Speech by SEC Commissioner:
Fortifying the Money Market Framework Upon Which Investors and Issuers Rely
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
January 27, 2010
Today, the Commission considers adopting a comprehensive package of amendments to the investment company act rules governing money market funds. I support these amendments and applaud the staff across the Divisions, including the Division of Investment Management, the Office of General Counsel, and the Division of Risk, Strategy and Financial Innovation for their excellent work in drafting such a complete and extensive package of rule amendments. Particularly, I want to highlight the expertise of our staff in the Division of Investment Management who have overseen and regulated a money market fund industry that started with one fund in 1971 and now encompasses over 750 funds with more than $3 trillion under management with very little growth in our own staff. To say these last few years have been challenging is an epic understatement, and I appreciate the continued hard work and commitment of our staff in the face of these challenges and the ones to come.
Money Market Funds Are Interwoven in the American Economy
Money market funds are investment vehicles that are interwoven into the fabric of the American economy. They are relied on by investors and intermediaries of all kinds. These funds are attractive to retail and institutional investors alike, both small and large. Corporate treasurers, municipal governments, and other institutional investors use money market funds to manage their short-term cash needs. Broker dealers, trustees, pension funds, and charitable foundations also use money market funds to manage their own assets, as well as their customers’ assets. Moreover, retirees and other individual investors often invest in money market funds as a way to earn a return on short term cash waiting to be deployed in other investments.
Issuers, in addition to investors, also rely heavily on money market funds. These funds provide a highly efficient conduit between issuers of high quality short-term debt and investors. Money market funds enable the federal government, corporations, municipalities, and other issuers to readily sell their securities in bulk transactions rather than to a multitude of individual investors in separate transactions. Likewise, money market funds provide investors with easy access to high quality investments and minimize transaction costs.
Today’s amendments recognize the integral role these funds play and are designed to fortify and strengthen the entire money market fund framework. These amendments are expected to make funds more resilient in the face of credit, liquidity, and interest rate risk. This result is to be achieved by limiting the types of investments funds can make, as well as adopting new requirements, such as liquidity requirements for a fund to specifically hold investments it can readily turn to cash. The new rules would also require much greater disclosure by the funds to the SEC and to the public about the content and value of fund portfolios. The rules also establish orderly liquidation procedures in cases where the fund is unable to maintain a stable net asset value.
Taken as a whole, these amendments limiting investment choices and risk taking represent a trade-off between making money market funds more resilient investment vehicles and the cost in potential yield that investors can expect. In the current no-yield environment, I acknowledge that the implementation of these new requirements, while needed and appropriate, will come with their own cost.
Public Disclosure of Shadow Pricing
I do want to highlight an issue that has generated a lot of discussion and that is public disclosure of a fund portfolio’s market based values, also known as its “shadow price.” Up until now, a money market fund’s shadow prices have only been publicly disclosed semi-annually in the Form N-SAR and, then, with a 60-day delay from the date of filing. The new rules will require monthly disclosure of a money market fund’s shadow price to the public, also with a 60-day delay. The release highlights that the Commission may solicit comment in the near future on whether there should be real time disclosure of this information, rather than after a 60-day delay. I remain concerned, as were many commenters, that real time disclosure may have more costs than benefits by inadvertently causing some investors to be unnecessarily skittish and may raise the risk of needless “runs” on the basis of information that could be interpreted in many ways given the variance in valuing the underlying assets. As this issue continues to be discussed, I look forward to hearing all viewpoints.
Next Round of Money Market Reform
Money market funds have been very successful. They have been so successful that the Commission recognized in the mid-1990s, that “investors generally treat money market funds as cash investments.”1 Because of that concern, over the years, the Commission has undertaken efforts to stress that investments in money market funds are not “risk free” and the Commission has long required that the covers of fund prospectuses prominently disclose language to that effect. However, the phenomenal success of these funds combined with the fact that until 2008 only one fund had ever “broken the buck,” has reinforced the public perception of the safety of these vehicles. Moreover, the federal intervention of 2008 to halt the beginnings of a money market run may have also raised public expectations that the federal government will step in if another crisis occurs.
The amendments being adopted today decrease the likelihood that money market funds will go through a similar crisis. Even as we adopt the additional safeguards being considered today, however, investors in money market funds need to realize that, as with almost any investment, these investments have risk. Nonetheless, it seems clear that our actions today will make the funds safer and will serve to better align the funds’ ability to maintain a net asset value, typically at $1.00 per share, with the expectation of investors that one (1) dollar in means one (1) dollar out. This may be the most important expectation that investors have when they invest in money market funds. It needs to be protected.
While the amendments being adopted today are comprehensive in their scope, the Commission has stated, as you have heard today, that this round of money market fund reform is only the first step. I would like to highlight two priorities that should not be lost as we move forward. Money market fund investments have worked well for all investors, particularly for retail investors. All contemplated proposals should take retail investors into account and make sure that they are able to continue to participate and benefit.
Moreover, as today’s proposals go a long way in instituting comprehensive reform, it is important to remember that any further reform should not be so transformational that the money market fund is no longer an economically attractive product. Any further proposals should be rigorously analyzed to understand the incentives and consequences that would result. One consequence no one wants to see is a flight of trillions of dollars to unregistered vehicles that have no regulatory oversight or accountability. As a second round of reform is contemplated, we should think about what other reforms should be made regarding unregistered vehicles to insure that there is no regulatory end-run.
As I sum up my remarks today, I want to reiterate the value that money market funds have to investors and our capital markets and emphasize that any further reform should balance change with maintaining that value.