SEC Division of Investment Management Director Buddy Donohue gave the keynote address reviewing some of the recent steps that the SEC has taken with respect to regulating money market funds.
The address was given at the Annual Policy Seminar of the European Fund and Asset Management Association conference in Brussels, Belgium. Despite the fact that a sense of normalcy has returned to the money markets, Donohue believes that the SEC needs to take further steps in this area. He acknowledged that the new rules effectively reduce the risk in money market funds while protecting shareholders' interests in the event another fund will "break the buck." However, Donohue stated that the events Fall 2008 showed that money market funds are susceptible to runs, particularly by institutional investors. Investors, particularly institutional investors, still have an incentive to flee a money market fund when there is an increase in short-term interest rates, a decline in the mark-to-market value of a money market fund's holdings, concern with the credit quality of the money market fund's holdings or concern that other investors may flee the fund.
Donohue next stated that others within the government and elsewhere have also raised proposals regarding money market fund reform. In a report issued on January 15, 2009, the Group of 30, led by Paul Volcker, recommended that money market funds with stable net asset values should be required to reorganize as special purpose banks; and that the remaining money market funds should not be permitted to use amortized cost pricing, with the implication that they carry a fluctuating NAV rather than a stable $1.00 value. A June 2009 White Paper issued by the Treasury Department also raised this issue in regard to systemic risk issues, suggesting that consideration be given to requiring money market funds to move to a fluctuating NAV or to imposing some other liquidity protection for fund shareholders. The report is expected to discuss advantages and disadvantages of different policy options. Lastly, he noted that there also have been certain ideas floated about a private liquidity bank funded by the industry that would provide an additional source of liquidity that money market funds could tap after exhausting their own internal liquidity.
Director Donohue also urged the mutual fund industry to re-examine, in a more positive light, the scenario of investment companies being subjected to International Financial Reporting Standards (IFRS). The SEC is moving all operating companies from Generally Accepted Accounting Principals (GAAP) to IFRS next year. So far, funds are exempt.
Donohue said the SEC had directed its staff to evaluate whether mutual funds should make the same switch to IFRS. "The SEC's evaluation will include making a determination as to whether IFRS contains sufficient standards for investment companies, and to the extent that changes need to be made, what the timing of those changes would be." Staff will also look at what the effect on fund investors would be if fund companies were left on GAAP while all other industries shifted to IFRS.
The Division of Investment Management is seeking member feedback on the subject. Specifically, would fund investors be confused if industry firms made this change? Also, if fund financials were prepared in accordance with IFRS, would that lead to a net asset value for financial reporting purposes that is different from the NAV used to process shareholder transactions? How does IFRS work with other provisions of the Investment Company Act that rely on the accounting results? And are there contractual provisions that would be implicated and, if so, what are the implications?
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