The Securities and Exchange Commission might just kill the patient it is trying to cure, according to Karrie McMillan, general counsel of the Investment Company Institute.
“What the SEC is considering doing to money market fund investors is outrageous,’’ she will assert Monday at the 2012 ICI Mutual Funds and Investment Management Conference in Phoenix. “Outrageous.
SEC Chairman Mary L. Schapiro said on Feb. 24 that the regulator is considering “two serious options” for preventing a run on money market funds, in the event of a “sudden deterioration in quality of holdings,’’ like that which occurred in September 2008. That was when the nation’s oldest money market fund, the Reserve Primary Fund, broke the $1 per share asset value when the value of its holding in Lehman Brothers assets plunged precipitiously.
The SEC’s two options: Float the net asset value or impose the establishment of capital buffers combined with limits or fees on redemptions, when a run comes.
Speaking just before SEC commissioner Elisse Walter comes on stage Monday, McMillan will argue that “no other mainstream financial product in this country has a regulator-imposed freeze on assets. No other mainstream financial product has been ordered to routinely tell its customers, “You can put your money in—but you can’t get it all back when you want it.”
The fallout will be significant, she will contend, when investors are told they can’t get their money back when they want it.
“For more than 70 years, mutual funds have operated on the opposite idea—the principle that funds will redeem their shares—in full—on any day that the markets are open,’’ she will point out, according to an advance copy of her remarks.
“Now, mix a redemption freeze that will lock up investors’ assets with a capital buffer that deprives them of yield, and you have one of the reported SEC proposals,’’ she contends.
The other “serious option,’’ if adopted, would unnecessarily damage the money market mutual fund as a viable business, McMillan will argue.
In 2010, the SEC adopted regulations that made the mix of investments that money market funds could hold more liquid and less risky. That was intended to prevent another guarantee of the “multi-trillion dollar industry,’’ Schapiro would say, as occurred in 2008.
But what letting the value float will “destroy the value of money market funds for investors—and for the economy,’’ according to McMillan.
And she will make the case that the industry’s own efforts to mark the values of their assets to current market levels through last year’s Eurozone debt crises proves the point.
During that time, prime funds with the greatest exposure to European financial institutions found their “floating” value dropped by nine-tenths of a basis point. Translate: Nine thousandths of a penny per share.
“If the SEC really wants money market funds to float, our research suggests they’re going to have to reprice them to $1,000 a share,’’ she will argue. “Otherwise, they’re going to force investors to swallow all the legal, tax, and accounting burdens of floating funds—only to discover that whatever funds are left won’t actually float at all.’’
The SEC’s “Round Two” proposals could easily destroy the “Round One” gains, by McMillan’s estimate.
“Round Two would drive billions of dollars away from of money market funds and into unregistered cash products that have no risk-limiting regulations, no required liquidity, no board governance, and no transparency,’’ she will argue.
“It’s time for the SEC to recognize the success of its 2010 reforms—and move on,’’ according to McMillan.