In testimony last week before the Senate Committee on Banking, Housing and Urban Affairs , Mary L. Schapiro, Chairman of the U.S. Securities and Exchange Commission, offered an “either or” strategy in her push for further reforms of money market funds. Schapiro suggested either to float the NAV, or maintain a capital buffer combined with limited restrictions or fees on redemptions.
Schapiro told Senators she believes that money funds “hoarded cash” during the financial crisis and continue to do so today. She said the purpose of the proposed rule changes is to protect “slower moving retail investors” and “small businesses who will bear the brunt of adverse reactions in the event of another major market disruption.”
After her testimony, Committee Chairman Tim Johnson (D-SD) asked Schapiro what provisions in the 2010 reforms have been most beneficial and what analysis the SEC has performed since those reforms were enacted. Schapiro said that liquidity requirements have been the most beneficial, but they “do not address propensity for a run.”
Johnson also asked whether additional reforms would cost more for investors. “Yes, we know that it will cost more but that cost would be far outweighed than the alternative of breaking the buck,” Schapiro said. “There will also be an impact on the commercial paper market, we realize and recognize that.”
Ranking Member Richard Shelby (R-AL) asked Schapiro whether the SEC worked with the Federal Reserve on the 2010 reforms and if the Fed is involved in the proposed rule changes. Schapiro said that she is unsure about the previous reforms but noted the SEC is in contact with the Fed over the new ones. He also asked whether the Fed should be the primary regulator for MMFs, and Schapiro replied that the SEC is the appropriate regulator “because these are inherently investment vehicles.”Concerns about impact on corporates
Sen. Jack Reed (D-RI), Chairman of the Senate Securities, Insurance and Investment Subcommittee, told Schapiro he is concerned about the potential impact on businesses that use MMFs as cash investment tools. He also noted that municipalities, CP issuers and others would likely be affected. “If a treasurer can’t bear the risk of even a penny loss, he or she should question whether this is the right product for them,” she said.
Sen. Mike Crapo (R-ID) also voiced his concern for corporates and investors that use MMFs as effective cash management and short term funding tools. Schapiro said that the SEC is aware that municipalities use MMFs and will inevitably be impacted. “We will look at the effects on [municipalities] and small businesses and retail investors. The SEC would like to collect specific economic data from this segment of the industry to understand how it will impact them,” she said.
Sen. Pat Toomey (R-PA) pointed out that a letter to IOSCO from three of the five SEC commissioners indicated that not everyone in the SEC is on board with Schapiro’s views. She responded that she does not know where all of the commissioners stand, but called the IOSCO report “premature” and said “it should not have been released at that time.”AFP study: corporates dislike proposals
In late June AFP released preliminary results from its 2012 AFP Liquidity Survey
, which found that organizations would be less willing to invest in MMFs and/or would reduce or even eliminate their holdings of MMFs under regulatory reforms supported by Schapiro.
The survey results indicate:
• 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
• 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.
AFP’s members offered their views before Congressional Committees
to explain the impact that MMF proposals would have on their investment choices and their sources of funding.