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The SEC’s Money Market Fund Proposal: A River of Discontent Must Choose A Direction

September 17, 2013

As the deadline for submitting comments to the SEC on its proposed money market fund reforms approaches , the level of letters sent to the SEC on this issue rises almost as fast as rivers in Colorado. The Commission has so far received 1081 “Type A” letters, alone. These letters “express our strong opposition” to the SEC’s proposal that would require institutional money market fund’s net asset value (“NAV”) to float. Supporting that view is a website established by the Investment Company Institute aimed at damming any flow of sentiment in favor of a floating NAV.

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The lobbyists have also been flooding the Commission’s halls. Representatives from Fidelity Investments have been the most frequent visitors, having met with SEC Chairman Mary Jo White and others in one meeting, and on separate occasions conferring with Commissioners Kara Stein and Daniel Gallagher. Fidelity held four additional meetings with Investment Division staff either in person or via teleconference. Other visitors have included the American Bankers Association, Vanguard, and the Albuquerque Chamber of Commerce.

Against this current swims the comments of the 12 Federal Reserve Banks. As befits their role, the Federal Reserve Banks’ comments focus on the financial stability as aspects of the SEC’s proposal.  The letter concludes that a floating NAV for both institutional and retail funds would provide the best protection against the risks posed MMFs. The Federal Reserve Banks believe that the imposition of standby liquidity fees and redemption gates (the proposal favored by the industry), would actually encourage MMF redemptions, promoting the very instability the MMF reforms are meant to address.

The Federal Reserve Banks’ penultimate paragraph notes: “to the extent that the fees and gates alternative resembles the status quo, it would be an attractive option if the only goal were to minimize the costs of adjustment within the MMMF industry. From a financial stability perspective, however, we believe that the floating NAV is the far better choice.”

The dilemma faced by the SEC thus rises to the surface: Is its role to promote the industry or regulate it?

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