SEC Commissioners Troy A. Paredes and Daniel M. Gallagher have issued a joint statement in response to Chairman Schapiro’s statement last week regarding the lack of votes to move forward with a proposal to further reform money market mutual funds. The commissioners said they were “dismayed” by the Chairman’s statement and decided to issue a joint statement “...as one step in setting the record straight.” Both commissioners also noted their respect for Commissioner Aguilar’s earlier statement on the prospect for new money fund reforms.
Said Commissioners Paredes and Gallagher: “[a]fter careful consideration, we determined that the changes the Chairman advocated were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation’s financial system.” The commissioners said that while they are not opposed to new money fund reforms, they believed the Commission should consider alternatives to a floating NAV and capital buffers with holdback restrictions.
Commissioners Paredes and Gallagher observed that there is a lack of data analysis suggesting that the 2010 money fund reforms are ineffective. The commissioners noted that money funds have since withstood several significant economic impacts, including the European economic crisis and the 2011 U.S. credit rating downgrade.
Also, there is insufficient data showing how a floating NAV and capital buffer would perform during a financial crisis. Here, the commissioners suggested that a “flight to quality” may “overwhelm” a capital buffer and negate the benefits of any holdback requirements. Similarly, the commissioners said that a floating NAV, which logically means a fund cannot break the buck, still may not stop investors from leaving money funds during a crisis because investors would have an incentive to leave money funds early to get the highest valuation. As a result, the prospect of future policy support for commercial paper markets during crises would remain.
The commissioners further observed that money market funds are relied upon by retail and institutional investors for cash management purposes. Businesses, states, and municipal governments also rely on money markets to finance their activities. With respect to a proposal for new money fund reforms, said the commissioners, “[w]e agree with Commissioner Aguilar that even just proposing rule amendments that advance the Chairman’s alternatives at this time could have harmful consequences.”
Additional money fund reforms, said the commissioners, must be founded on empirical analysis that shows the reforms would be effective without disruption to the functioning of money market funds and short-term credit markets. Specifically, the commissioners would favor an approach that includes discretionary gates on redemptions, improved disclosure of money fund risks, and further study of key questions about money market funds.
Questions the commissioners would ask SEC staff to review cover a range of topics, including: (1) the behavior of investors during the 2008 crisis regarding flows of monies from prime money market funds to Treasury money market funds, (2) the effectiveness of the 2010 reforms, (3) where sums now invested in money funds could migrate to if large numbers of investors left money market funds due to new reforms, and (4) the impact of outflows from money market funds on commercial paper and municipal debt markets.