Since the fall of 2008, a great deal of attention has been given to the safety and soundness of money market mutual funds (MMFs). The focus on this issue was triggered in September 2008 by the Reserve Primary Fund “breaking the buck,” or lowering its share price below the $1 fixed net asset value (NAV) that is currently associated with most money funds. Investors in the Reserve Primary Fund, which held more than $60 billion in assets prior to its collapse, were unable to redeem shares as the company froze the fund to ensure an orderly unwinding of its remaining positions.
The MMFs most commonly used by retail and institutional investors are regulated by the Securities and Exchange Commission (SEC) under Rule 2a-7 of the Investment Company Act of 1940. As a result of concerns stemming from the Reserve Primary Fund and other money funds, in May 2010, the SEC implemented a number of new rules. These rules addressed liquidity requirements, portfolio quality and maturities, reliance on rating agencies, and portfolio disclosure. The new rules also required the reporting of a “shadow NAV” on a 60-day delay. Many people see the reporting of the shadow NAV as a precursor to moving to a floating NAV.
In October 2010, the President’s Working Group on Financial Markets (PWG) released its report on money market fund reform. The report was prepared in response to the Department of Treasury’s June 2009 request that the PWG assess the additional reforms needed to further reduce the money market fund industry’s susceptibility to runs and risk to the U.S. financial system. The report states that, even though the SEC has already tightened MMFs’ regulation, further reform is needed. However, it does not endorse any particular approach to reform but rather provides a summary of reform options. Within the recommendations, the PWG requested that the Financial Stability Oversight Council (FSOC) further examine the options detailed in the report. In support of this effort, the SEC solicited public comments on the reform proposals including the concept of a floating NAV.
On several occasions since the release of this information nearly two years ago, AFP has expressed concerns regarding the option to eliminate the stable net asset value (NAV) in favor of a floating NAV and has been clear on our opposition of such a proposal. We believe it 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.
Fast forward to January 2012 and it is clear that these issues are still at the forefront of the regulator’s mind. It is expected that SEC will release additional rules and guidance on this issue in early 2012. In anticipation of this action, AFP is preemptively reiterating our position to the SEC and collecting the names of companies who share our views. AFP will send a joint letter highlighting our concerns and we invite you to sign on to this letter and add your company name to the effort. If you would like to receive a copy of the draft letter or have questions, please contact me at
jarnett@AFPonline.org or visit AFP’s Money Market Fund Resource Center at
www.afponline.org/moneyfunds.