The Investment Company Institute is on board with many government reforms intended to make money market funds more secure, but not all of them.
The Securities and Exchange Commission has turned its attention to money market funds since the Reserve Primary Fund, in the thick of the financial crisis, "broke the buck" in September of 2008, its net asset value spiraling down to 97 cents a share—and causing a multi-billion-dollar run on money funds.
Last month the SEC approved rules that would require money market funds to maintain minimum levels of liquidity. At the ICI's Mutual Funds and Investment Management Conference in Phoenix this week, Paul Schott Stevens, the institute's president and chief executive, pointed out that the SEC has already put into place protections for money market funds, such as granting the boards of these funds power to stop the flow of redemptions and liquidate a troubled fund.
Stevens made it clear that, like the SEC, the ICI wants to make money market funds more secure, and it is open to myriad reforms. But he emphasized that his organization strongly opposes doing away with a steady net asset value, which is usually $1.00 per share, and is a fundamental feature of money market funds.
"Make no mistake: forcing these funds to 'float' their NAV will destroy money market funds as we know them," Stevens said at the conference Monday. "It will penalize individual investors and exact a high price in the American economy. But it will not — repeat, not — reduce risks to the financial system. By any measure, it is a bad idea."
Stevens said mutual funds that float their NAV are not immune to redemption pressure. "That's clear from the record of floating-value ultra-short bond funds — they lost half of their assets in the course of 2008," he said. "Clearly, the experience of these other funds demonstrates that a fluctuating per-share value would not eliminate the possibility of wholesale redemptions from money market funds during a future crisis."
What the ICI is doing to protect money market funds and investors is to provide a stronger backstop for money market funds during a crisis, Stevens said. After it issued its Money Market Working Group report in March 2009, the ICI began exploring putting into place emergency liquidity facilities, a strategy that Stevens said is moving forward quickly. The facility would be a state-chartered bank or trust company, organized and capitalized by the prime money market fund industry, that would be managed and governed in accordance with applicable banking laws.
These funds currently have assets of $1.8 trillion, Stevens said. Under the SEC's new liquidity requirements, money market funds soon will need a minimum cushion of $540 billion of assets that are liquid within seven days, of which $180 billion must be redeemable on any given day.
Stevens said he could not say when or if a liquidity facility will be launched, but the ICI's executive committee supports establishing the facility if industry participants and regulators can agree on a working model, he said.