As the deadline approaches to comment on the Security & Exchange Commission’s proposal to reform money market funds (MMFs), comments so far are unanimously opposed to one of two solutions designed to make the funds safer. History shows, however, that the SEC may proceed regardless.
The SECs’s website divides the more than 400 comment letters received by the last week in August into four types – the SEC created sample templates of the types of letters received. All of them oppose the provision – if for somewhat different reasons – that funds catering to institutions to change from a stable $1 per share to a floating net asset value (NAV).
“The hard dollar costs, time, systems/processes and personnel resources needed with a floating NAV will make MMFs just too expensive and force users to seek less attractive or unregulated alternatives,” noted the SEC sample that represented more than 90 percent of comment letters.
The deadline for comments is September 17, 2013, leaving a few more weeks for supportive letters to arrive; often the bulk of comment letters tend to arrive at the very end. Even if strong opposition remains, however, the SEC may proceed anyway with a final rule that echoes the proposal.
Jay Baris, a partner at Morrison Foerster and chair of its investment management practice, noted the competing concerns. “They could pare back the requirements, put the proposal back for further study … all kinds of things,” he said, noting that support from the banking regulators creates a difficult balancing act for the SEC. “The banking regulators have strong views, and they’ve supported [MMF reform] strongly,” he said.
In fact, the SEC halted MMF reform efforts last summer when then-Chairman Mary Schapiro announced the agency did not have the votes to proceed with a proposal. Those efforts were revived earlier this year when the Financial Stability Oversight Council (FSOC) released a set of reform recommendations, including a floating NAV. The proposal also got a boost from SEC commissioner Daniel Gallagher, who originally helped derail the effort in 2012. The FSOC also recommended at NAV buffer to absorb day-to-day fluctuations and a risk-based buffer of up to 3 percent to absorb losses. All are meant to make MMFs less susceptible to runs that occurred during the financial crisis
The SEC issued its new proposal in June. It comprises the floating NAV, this time only affecting the less than 40 percent of funds aimed at institutional investors, such as corporates, and gives boards of institutional and retail MMFs the power to stop temporarily the outflow of money during times of stress.
As evidence that the SEC would charge ahead regardless of complaints, Mr. Baris noted a 2004 rule requiring investment companies to provide more disclosures about their portfolio managers, including their fees and the accounts they manage. “The industry didn’t like that proposal, but the SEC passed it anyway,” Mr. Baris said.
On the other hand, Mr. Baris added, the Commodity Futures Trading Commission backed off a proposal this summer that would have required commodity pool operators who are also investment advisors to follow two sets of rules, and now they must comply with only one.
A July 2 letter from a coalition of trade organizations representing corporate interests, including the Association of Financial Professionals and the National Association of Corporate Treasurers, expresses concern about the floating NAV.
“As a next step, we therefore request that the commission convene a roundtable to discuss the various issues that the proposal raises for companies, states and municipalities, and others who rely on MMFs for cash management and short-term financing,” the letter said.