Speech by SEC Commissioner:
Opening Statement at Open Meeting on Money Market Fund Reform
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
June 24, 2009
Thank you, Chairman Schapiro. I too would like to thank in particular the staff of the Division of Investment Management, especially Buddy Donohue, Bob Plaze, Hunter Jones, Penelope Saltzman, Diane Blizzard, Sarah ten Siethoff, Thu Ta, Adam Glazer, and Daniel Marchesani. I would also like to thank the staff in other divisions and offices who have worked on the proposals before us today. And, my particular thanks go to my counsel, Christian Broadbent, whose expertise, tenacity, and patience on this project have served me extraordinarily well. All of your efforts in preparing these proposals for our consideration have been nothing short of Herculean, and deserve to be recognized in every way possible. I am pleased to say that I am supportive of your recommendations. The proposals are truly significant and a very thoughtful response to recent market events.
As you have already heard this morning, but I think it bears repeating: Money market funds play an important role in our country, an important role in the lives of everyday investors, and they are equally important to large institutional investors and to the systemic soundness of our economy and financial structure. Money market funds have experienced amazing growth, particularly in the past ten years, where assets under management have grown from $1.4 trillion at the end of 1998 to approximately $3.8 trillion at the end of 2008. And, although the growth has been evident in both retail and institutional money market funds, the lion's share has been driven by institutional investment—which is consonant with other market developments.
This growth has also meant increasing importance for money market funds in our capital markets. For example, they hold a significant portion of outstanding commercial paper and provide a substantial portion of short term credit extended to U.S. businesses. They also play important roles in other aspects of the short term and broader markets, including with respect to repurchase agreements, state and local government debt, Treasury securities, and agency securities.
For more than three decades, rule 2a 7 has generally provided a sound framework in which money market funds have operated, largely without issue until the recent financial crisis that we have all faced. For money market funds, this culminated last fall when The Reserve Fund began experiencing a run on its Primary Fund that also spread to other Reserve funds. Ultimately, when The Primary Fund broke a buck, investors, mostly institutional, in other prime money market funds tried to redeem their holdings or move them to Treasury or government money market funds. And, this trend was no doubt intensified by the overall turbulence in the market for financial sector securities at the time.
Today, in proposing rules to strengthen the money market fund regulatory structure, we must recognize both that the system in place historically has served investors quite well, and that there are enhancements that we should consider in order to reflect the problems experienced by money market funds during the financial crisis and our experience with The Reserve Fund. One of the strengths of our financial regulatory system, and one of our strengths at the Commission, is that we never hesitate to re examine and improve upon what we have already done. These enhancements should make money market funds more resilient to certain short term market risks, and provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share.
We are proposing to do this in several ways. For example, we would tighten the risk limiting conditions of rule 2a 7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the weighted average maturity of portfolio holdings, and limiting funds to investing in the highest quality portfolio securities. Also, we would require money market funds to report their portfolio holdings monthly to us. Further, we would permit a money market fund that has "broken the buck" to suspend redemptions to allow for the orderly liquidation of fund assets.
Also, we are seeking comment on other potential changes in our regulation of money market funds. Specifically, we are requesting comment on whether money market funds should have "floating" rather than stabilized net asset values, and whether to require that funds satisfy redemption requests in excess of a certain size through in kind redemptions. I am particularly looking forward to comments on these broader ranging issues.
And, I too am looking forward to comments on the NRSRO question. This is an opportunity for commenters, and for us, to focus on the use of ratings in the specific context of money market funds, and in the specific context of rule 2a 7, which is not precisely the same as the use of ratings elsewhere. I would ask particularly that commenters focus not only on recent market events and the competitive issues, but also on the effectiveness of substitutes for ratings—as we do not want to end up with a system that is weaker than the one that we have today.
There are possible alternatives, and I encourage commenters to be creative, either in considering whether to eliminate the use of NRSROs in the rule, or to use a system of designating NRSROs. Some suggested changes could be small ones. For example, we could adopt a rule that would allow designation, but require that there be more than three NRSROs—which would have a different sort of competitive effect. I encourage specific comment on that. I also encourage commenters to think about this issue from a longer term perspective to determine whether there are alternatives that would serve investors in these very important investments well. And, we will consider all comments very carefully—and undoubtedly make changes to our proposals based on the comments—as we continue to work aggressively to enhance the protections in our money market fund regulatory structure.
Again, I would like to thank the staff for their efforts in bringing the proposals before us today.