Although financial advisers don't use money market funds often — preferring insured bank accounts for their clients' idle cash — they are wary of the potential changes to the investments being urged by SEC Chairman Mary Schapiro.
In testimony last week before the Senate Banking Committee, she said that an SEC review found more than 300 instances since the funds' inception in which sponsors injected their own capital to sustain the value of a money market fund, moves that she said highlight the funds' vulnerability and underscore the need for reform.
“There will come a time when a fund will have neither the capacity nor the willingness to step in and support the fund — and investors believe that there will be support,” Ms. Schapiro said.
She used the statistics to buttress her argument that money market funds continue to be susceptible to runs such as the one in 2008 that forced the Reserve Primary Fund to “break the buck” — the $1 net asset value return that shareholders are promised.
An investor stampede out of a single fund could metastasize into a “contagion that spreads quickly,” potentially destabilizing the financial system, according to Ms. Schapiro.
DOGGED PERSISTENCE
In her appearance, the chairman reiterated that the Securities and Exchange Commission must go beyond the money fund changes that it imposed in 2010, which require increased liquidity and decreased interest rate exposure for funds.
She made the case for further reforms, such as requiring a floating NAV or imposing capital buffers with redemption restrictions. But fierce opposition from the $2.5 trillion industry — which argues that the possible changes would undermine the funds' immediate liquidity and stable value — as well as skepticism in both parties of Congress have slowed Ms. Schapiro's reform efforts. It isn't clear when or if the SEC will make a proposal.
Investment advisers aren't as intense about money fund reform as regulators and lobbyists because the instruments aren't a priority for clients' portfolios.
“I don't remember the last time I made a recommendation to use a money market mutual fund,” said Robert Schmansky, founder of Clear Financial Advisors LLC.
He steers clients toward federally insured bank deposits for their uninvested cash.
“If you're doing what's right for the client, you're probably telling them, "Go find a bank account on your own, and here are your options,'” Mr. Schmansky said.
Money market funds rarely appear in the portfolios that Samantha Macchia, a principal at Summit Financial Strategies Inc., constructs.
Nevertheless, she is wary of the proposed changes.
“I'm concerned about them changing the game in terms of what a money market fund is — and that consumers would not understand those changes,” Ms. Macchia said.
Observers speculate that Ms. Schapiro is having trouble cobbling together the three votes that she needs on the five-member SEC to release a proposal. The two Republican commissioners — Daniel Gallagher and Troy Paredes — are likely to oppose further money fund changes, while another commissioner, Democrat Luis Aguilar, appears to be on the fence.
When the proposal does come out, it is certain to generate hundreds or perhaps thousands of comments. Many of them will be from industry participants who contend that the sector is under more threat from the SEC than from a potential run.
At the Senate hearing, J. Christopher Donahue, president and chief executive of Federated Investors Inc., said that history shows “the inherent resilience of the funds” and “a strong dynamic in the industry ... to support these products.”
“Every one of [Ms. Schapiro's] ideas destroys the industry by definition, and by money leaving,” Mr. Donahue said. “What they want to do is give medicine that is deadly to the healthy.”
One investment adviser expressed similar qualms.
“My primary concern is that the proposed reforms have the potential to eliminate essential characteristics of a money market mutual fund: stability and liquidity,” said Keith Newcomb, portfolio manager at Full Life Financial LLC.
“There are some corners we can't see around,” he said. “So many times, reform designed to solve a problem that comes up in one crisis becomes the root cause of a subsequent crisis.”STICKING TO HER GUNS
Ms. Schapiro has stuck to her guns on money fund reform even though she has been hit with a barrage of skepticism similar to that voiced by Mr. Newcomb.
“More needs to be done,” Ms. Schapiro told senators.
“That's because the incentive to run still remains,” she said. “It is essential that we address this risk now rather than waiting until the middle of the next crisis.”
Ms. Schapiro also refuses to concede that there is a political stalemate at the SEC over this issue.
“Some [commissioners] would tell you that they still have an open mind and want to engage with a document from the [SEC] staff,” she told lawmakers. “I am hopeful that we will have the debate that I think we need to have.”
In a meeting with reporters after the hearing, Ms. Schapiro declined to speculate about when the SEC might issue a proposal.
“We will be working through the issues of the commissioners over the next month or so,” she said.
Ms. Schapiro tried to soothe skeptical lawmakers by acknowledging the important cash management role that money market funds play for investors and businesses.
“The goal here is not to demonize the industry,” she said.
mschoeff@investmentnews.com
