ICI Comments on SEC Proposal for Money Market Funds

The Institute is against floating the net asset value (NAV) for any category of money market funds. In a recent speech in Baltimore, Maryland, ICI President and CEO Paul Stevens called the SEC’s proposed alternative—liquidity fees and redemption gates—the best approach. Noting that money market fund reform may be “in the top of the ninth” inning after several years of debate, he praised the SEC for resuming control of the issue and pursuing a thoughtful regulatory process since last summer.

Stevens reiterated the fund industry’s belief that floating NAVs, which the SEC would apply to institutional prime and tax-exempt funds under one of its two alternatives, would harm the product, investors and the economy, while failing to meet regulators’ objectives.

“Simply put, forcing funds to float their NAVs doesn’t address the problem that most preoccupies many regulators—how to avert heavy redemptions out of money market funds. Let’s check the count against floating NAVs. They don’t address regulators’ goals. They eliminate key benefits to investors. They harm the economy. They increase systemic risk. And they carry immense costs and operational complications,” he said.

Stevens also cited the broad-based opposition of dozens of groups representing individual investors, businesses, state and local governments, and nonprofits to proposals to undermine the stable dollar value of money market funds. “Since 2009, hundreds of entities from the private and public sectors across the economy have expressed their opposition to floating NAVs and other ill-considered proposals,” Stevens noted. Under a floating NAV, “corporate America could see a significant reduction in the supply of short-term credit [and] the pool of capital that state and local governments use for financing vital needs will shrink or dry up.”

In contrast to the floating NAV, Stevens said, “[l]iquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressures in periods of market turmoil.” If redemption fees were imposed when a money market fund experiences difficulties—based on levels of weekly liquid assets and at the board’s discretion—the fees would slow redemptions while still allowing investors access to their cash.

Stevens noted that ICI sees potential for positive changes in the proposed set of standards on disclosure, reporting, and diversification. He added that ICI will present its views on the proposal more fully when it files a comment letter in September.

According to the SEC, the aim of the proposal is to: (1) Mitigate money market funds’ susceptibility to heavy redemptions during times of stress; (2) Improve money market funds’ ability to manage and mitigate potential contagion from high levels of redemptions; (3) Preserve as much as possible the benefits of money market funds for investors and the short-term financing markets; and (4) Increase the transparency of risk in money market funds (see “SEC to Propose Money Market Fund Reform”).