Reed Smith's Keen on MMF Reform
Reed Smith's Stephen Keen writes on "Money Market Fund Reform: The Next Crossroads". He says, "The period for comments on the Securities and Exchange Commission's proposed money market fund reforms ended September 17. The tone of the comment letters, as well as the large quantity of responses, should serve to remind the SEC that the views of investors matter most in the rulemaking process. Indeed, the outcome of this regulatory chapter needs to be about which reform best serves the shareholders of money market funds, and not which best pleases the Financial Stability Oversight Council ("FSOC"). Unfortunately, sometimes it seems as if the latter, not the former, is the party getting preferential treatment. The SEC proposed two fundamentally different alternatives. Alternative 1 would force the prices of institutional prime and tax-exempt money market shares to "float" by requiring these funds to calculated their net asset values ("NAVs") using market-based prices and rounding the result to the nearest basis point. (A basis point is the fourth decimal following a price of $1—a hundredth of a cent). Retail money market funds could avoid this by imposing a $1 million limit on each shareholder’s daily redemptions. Alternative 2 would require all prime and tax-exempt money market funds to impose a 2 percent fee on redemptions if, at the end of the previous business day, its weekly liquid assets were less than 15 percent of its total assets. The fund's board of directors would have the option of suspending redemptions for up to 30 days, imposing a lower redemption fee or calling off the redemption fee entirely. As of October 9, 200 comment letters were available on the SEC's website regarding the proposal, in addition to more than 1,200 form letters against Alternative 1. Additional letters will continue to trickle in, but the current docket already reflects a massive and predominantly negative response to the proposed alternatives. Contrary to earlier reports, JPMorgan did not support Alternative 1, arguing instead that a variation of Alternative 2 is "the best option for achieving the SEC's objectives." Goldman Sachs' support for Alternative 1 was tepid, insofar as it recommended rounding the NAV to only the nearest 10 basis points, which would not produce a floating price under most market conditions. Of the 10 largest money market fund managers, only the two predominantly retail managers (Schwab and Vanguard) commented in favor of Alternative 1, in each case subject to increasing the cap on daily redemptions and solving the tax and accounting issues inherent in using a floating share price for daily cash management. Even before the comment period ended, unnamed sources at the Federal Reserve and the Treasury told the press that only Alternative 1 would be acceptable to FSOC."
