The Investment Company Institute released its 115-page Comment Letter of to the Financial Stability Oversight Council on its Proposed Recommendations Regarding Money Market Mutual Fund Reform. The press release accompanying the letter, entitled, "Temporary Liquidity Gates, Fees Concept Only Viable FSOC Option for Prime Money Market Funds," is subtitled, "ICI Comment Letter to FSOC Opposes Flawed Proposals; Raises Concerns About Council's Legal Authority and Analysis. The release says, "Temporary "gates" to halt redemptions from prime money market funds during times of market stress, with the option to impose fees for further asset withdrawals, could address regulators' concerns about redemption pressures, the Investment Company Institute says. In addition to detailing its temporary gate and fee concept in a comment letter filed with the Financial Stability Oversight Council (FSOC), ICI also explains the fund industry trade association's continued opposition to FSOC's three flawed regulatory proposals; explains that FSOC has not made the case for applying any reforms to government, Treasury or tax-exempt funds; highlights FSOC's failure to follow the legal process required by the Dodd-Frank Act; analyzes the misleading and incorrect statements FSOC uses as a foundation for its case for making fundamental changes to money market funds; and points out FSOC's required economic analysis has significant shortcomings."
President and CEO Paul Schott Stevens comments, "As we have for more than four years, ICI continues to pursue proposals that can increase the resilience of money market funds without changing the fundamental nature and value of these funds. A temporary gate with the option for a fee is the only proposal under discussion that would stop redemptions during extreme market stress. The other recycled regulatory proposals FSOC suggests would not accomplish regulators' stated goals and, in fact, would be counter-productive in light of the harm they would inflict on investors and the economy."
The release explains, "In its comment letter, ICI details how temporary restrictions on redemptions, or "gates" and fees, combined with enhanced disclosure, would act as a "circuit breaker" on heavy redemptions from prime funds during times of market stress. Unlike the other FSOC proposals, the ICI proposal would not limit investors' access to their shares during normal market conditions, and thus would not change the fundamental characteristics of money market funds or their value to investors and the economy."
It says, "Temporary restrictions on redemption, or "gates," if triggered on liquidity levels, would prohibit investors from redeeming and would provide time for the fund to restore liquidity. Temporary liquidity fees, if determined appropriate by a fund's board, would allow redeeming shareholders access to liquidity if they need it, but would impose a fee to compensate the fund and remaining investors for the potential cost to the fund of the withdrawal and to protect remaining shareholders. Enhanced disclosure of mark-to-market NAVs and portfolio liquidity levels would give regulators and investors more insight into portfolio holdings."
The statement adds, "ICI continues to oppose all three of the alternative money market fund recommendations proposed by FSOC: forcing funds to buy and sell shares at a "floating" net asset value (NAV) and an initial share price of $100.00, a NAV buffer and "minimum balance at risk," and a significantly larger NAV buffer combined with "other measures." All of these concepts have faced strong public opposition in earlier forms, as evidenced in the SEC's comment letter file for money market funds."
They tell us, "A floating NAV would harm investors and the economy. It would not change shareholder behavior and would deprive state and local governments of much-needed financing. FSOC's floating NAV proposal introduces a host of tax, accounting and operational complications that will drive many investors to less transparent and less regulated alternatives. Additionally, FSOC's concept of requiring money market funds to offer shares at a $100.00 NAV is without precedent -- no other mutual fund faces such a requirement -- and would seem to require money market funds to comply with a pricing standard that is at least 10 times more onerous than the standard articulated by Securities and Exchange Commission accounting guidance. Sponsors would be unlikely to offer such funds, and investors would be unlikely to buy them."
ICI comments, "The proposal for a minimum balance at risk (MBR), coupled with 1 percent capital (or NAV buffer), is deeply flawed. The MBR would withhold 3 percent of an investor's redemptions for 30 days and place those withheld amounts in a first-loss position if the fund suffers losses in excess of the 1 percent NAV buffer. The most likely impact of the MBR would be to drive investors as well as intermediaries away from money market funds. ICI strongly opposes denying investors access to their assets when liquidity is available in a money market fund, a change that would impair a fundamental protection that mutual fund investors have enjoyed for more than 70 years."
The release continues, "The proposal for a NAV buffer of up to 3 percent of fund assets would likely drive money market fund sponsors out of business, depriving investors, issuers and the economy of the benefits of money market funds. Requiring advisers to commit capital would likely drive sponsors away from offering regulated money market funds; requiring funds to raise capital in the market is unworkable; and requiring funds to accumulate a within-fund capital buffer from retained earnings would take 10 to 15 years in the current near-zero yield environment. NAV buffers at smaller amounts would still present hardships, and would accomplish little."
Finally, ICI General Counsel Karrie McMillan adds, "In taking action on money market funds at this time, FSOC has overstepped its legal authority as defined by Congress. It is proceeding before necessary rules are finalized and in place. The fact that FSOC is acting with such haste and without adequate concern for the process outlined in the Dodd-Frank Act is very troubling."
