Today, we excerpt from a panel from last week's ICI & FBA Mutual Funds & Investment Management Conference in Palm Desert, Calif. The "Money Market Funds" panel included ICI's Jane Heinrichs, Reed Smith's Stephen Keen, Goldman Sachs' David Fishman, Schwab's Rick Holland, and the SEC's Craig Lewis. Keen commented, "I agree that on a regulatory basis there is nothing that [would have helped] affect the Lehman situation or the Reserve Primary Fund. On the other hand, based on my conversation with portfolio managers ... I don't think anybody would buy an SIV anymore. They wouldn't buy a market liquidity based product, as opposed to something that had more of a liquidity back-up to it. They learned their lesson, and I would also suspect that most people would not rely on the government to come [in and support an] investment bank.... There may have been changes not [due to] regulations that have limited the risk."
Fishman told the MFIMC audience, "[With] the floating NAV proposal, we typically get three complaints, or three issues, that clients have brought up. The first [one is] accounting.... They are now treated [as] cash and cash equivalents, so now we have to treat them differently. The second would be operational. How do we actually trade them? We have systems trained to trade them at a $1 dollar per share. We now have to spend millions of dollars to rebuild our systems. And the third is on tax. If I use money funds as a bill-paying mechanism, I may create ... tax [issues].... These three issues tend to really [compromise] the utility of it [and it] is something that moves small amounts anyway."
Holland said, "An overwhelming majority of our shareholders have responded that they would not find any benefit to a fluctuating NAV money market fund, and it would be unnecessarily burdensome. Certainly, the registered investment advisor community, that I spend a lot of my time talking with and who represents the individual shareholder, has spoken loudly and clearly about the fact that they just don't see where the benefits would be, and there is a lot of imposed inconvenience."
When asked about the disclosure of daily market NAVs, Fishman responded, "We did what we think is a natural progression. We are very proud of the industry. We think there is a lot of utility and value that we offer our clients.... [O]ne of the purposes [of disclosing daily market NAVs] is to bring us out of the shadows, because, frankly, we don't think we have a whole lot to hide. These funds are very conservative. They are very transparent. Since 2008, we have been in a steady march towards transparency, and this is just one more natural step. Frankly, it is not the last step, and I think the more we share with regulators, with the industry as a whole, and with our clients, the more people will appreciate the product for what it is, which is a very conservative, safe vehicle that offers a lot of utility."
Holland answered, "I think Schwab had to take a slightly different perspective only because we have such a preponderance of retail shareholders, many of whom who would without simultaneous educational support about the mark-to-market disclosure would be confused about what that means. [See today's "Link of the Day too.] So we wanted to be very thoughtful and take our time about the way in which we will provide this information, and accompany it with the appropriate educational material so that there was no confusion about what that meant. I also do think that it was just a very good idea, the timing of which was hopefully designed to help the regulatory authorities to understand that there isn't anything to hide here.... We're very, very transparent about the true mark to market values are."
Heinrichs asked, "What does a floating NAV do that daily NAV does not? The SEC's Craig answered, "I personally think more disclosure is better. We like to see disclosure. I would like to think that as this evolves and becomes more common that there would be more archiving of the shadow NAVs as opposed to just daily NAV that you see today. Also, we claim that it would be helpful for investors if they could understand what the liquidity levels were in the fund too. Disclosures around weekly assets for example would be I think interesting additional pieces of information.... Disclosure of daily NAV tells you where of losses or gains in your portfolio relative to amortized cost are at any point in time. What a floating NAV product does though is that it actually forces the investor to realize those losses and gains on a daily basis. So you'd understand in the disclosure regime that those gains or losses exist relative to amortize cost, but in a floating NAV environment you actually bare the economic consequences of those gains and losses."
Finally, when asked "Can the Industry afford a capital buffer?," Fishman said, "I think it is very difficult, obviously in the interest rate environment that we are in. Ultimately, you are talking about a very high likelihood that the shareholder ends up paying for that. You really end up taking what is arguably an implicit [support] and making that explicit, and that might go back on what is an original argument of what some of the regulatory authorities have said they don't want.... So I think we have to step back to the very beginning and say what is it indeed we are trying to solve for and does a capital buffer address that.... If a money fund has capital that is provided by the sponsor it's likely that the sponsor would need to consolidate those assets, all the assets of the money funds, onto the balance sheet of the banks."
