Critics say floating NAV would sink money funds as retirement vehicles
Industry groups change tactics in bid to scuttle restrictions proposed by SEC
August 21,2012
Opponents of a pending money-market reform proposal from the Securities and Exchange Commission have opened up a new front in the war, asserting that it threatens retirement savings.
In a letter to the SEC on Tuesday, a dozen organizations argued that the potential changes — which could include allowing a funds’ net asset value to fluctuate beyond the traditional $1 or setting capital requirements with redemption restrictions — would erode money funds’ role as a conservative and liquid part of a retirement portfolio.
“In our view, these proposals, taken alone or in tandem, would fundamentally alter the structure of money market funds, rendering them far less desirable — if not unusable — for retirement savers and the plans they participate in,” the letter states.
Among the signers: the Investment Company Institute, the Financial Services Institute, the Securities Industry and Financial Markets Association, the American Society of Pension Professional & Actuaries, the National Association of Insurance and Financial Advisors and the U.S. Chamber of Commerce.
The SEC could be poised to issue a money-fund reform proposalas soon as Aug. 29. SEC spokesman John Nester declined to comment on the letter and said that the agency has not scheduled a meeting date.
For months, SEC Chairman Mary Schapiro has argued that a run on money funds would pose a grave risk to the financial system and could put taxpayers on the hook for a bailout. She maintains that new rules are required to prevent a collapse like the one experienced by the Reserve Primary Fund in 2008, when it “broke the buck.”
She has faced strong resistance from the financial industry, which has argued that money funds are among the safest investments on the market and that reforms implemented in 2010 to strengthen liquidity and credit requirements are sufficient.
In the letter, opponents for the first time highlighted what they call the threat to retirement savings. Of the $2.6 trillion held in money market funds, about $375 billion is held in 401(k) and individual retirement accounts. The industry letter said that money funds offer a “conservative investment option in many plans” which allows diversification and acts as a source for easily available cash.
“It’s crucial that the SEC hear from the investor community, in particular the pension and retirement community, who use money funds as an important cash-management vehicle,” said David Abbey, ICI’s senior counsel for pension regulation.
Money market funds allow more flexibility in 401(k) plans, for instance, than stable-value funds, according to Mr. Abbey. Money put into a stable-value fund cannot be transferred to an equity fund for 60 days.
“There are no good alternatives [to money funds] in the retirement marketplace,” Mr. Abbey said.
The structural changes being considered also could pose operational problems for retirement plans.
“To implement floating values or redemption restrictions, intermediaries would need to change thousands of systems that support broker-dealers, banks, insurance companies, trusts, 401(k) record keepers, or other institutions tasked with processing money market fund transactions for their clients,” the letter states.
One goal of the letter is to take the debate over money-fund reform – which has been fought between the financial industry and federal regulators – to the consumer level.
“We are acutely aware of the importance of money market mutual funds to Main Street investors,” FSI chief executive Dale Brown said in a statement. “These investors look to money market funds for liquidity, diversification and convenience, along with a market-based yield.”
Is the U.S. Economy Protected From the Euro Crisis?
Confidence is increasing that the United States could sustain the worst from Europe
By David Francis
August 17, 2012
Earlier this week, German Chancellor Angela Merkel announced that Europehas made dramatic progress in dealing with the continent’s financial crisis. Her comments were meant to build investor confidence and revive hopes that the European Union would act to saveSpain,Italy, andGreece, three countries on the brink of financial ruin.
But in recent months, the chancellor’s comments, as well as statements from other high-ranking officials inEurope, have done little to quell doubt over how the crisis will be resolved.Europe’s problems have been evident for nearly three years, yet no definitive action has satisfied investors that the European Union can be saved.
For years, analysts have cautioned that a turn for the worst in Europe would mean bad news for theUnited States. They warned that the dissolution of the European Union as it is currently constructed has the potential to send theUnited Statesinto a double-dip recession.
Along with political uncertainty in Washington, Europe has served as the economic boogeyman that keepsU.S. investors on edge. However, according to experts, the doomsday scenario inEurope might not have the knockout potential here that many people think.
“I think Europe is more concerned about what happens to theU.S.economy than we are about the European situation,” says Ernest Dawal, chief investment officer of wealth and investment management for SunTrust Banks. “We don’t think [the ongoing European crisis is] going to have a material impact” on theU.S.economy.
Understanding the crisis. Overspending and government deception are at the heart of the European crisis. For years, some European countries were disingenuous about the amount of debt they had, as well as their ability to pay this debt back. They also overspent on maintenance of large bureaucracies and made bad bets on construction and other industries. At the same time, they flaunted EU budget requirements.
These countries were able to appear healthy because of the strength of the euro. Northern European economies, most notablyGermany, were able to keep the currency strong with consistently positive economic output.
It took the 2008 financial crisis to reveal the extent of Europe’s problems. As the world economy slowed, it became apparent thatGreece and other European countries had unsustainable levels of debt and would need bailouts. Since then, European leaders have taken a number of stopgap measures to reassure markets that the euro zone would survive, but none worked. Wall Street is still not convinced that the euro can survive.
The European crisis has the potential to affect theU.S.economy in a number of ways. Manufacturing companies that export goods toEuropehave seen orders decrease.U.S.banks also have exposure to European debt, and could face a crisis similar to the downfall of Lehman Brothers if a European country goes bankrupt.
There are also concerns about how a disaster in Europe would affect American consumer confidence, says Andrew Tignanelli, president of The Financial Consulate, an investment advisory firm in Baltimore.
“You can’t in today’s world dissect the major economies of the world and say if one does really poorly, it’s not going to matter to me,” he says. “If the European Union were to have a catastrophe, there’s no way that it’s not going to have a dramatic impact on theUnited States.”
Insulated from the worst? Dawal says a bad turn inEurope would cause a short-term hit to the American economy. But he adds that he believes theU.S. economy is resilient in the long term and would be able to rebound from a European shock.
Dawal says two factors give him confidence: Banks are healthy and manyU.S.manufacturers have shifted their focus on domestic markets. “U.S.banks are better capitalized than their peers inEuropeare. The latest stress tests had some pretty significant circumstance build into them, and our banks help up relatively well,” he says.
“If you look at the percentage ofU.S.exports to [distressed European countries], it’s less than 3 percent. Our direct exposure from an export perspective is nominal,” Dawal adds.
Since the crisis began, experts have advised a wait-and-see approach, urging caution until the European situation is resolved. However, if Dawal is right, now could be a prime opportunity to shift to a more aggressive investment strategy.
And Dawal is not alone in his assessment. Brad Sorensen, director of market and sector analysis at Charles Schwab, says recent statements made by European leaders outlining steps to stem the crisis are encouraging. “We think it’s far too early to sound the all-clear bell … but there’s hope on the horizon,” he says.
Dawal says a far greater threat looms closer to home: The government must come to an agreement that keeps the country from going over the fiscal cliff, he says, referring to the expiration of the Bush-era tax cuts and other spending cuts set to kick in at the end of the year.
“Right now, the biggest threat to theUnited Statesis ourselves,” he says.
SEC may be ready to move on money market reform
Commission could vote Aug. 29, setting off a comment period that could lead to new regulations
August 8, 2012 3:56 pm ET
The Securities and Exchange Commission appears to be ready to move on money market fund reform.
Quoting unnamed SEC officials, The Wall Street Journal reported Wednesday that the commission will vote Aug. 29 on the new regulations, against which the industry has been lobbying for months. Any action on that day is likely to start a public comment period, which could last 60 to 90 days.
The SEC would not confirm the Aug. 29 date.
For months, SEC Chairman Mary Schapiro has argued that a run on money funds poses a systemic risk to the financial system and could put taxpayers on the hook for a bailout. She said that new rules are required to prevent a collapse like the one experienced by the Reserve Primary Fund in 2008, when it “broke the buck” — the $1 net asset value that the funds maintain.
She has been fighting strong, unified resistance from the financial industry, which has argued that money funds are among the safest investments on the market and that reforms implemented in 2010 to strengthen liquidity requirements are sufficient.
Any new rules would have to be OK’d by three commissioners. Republicans Troy Paredes and Daniel Gallagher Jr. have indicated they oppose new regulations, while two others, Ms. Schapiro and Elisse Walter, favor reform. Democratic commissioner Luis Aguilar appears to be on the fence.
A veteran and politically savvy regulator, Ms. Schapiro apparently has decided that the timing is right to take the next step.
“Most likely, she feels that she has three commissioners,” said Jack Murphy, a partner at Dechert LLP and a former chief counsel in the SEC Division of Investment Management.
Mr. Aguilar, however, could keep his cards close even if he votes to open a reform proposal to public comment.
“A vote to propose something doesn’t mean anybody has committed themselves to voting for or against a final rule,” Mr. Murphy said.
Mr. Aguilar declined to comment.
During a comment period, thousands of critiques from the industry and advocacy groups will be filed, pushing off a final rule into next year.
Ms. Schapiro and the SEC staff have indicated that the proposal, which is said to be 337 pages, revolves around two options — instituting a floating NAV or imposing a capital buffer with redemption restrictions.
Both ideas have drawn fierce resistance. Financial industry officials argue they undermine the features of money funds that make them attractive — a certain return and immediate access to capital. They said that the changes would sharply increase costs for sponsors in the $2.7 trillion money fund market, and limit fund availability for companies and state and local governments that depend on them for cash management.
The Investment Company Institute has been at the forefront of the opposition.
“The ICI and scores of groups representing money market fund investors — including businesses, state and local governments, nonprofits and individual investors — have told the SEC that the structural changes the staff are pursuing will harm investors, disrupt financing and damage the economy,” ICI spokeswoman Ianthe Zabel wrote in an e-mailed statement. “There’s been a robust dialogue and we hope the commission will heed it.”
The potential rule-making process is almost certain to extend beyond the election and could be influenced by that vote. For instance, if presumptive Republican presidential nominee Mitt Romney defeats President Barack Obama — or Republicans retain control of the House and take over the Senate — action on money fund reforms could be slowed halted.
“A lot depends on the election,” Mr. Murphy said. “This one’s a lot more political than SEC rule makings normally are.”
