Today, we cite two more "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF, one opposing the floating NAV option from a small bank trust and one opposing both the floating NAV and "gates" option from a large corporation. The first letter, from Kathy Smith, United Bank, Inc., Charleston, West Virginia, says, "We are writing to express our concern about a recent proposal by the Securities and Exchange Commission ("SEC") which, if adopted, will cause considerable disruptions on how we, as a corporate trustee, fulfill our obligations pursuant to trust indentures, escrow agreements, or similar arrangements where we act in some intermediary capacity. As a part of our responsibilities, we take temporary possession of substantial sums of money that need to be invested in highly liquid vehicles carrying the highest rating from one or more credit rating agencies. In many of our arrangements, we are obliged to adhere to precise schedules as to the cash needs of the account. It has become customary for us to rely on institutional prime money market mutual funds ("institutional prime funds") that hold the requisite ratings to fulfill such needs."
It explains, "Should the SEC implement a rule that would require the prime funds we currently utilize to mark their securities to market on a daily basis, we would be forced to buy and redeem shares at something other than $1.00 per share. This would reverberate through the operational and administrative systems that are currently structured to anticipate shares being purchased and redeemed at $1.00. In virtually all circumstances, our clients' assets require a precise valuation (sometimes by state statute, governing documents or client investment limitations) to ensure seamless and predictable liquidity services. The introduction of a variable net asset value would, in essence, result in what has become a cost effective and highly efficient service reverting to a pre-money market mutual fund business model that existed in the early 1970s. The assembly of a portfolio of individual securities would require the re-pricing of our entire business as a result of the addition of an extra layer of administrative work that the management of individual securities would require."
United's Smith continues, "We are familiar with the alternative proposal set forth in the proposed rule which would grant the board of directors of an institutional prime fund the right to suspend redemptions given the occurrence of certain conditions. We find this alternative to be preferable in that it preserves the feature that makes institutional prime funds so appealing from a cost, administrative and customer service standpoint."
Finally, she writes, "We would urge the SEC, as part of its deliberations, to recognize what a huge impact its decision would have on institutional prime funds and force us to abandon the very feature that allows us to offer the sophisticated and globally competitive corporate trust services that our clients have come to expect from us."
The second comment, from Gregg Murphey, Global Treasury Manager, Novelis, CTP, Atlanta, Georgia, tells us, "I am responsible for overnight investments for Novelis, the world's largest rolled aluminum manufacturing company. We invest our excess cash in Prime Money Funds, and we do so because the funds have a high level of transparency, a proven history of providing safe investment via quality counterparty diversification, with the highest level of liquidity."
He says, "Given the recent rate environment, our sole purpose of investing in Prime Funds is to protect Novelis assets with a diversified investment product. Bank CDs and similar instruments, while belonging in a diversified portfolio, do not provide the same levels of counterparty risk diversification or liquidity as prime funds. My position on the reform suggestions under review is that either the floating NAV or the fees and gates will result in Novelis discontinuing use of Prime Money Funds."
Murphey writes, "In my opinion, the floating NAV will: Encourage redemptions when the NAV is in the money, promoting speculation; Result in additional burden to tax and accounting departments to deal with daily gains and losses; and, Change the nature of a money market security from a cash equivalent to an instrument with more of a speculative nature. The Fee and Gate proposal will: Seriously bring into question one of the greatest strengths of a Prime MMF -- liquidity; A fund who imposes a fee or withholds redemption would sink faster than a fund that breaks the buck under current regulations, which means the tool for the funds would be ineffective; and, Cause runs on funds when news events about an issuer would cause holders to quickly sell their shares before everyone else does, trying to avoid the gate and or fee. In the current world, news events about individual issuers doesn't cause the level of panic that will be present when gates close and fees are imposed."
He continues, "All of this boils down to the axiom that there's no such thing as a risk proof investment. There never was, and there never will be. The proposed changes by the FSOC/SEC will do nothing to change this -- the proposals increase costs, and shift the timing of runs on money funds as a competitive advantage to those who can stay in front of crisis. Since there will be those, like my company, that will no longer participate, funds will be smaller on an ongoing basis, so it will be more likely that redemptions will push funds into a crisis position."
Finally, Murphey adds, "My only hope is that you listen to me and people like me that routinely invest overnight cash and understand the risk reward profile of those investments. The measures you are considering will be a self-fulfilling to ensure the failure of the money fund industry, or best case scenario, making it weaker than it is prior to the regulations. Don't act for the sake of acting alone."
