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The Resource for the Global Finance Profession

Advocacy in Action: Financial Pros Notch Win in MMF Tussle

  • By AFP Staff Writers
  • Published: 2012-08-28

When the U.S. Securities and Exchange Commission (SEC) announced that there would be no vote on the controversial proposals to significantly reform money-market funds, industry insiders who were troubled with the components of the proposals rejoiced. After nearly two years of meeting with SEC commissioners and staff, submitting formal comments, attending Congressional hearings and advocating tirelessly on behalf of corporate practitioners, AFP Advocacy also rejoiced.

"The decision to cancel the vote indicated that a majority of Commissioners took heed to the concerns that we have raised consistently for the past two years," said Jeanine Arnett, AFP's director of government relations & policy.

AFP Advocacy has taken every available opportunity to educate policymakers on the detrimental impact that proposals such as floating the net asset value could have on corporate treasurers. "Since the initial idea was discussed in the President's Working Group paper in 2010, AFP has consistently warned that additional reforms could cause a disruption in the commercial paper market," Arnett said. AFP offered a number of formal comment letters, both individually authored and joint letters that reiterated this point on many different occasions. "The move to cancel the vote is proof that the policy process is working and AFP Advocacy's message is being heard and considered," she said.

Over the course of the debate, AFP argued that changes to MMF rules would greatly reduce investors' interest in utilizing MMFs as a cash management and investment tool, whether applied to all investors or just institutional investors. Further, we voiced strong concerns about the move to a floating NAV citing that the potential of principal loss may preclude floating NAV MMFs from being an approved investment alternative for many organizations.

Aside from the floating NAV issue, SEC Chairman Mary Schapiro also indicated that her proposal would include implementing a capital buffer to absorb losses, possibly combined with a redemption restriction to reduce the incentive to exit the fund. These proposals also caused corporate treasurers a great deal of concern as the idea that there would be a holdback of funds was not favorable.

"Daily liquidity means that investors would have access to all of the funds they invested the day before, not 97 percent of those funds," said Brian Kalish, AFP's director of finance practice. "Over 30 days, the implication of a 3 percent daily holdback is certainly material and will have a substantial impact on a company's access to cash."

Although the cancellation of the vote represents a setback for Schapiro and the proponents of additional reforms, there is a possibility that the Financial Stability Oversight Council (FSOC), which was created by the Dodd-Frank Act, may take action and identify individual fund companies for heightened scrutiny by the Federal Reserve. Similarly, the Fed also could limit the exposure of banks to the money-market funds that buy their short-term debt. 

AFP will continue to monitor this issue and provide updates as they occur. To learn more about AFP's position on MMFs and stay tuned in to the latest developments; visit the Money-Market Fund Resource page at www.afponline.org/moneyfunds.

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