Response to Treasury Secretary Geithner's letter to FSOC members
Oct. 1, 2012
Last week, U.S. Treasury Secretary Timothy Geithner wrote to members of the Financial Stability Oversight Council regarding a proposal for further regulation of money market funds. The options recommended in Secretary Geithner’s letter are essentially those championed by SEC Chairman Schapiro—a floating NAV and a capital buffer paired with redemption restrictions. The proposal is built on an inaccurate premise that money market funds caused the 2008 financial crisis.
Over the past nearly two years, Federated Investors along with thousands of investors, businesses, state/local government entities, trade associations, non-profits, other financial institutions and a bipartisan group of members of Congress have written to the SEC. They have voiced their strong opposition to these proposed rules and made clear the very deleterious impact these initiatives would have on the 56 million Americans who depend on money market funds as well as the U.S. economy.
As we have previously stated, we believe the proposals in their current forms will destroy money market funds as we know them, a popular and effective $2.5-trillion product that has provided significant benefits as a cash management and funding vehicle for over 40 years. Specifically:
- Replacing the stable $1.00 net asset value, which is often necessary for investors to conduct their business, with a floating NAV would create unnecessary recordkeeping, accounting and, in many cases, tax nightmares for all users, requiring the tracking and reporting of fractional changes in share price each time shares are bought or sold.
- Instituting redemption restrictions would prohibit money fund users from having full access to their investments when they want it or need it. Such a freeze would also cripple sweep accounts, check-writing and a number of others features that money market fund users depend on.
- Requiring money market funds to maintain capital buffers or reserves would further limit the attractiveness of money market funds (by further depressing yields), particularly in the current low interest rate environment.
It is important to remember theefficacy of these proposals has already been questioned by a majority of SEC Commissioners. They are concerned about the severe impact of the measures and where assets now in money market funds would flow. Moreover they are troubled by the lack of analysis that the Commission failed to conduct regarding the far-reaching money market fund reforms instituted in 2010 and whether any additional action is even warranted. By any measure, the 2010 amendments to Rule 2a-7 meaningfully and sufficiently strengthened money market funds as evidenced by the lack of meaningful issues despite the significant challenges posed by various crises since the amendments were enacted.
Most importantly, there is no evidence that such reforms would achieve the stated goal of “reducing the risk of runs” as that phenomenon is triggered by a loss of confidence in the system and a desire by investors to minimize losses by fleeing to safe haven investments like U.S. Treasury securities or money market funds investing in such securities.
Federated will continue to work with those who believe that money market funds are well regulated and that the system is running smoothly to oppose draconian new rules that would fundamentally alter money market funds. We appreciate the outpouring of support we have received in our efforts to date. As the FSOC process moves forward, we will provide regular updates and information on how others can help us preserve money market funds on the Money Market Matters section of our website.