After SEC Chairman Mary Schapiro failed to gain majority support
for further money-market fund reforms from her fellow commissioners, an overhaul of the industry looked to be off the table, at least in the near term. But with Treasury Secretary Timothy Geithner urging
the Financial Stability Oversight Council to move forward on tighter regulations, the debate continues, and corporates should take note.
Geithner favors the same rules that Schapiro proposed, which include implementing a floating NAV, capital requirements and redemptions. And what’s more, even if the FSOC cannot force the SEC into action, the council could potentially impose the rules on its own. The FSOC could also designate certain MMFs as “systemically important” and subject them to tighter regulations.
Brian Kalish, AFP’s director of finance practice, sees corporates continuing to closely monitor actions by the FSOC with regard to the restructuring MMFs. “Issuers, investors, members of Congress (on both sides of the aisle) and the SEC itself, have made it clear that no further changes to the structure of MMFs are warranted at this time,” he said.
Jim Gilligan, CTP, assistant treasurer of Great Plains Energy Inc. and a member of the AFP Government Relations Committee (GRC), sees Geithner’s comments as a clear indicator that the dispute over further MMF reform could be coming sooner than anyone expected. “Mr. Geithner’s stated intention of making a formal recommendation to the FSOC to direct the SEC to proceed with possible changes to MMF regulation portends that Money Market Fund reform will be debated again in the months ahead,” he said. “Corporations have strongly voiced their objections to the proposed regulations and fear the changes as proposed will have major unintended consequences on the short-term capital market. As I’ve previously stated, I hope future discussions are conducted on a more collaborative basis with participants.”
Robert Foster, CTP, manager, corporate treasury, accounting & compliance at Northrop Grumman and a member of the GRC, believes that Geithner and FSOC could possibly turn the regulatory jurisdiction of MMFs over to the Fed under prudential regulations and bypass the SEC since three out of five SEC commissioners have been resistant to the floating NAV. Foster sees tighter MMF regulation—even if it is only imposed on certain funds deemed systemically important —being a significant disincentive for many investing organizations, due to company policies, debt covenants and accounting implications. “Under the NAV, the mark-to-market adjustments would be recorded to earnings and realized gains/losses would have unintended tax consequences,” he told AFP. “Additionally, I would think that MMFs would no longer be considered as cash equivalent. The MMFs themselves would be impacted by potential market contraction due to companies looking for investments that were more in line with their restricted short-term investment requirements.”
Bobbie Eiseman, CTP, director, corporate treasury programs at SunGard and a GRC member, said it was no surprise that the FOSC has become interested MMF reform, which has been a goal of Schapiro, and others, since 2008. “No one believes in a cause this strongly for four years and simply walks away from it,” she told AFP. “The odds were always in favor of a continuation of the discussion, but likely from another direction. There are significant supporters for reform including Current Treasury Secretary Geithner, Former Treasury Secretary Paulson, Former Fed Chair Volcker and Former SEC Chair Levitt. There is reform support within the FSOC, but I am not sure there is enough support to move regulation to the Fed, so this is certainly an area to watch.”
Eiseman noted that much of the key opposition to the proposed floating NAV stemmed from the concept of “return of capital, not return on capital,” potential violation of corporate investment policies, disqualification of MMFs as approved investment alternatives, and the unknown reaction from accounting and external auditors. “The last three out of the four could be successfully managed with proper planning of any changes, but the valuation techniques used by the accountants would likely be the largest hurdle of those three,” she said. “Remember all of the various interpretations of SOX by the auditors? Something similar could happen with floating NAV valuations.”
“Practitioners might not want to risk being thrown over a loan covenant threshold due to the mark-to-market valuations of a money market fund, and many companies are likely to not want to take that risk,” Eiseman added.
Eiseman sees the markets as essentially a large ecosystem, and if corporate and institutional investors pull out, it will limit, or possibly prevent other corporates and organizations such as utilities and municipalities from having a market to sell debt that is cost efficient. “This could force these corporates and organizations into more expensive financing vehicles, if the credit capacity is even there,” she added.
Eiseman said her first preference as a corporate investor would be to not support the floating NAV. However, she believes corporates would be wise to help educate, which could perhaps help shape the changes so that they are not formulated in a way that discourages corporate investments or limits markets for corporate borrowers. “Without proper planning by the regulating authority I think it would create a drain on the funds,” she said. “Maybe not a full withdraw at a single point in time constituting a ‘run,’ but investors may begin to pull out and this could gain momentum. Of course, the question then becomes where do you put it given the potential FDIC expiration in December?”
Jeff Jellison, CEO-North America of Institutional Cash Distributors told AFP that he does not believe FSOC’s recommendations will force the SEC into doing anything that it does not believe is in the best interests of the country. Despite being under pressure for more than two years to enact tighter regulations, the majority of the SEC has taken the position that further analysis of the key issues surrounding MMFs is needed. “SEC Commissioner Daniel M. Gallagher in a speech at the SIFMA Regional Conference in Charlotte, N.C. on September 24 indicated their economists were getting close to completing their analysis,” said Jellison. “We believe the SEC economists will come to the same conclusions that have been published by the AFP, Arnold and Porter, ICI, ICD and other treasury industry players—that the specific regulations promoted by the members of FSOC would do much more harm than good.”
ICD believes that the courts will determine that the FSOC does not have the power to enact MMF regulations, which could be why it is applying pressure through the media. Jellison noted that many members of the FSOC have gone on record to promote policies that discourage investments in MMFs, possibly to increase bank deposits. “With the unlimited FDIC insurance TAG Program going away at the end of this year, we believe the members of the FSOC will do whatever they can to keep the majority of the over $1 trillion in the TAG Program from leaving bank deposits,” he said.
Jellison added that ICD’s surveys indicate its clients would reduce their MMF investments by 41 percent if the proposed regulations were enacted. “If they were relegated to only certain money-market funds, we’d expect those certain funds to face 41 percent reductions in their assets, which would be invested in MMFs the FSOC did not determine to be systemically risky,” he said.