff issued a response of nearly 100 pages to the questions of Commissioners Gallagher, Paredes and Aguilar. Among other things, the response includes the first published analysis by the regulator of the impact of the 2010 amendments to Rule 2a-7 on the resiliency of money market funds. The response also provides analysis of the alternatives to money market funds, including bank deposits, time deposits, offshore funds, enhanced cash funds, ultra-short bond funds, collective investment funds, short-term investment funds, and others. The report notes that shifting money fund assets to one of these alternatives "may create additional operational costs or complexities, and they may impose redemption restrictions or other limitations on liquidity." The report also observes that shifting money market fund assets to bank deposits "would increase reliance on FDIC deposit insurance and increase the size of the banking sector, which raises additional concerns about the concentration of risk in the economy."
Schwab adds, "With the benefit of this additional information, the SEC staff is reportedly working on a revised proposal for consideration by the commissioners. Given that all signs point to another attempt by the regulatory agency of jurisdiction to promulgate a rule in 2013, we believe that the Council should not consider any further action on money market fund reform until such time as the SEC has completed its ongoing work."
The letter tells us, "In its Proposed Recommendations, the Council specifically states that it "aims to address the activities and practices of MMFs that make them vulnerable to destabilizing runs." We believe our proposal meets the Council's goal by greatly reducing the first-mover advantage in the Prime Variable NAV Fund and by removing from Prime Constant NAV funds the shareholders most likely to cause a destabilizing run. No solution can offer any guarantees -- the very nature of any securities product is that it could lose value and shareholders could abruptly decide to mitigate their potential losses. The Council also notes that the same features that make money market funds vulnerable to runs make them appealing to investors. In its zeal to prevent runs, the Council's proposed solutions render the product unappealing to retail investors. Our proposal succeeds in maintaining the important balance between stability and utility."
