Recent Developments in Money Market Funds

Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement by Commissioner Aguilar available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

There have been recent developments related to the Securities and Exchange Commission’s consideration of potential reform of money market funds that I would like to highlight.

On November 30, 2012, the SEC staff delivered to the Commission its report delving deeper into the causes of investor redemptions in 2008, the efficacy of the Commission’s 2010 amendments to strengthen Rule 2a-7 (the principal rule that governs money market funds), and the potential impacts of future reform on issuers and investors. This is a welcome development. As I previously stated, I have been requesting this analysis so that it could inform the dialogue as to any further money market fund reform. [1] The staff’s report is a response to a request made in mid-September by a majority of the Commission (Commissioners Aguilar, Paredes and Gallagher) that asked the Division of Risk, Strategy, and Financial Innovation to conduct a study to answer a series of questions intended to inform the continuing dialogue.

I look forward to the staff’s report being made public, so that the Commission can benefit from the public dialogue.

There have also been developments in the consideration of the potential impact of assets migrating from existing transparent, regulated money market funds to opaque, unregulated funds (sometimes referred to as Liquidity Funds) as a result of structural changes to money market funds.

Given the level of transparency and investor engagement in regulated, transparent money market funds subject to Rule 2a-7 (the principal rule governing money market funds), it remains a concern that assets could flow to unregulated, opaque funds. Many do not realize that due to the 2010 Amendments, money market funds have become one of the most transparent financial instruments for both regulators and investors. The SEC worked very hard to implement new disclosure requirements that now provide a great deal of useful information on individual money market funds, and the industry as a whole. As a result of these new requirements, the SEC receives monthly reports on Form N-MFP that contain a wealth of data, which is also made available to the public on a delayed basis. Moreover, investors and interested parties are able to monitor a fund’s portfolio holdings through its website. Additionally, other domestic and foreign regulators have relied on the data to understand money market fund holdings as they affect other regulated entities within the financial system. Accordingly, the transparency of regulated money market funds provides a crucial safeguard in monitoring systemic risk.

The outflow of money fund assets to an unregulated market is a significant systemic risk concern, and can result in harm to our market and investors. As was stated by an SEC spokesperson, this was not a concern shared by the SEC staff. [2]

However, the SEC staff’s recent report has now identified the issue of migration to unregulated products and is, for the first time, offering a more in-depth analysis. Moreover, the new Director of Investment Management, Norm Champ, who has experience with unregulated funds, has indicated to me that the staff is now actively considering this issue.

Additionally, both Secretary Geithner [3] and FSOC [4] have expressly raised the need to address the concern of money fund assets migrating to an opaque, unregulated market as a result of structural changes to money market funds.

The serious consideration by the SEC staff and FSOC of the potential migration of money fund assets to opaque, unregulated funds is also a welcome development.

These developments are important to address the issues that have been identified regarding money market funds and will serve to inform the nature of any needed reforms. The goal is to act in the best interests of investors and the public interest.

Endnotes

[1] See, Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, “Statement Regarding Money Market Funds,” Washington, D.C. (August 23, 2012), available at http://sec.gov/news/speech/2012/spch082312laa.htm.
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[2] Hilzenrath, David, Democrat Luis Aguilar willing to go his own way on SEC, Washington Post (August 25, 2012), available at http://www.washingtonpost.com/business/economy/2012/08/24/0e2845a0-ee17-11e1-afd8-097e90f99d05_story.html (quoting SEC spokesperson, John Nester, that the SEC staff had concluded that, to the extent assets migrated, they would likely go to bank products and U.S. Treasuries.)
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[3] Letter of Timothy F. Geithner, Secretary, U.S. Department of the Treasury, to Members of the Financial Stability Oversight Council on Necessary Money Market Reforms (September 27, 2012), available at http://www.treasury.gov/connect/blog/Pages/geithner-fsoc-letter.aspx.
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[4] Financial Stability Oversight Council, Proposed Recommendations Regarding Money Market Mutual Fund Reform (November 13, 2012), http://www.treasury.gov/initiatives/fsoc/Documents/Proposed Recommendations Regarding Money Market Mutual Fund Reform – November 13, 2012.pdf.
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