Paul Schott Stevens, president and CEO of the Investment Company Institute, said the SEC has “pre-judged” the results of the 2010 round of reforms to money market mutual funds.
And that a second round will undermine funds altogether.
“SEC Chairman Mary Schapiro pre-judged the force of the 2010 amendments. Even before voting on them, she declared that regulators wanted a “Round II” of “structural changes” to money market funds,” Stevens said in an address at the Money Market Expo in Orlando, Fla.
In 2010, with the fund industry’s strong support, the SEC adopted rule amendments that raised the credit quality, shortened the maturity, enhanced the transparency and increased the liquidity of money market fund portfolios, he said.
“These reforms were tested in the troubled markets of the last year—and they passed with flying colors,’’ he said. “Thanks to the 2010 amendments, money market funds are stronger today—and today’s money market fund is a very different product from its 2008
Two years later, trial balloons from the SEC indicate the regulator is seeking“structural change” means proposals that will undermine the core features of money market funds and their value to investors and the economy, he said.
The core of the potential proposals are allowing the net asset value of money market funds to float from $1 a share, long the bedrock promise of the funds; or, establishing capital buffers, that the ICI worries will raise costs for all investors.
“The fact that the power of the 2010 reforms is not acknowledged—that’s disappointing,’’ he said.
Stevens further added that the 2010 amendments “are the latest chapter in one of the great success stories of modern financial regulation.”
Despite the proven success of the 2010 reforms, Stevens said SEC Chairman Mary Schapiro insists that the financial system is “living on borrowed time”. According to Stevens, the arguments that critics use to justify changes are “riddled with myths and misstatements” to the industry, and will undermine the value of money market funds to investors and the economy.
The first myth: That money market funds somehow caused or accelerated the financial crisis of 2008. That is a “false narrative,” he said. The breaking of the buck by the Reserve Primary Fund in September 2008 came “ in the middle of a raging epidemic,’’ he said.
The second myth: That money market funds are “susceptible to runs” and likely to trigger systemic risk. Money funds, he said, are not “easily broken. Nor are they likely to be affected in a significant way outside of extreme market conditions.’’
Those first two myths fuel a third, he said. That’s the notion that banks offer the superior model for all financial activities and that capital market institutions like money market funds are really ‘’shadow banks,’” he said.
Hung Tran writes for Money Management Executive.