U. S. Securities and Exchange Commission (SEC) Chairman Mary L. Schapiro Wednesday canceled a vote on her proposals to address the susceptibility of money-market funds (MMF) to runs. Unable to convince a third SEC commissioner to support her controversial plan, Schapiro lacked a majority of votes on the five-member body and backed down.
Schapiro's proposals sought to address two issues that she believed were inadequately addressed during a round of MMF reforms in 2010. In her view, there was no mechanism to absorb the sudden loss in the value of a portfolio security of a money-market fund without threatening the stable net asset value (NAV). Moreover, she believed that investors remained incentivized to redeem their money-market fund holdings at the first sign of a problem, so that they could recoup a full dollar, leaving other investors behind to bear all the losses.
To address her perceived concerns, Schapiro recommended alternative reforms that included:
1. Implementing a mandatory floating NAV, and/or
2. Implementing a capital buffer to absorb losses, possibly combined with a redemption restriction to reduce the incentive to exit the fund.
AFP has been vocal on this issue and our members have provided formal comments to policy makers to explain the impact that MMF proposals would have downstream on both their investment choices and on their sources of funding.
AFP argued that such changes to MMFs would greatly reduce investors' interest in utilizing MMFs as a cash management and investment tool, whether applied to all investors or just institutional investors. For purchasers of MMFs, the return of principal is a much greater driver of the investment decision than return on principal. For a large number of institutional investors, the potential of principal loss would preclude floating NAV MMFs from being an internally approved investment alternative.
In June and July 2012, AFP released the results from its 2012 AFP Liquidity Survey
, which found that organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings in MMFs in their short-term investment portfolio under three regulatory reform proposals, which were reported to be under consideration by the SEC at the time.
Survey results indicated that:
• 77 percent of companies would stop investing if the NAV were allowed to float, with 56 percent immediately liquidating all or some of their current MMF holdings
• 80 percent of companies would stop investing if MMFs were subject to redemption holdback provisions, with 73 percent immediately liquidating all or some of their current MMF holdings, and
• 66 percent of companies would stop investing if fund companies were required to raise reserve capital (e.g., through fees), with 55 percent immediately liquidating all or some of their current MMF holdings.
In her statement
announcing the cancellation of the vote, Schapiro maintained that she would support efforts by other regulators to force reform on the industry. "The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away," she said.
Although the cancellation of the vote represents a setback for Schapiro, her statement indicates a possibility that other regulatory bodies may take action. The likeliest candidate would by the Financial Stability Oversight Council (FSOC), which was created by the Dodd-Frank Act to make recommendations to enhance the integrity, efficiency, competitiveness and stability if U.S.
financial markets; promote market discipline; and maintain investor confidence. With an additional focus on financial risk, it is possible that the FSOC could 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 in tuned in to the latest developments, visit the Money-Market Fund Resource page at www.afponline.org/moneyfunds