SIFMA today released comments to the Financial Stability Oversight Council (FSOC) regarding their Proposed Recommendations on possible further reforms to money market funds.
“SIFMA supports steps to enhance the resilience of money market funds,” said Kenneth E. Bentsen, Jr., executive vice president, public policy and advocacy at SIFMA. “We believe that the SEC should remain the primary regulator of these funds and undertake any additional future reforms being in the best position to formulate potential reforms. Any additional reforms, too, should take into consideration a number of market factors that should be addressed in tandem to avoid adverse effects on individual investors.”
Among other comments, SIFMA highlights issues of importance to money market fund customers who would be significantly affected by changes. SIFMA urged attention to simplicity and transparency, and notes that key issues of customer impact must be considered before undertaking any reform. For example, tax, accounting and brokerage suitability issues relating to the proposed floating “net asset value” (NAV).
The comment letter focuses on seven points that fall within four categories. In addition to commenting on the recommendations, SIFMA also sets forth options for other possible reforms, which are discussed below.
FSOC’s Process
- Accommodate the Securities and Exchange Commission’s (SEC) continued engagement on money market fund reform and recognize its role as primary regulator on this issue. SIFMA offered its comments to inform the SEC’s evaluation of money market fund reform, rather than to counsel action by FSOC in advance of the primary regulator.
- Do not make recommendations under Section 120 of the Dodd-Frank Act at this time, as it has not been demonstrated that money market funds pose a high level of systemic risk that is prerequisite for recommendations under that section.
Guiding Principles
- Tailor reforms as narrowly as possible. Since any changes to money market funds may have far-reaching unintended consequences that are detrimental to shareholders and the broader economy, we urge that any changes be narrowly tailored to avoid unnecessary disruption. Tailoring reform narrowly will benefit markets by easing the process of adjusting to changes, and providing a basis to evaluate the need for further actions based on the results achieved. Prudence requires an incremental process.
- Recommendation Must Bear on Goal. SIFMA understands that the main goal of the Proposed Recommendations is to alleviate money market funds’ vulnerability to destabilizing runs. We do not believe, however, that imposing capital requirements and/or a “minimum balance at risk” (MBR) are suited to the stated goal of reducing vulnerability to destabilizing runs, and there is significant doubt among many of SIFMA’s members regarding the efficacy of the floating NAV.
- Consider Transparency and Simplicity. Any reform should allow money market funds to remain transparent and uncomplicated, as they currently are.
Floating NAV
- Address tax, accounting, brokerage account suitability and other key issues relating to the floating NAV, if regulators pursue that reform. Addressing those issues must be a prerequisite to any recommendations.
Other Possible Reforms—Redemption Gate Accompanied by Liquidity Fee
- SIFMA suggests that the SEC explore structuring a proposed redemption gate, accompanied by a redemption fee or “liquidity fee.” The gate, when triggered, would prohibit investors from redeeming and provide a period of time for a fund to restore its market-based NAV and liquidity. At the time the gate is lifted, the fund would impose a fee on subsequent redemptions until such time as liquid assets in the fund were restored to a pre-determined level. The gate would operate for a brief period. The purpose of the gate would be to allow time for the fund to implement the liquidity fee and make any other necessary determinations regarding the fund’s next steps.
The full text of the letter can be found at the following link:http://www.sifma.org/issues/item.aspx?id=8589941464
