For the past few months, financial professionals have waited
with baited breath for the proposed changes to money market fund
(MMF) rules that have been discussed by the U.S. Securities and
Exchange Commission. Since January 2012, SEC Chairman Mary Schapiro
has publicly stated that she believes additional reforms are needed
so as to avoid another major incident of funds "breaking the buck."
For the first time since Schapiro announced that she intended to
introduce additional proposed changes, the Wall Street
Journal is reporting that they have received some insight
into the specific proposals believed to be in this new rules
According to a report released July 10, the SEC is considering
requiring MMFs to hold a small capital buffer of less than 1
percent of the overall value of a fund's holdings. A senior SEC
official signaled that the general size of a capital buffer the
agency is weighing would insulate money funds from sudden
losses in the values of their holdings.
Schapiro is pushing her fellow commissioners toward a vote on
tougher rules for the MMF industry as early as this month. It
appears that the SEC staff distributed a 337-page draft proposal to
the agency's five-member commission last week, but its details have
yet to be made public.
Schapiro and other top financial regulators from other agencies
have remained firm in their stance that money funds are a
continuing vulnerability in the U.S. financial system.
AFP study: MMFs would suffer
In June and July 2012, AFP released the results from our
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 are reported to be
under consideration by the SEC.
AFP has been vocal on this issue and our members have
offered their views before Congressional Committees to explain
the impact that MMF proposals would have downstream on both their
investment choices and on their sources of funding. We believe 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.
Further, our 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
To learn more about AFP's position on MMFs, visit the Money
Market Fund Resource page at www.afponline.org/moneyfunds.
Jeanine H. Arnett is Director, Government Relations &