Game On: Money Funds Disclosing Ulterior Motives
January 25, 2013
Earlier this month, Goldman Sachs started the congo line, which quickly formed to include other money market fund players such as J.P. Morgan Funds, BlackRock Fidelity Investments, Federated Investors, Reich & Tang and State Street Global Advisors, all of whom have announced plans to publish the market value of assets in their funds everyday, while keeping the net asset values in their funds priced at $1 a share.
And experts only expect more to follow suit.
Why the sudden jump to bare all? Money fund companies - which are currently only required to disclose money funds' market values on a monthly basis - tout their active commitment to transparency and helping government regulators find the right solution to preventing another run on money market funds a la the Reserve Primary Fund in 2008.
The disclosure announcements are also clearly a response to proposals set forth by the Financial Stability Oversight Council as a continuation of former Securities and Exchange Commission chairman Mary Schapiro's quest for money fund reform. The proposals present three options for money fund regulation: the use of floating NAVs over stable $1 threshold characteristic of the industry; capital buffers between 1% to 3% of assets to protect against potential future losses; and a slightly higher buffer of 3% combined with other measures, the efficacy of which could result in a lower buffer. Secondary measures include more stringent diversification and disclosure requirements and increased minimum liquidity levels.
But Scott Burns, director of fund research at Morningstar, says there's "a little gamesmanship" involved.
Money fund firms "find that publishing the floating NAV is the least unsavory of [the FSOC] options," Burns said. "If they can jump and take that regulatory zeal away from folks, they can use the one that's most palatable and avoid the least palatable."
For now, most industry insiders seem to be staying decidedly quiet on the matter. This coincides, of course, with FSOC's ongoing comment period, recently extended to Feb. 15 from Jan. 19 at the request of current SEC chairman Elisse Walter, for its regulation proposal. According to a Jan. 15 press release, the FSOC has "reportedly received 50 comments so far from firms such as Charles Schwab and Vanguard Group."
However, Vanguard has not yet jumped to publish daily market valuesfor the assets in its funds. Why? According to John Woerth, a spokesman for the firm, the firm has "not seen an increased demand for more frequent disclosure from our clients, who are primarily retail investors." Also, he said the fluctuation in the NAV of the firm's largest money market fund (the $122 billion Vanguard Prime Money Market Fund) has been "de minimis."
To wit, FSOC has declined to comment because it is currently in quiet period. The Investment Company Institute also declined to comment because they are preparing to submit comments to the FSOC.
Meanwhile, SEC spokesman John Nester provided only an email statement, saying, "Chairman [Elisse] Walter is encouraged when industry voluntarily takes steps to provide greater transparency for investors."
Transparency also serves another purpose: proving to regulators that the FSOC proposals may be unnecessary. Michael Lydon, chief executive officer of Reich & Tang, stressed that publishing daily market values alone addresses many of the concerns that the SEC and FSOC have about money funds. Reich & Tang plans to begin publishing daily values sometime in the first quarter and is the only company to also publish their portfolio holdings and approved issuers' lists a daily basis.
"One of the things that I believe the industry hopes for is that by us producing these NAVs, we're going to show that we have nothing to hide, here is our complete NAV, and as you can see it really doesn't move much at all," said Lydon.
There's merit to the idea that daily disclosure by itself solves a lot of issues about money funds, Burns of Morningstar said. Managers under so much scrutiny won't deign to "play fast and loose" like they did in the pre-2008 era, he said.
"What the SEC can do and would do if you saw a lot of volatility is nothing compared to what investors would do by pulling out their money. Economics rule the day not regulations," said Burns.
"With all that transparency nobody wants that dollar moving around. Investors want a buck to be a buck," he added.
Publishing daily market values will not affect investors' investments, companies have stressed. But does it affect companies still battling to survive in a space battered by low interest rates and regulatory heat?
"Because of our focus on transparency, we don't see a problem with showing this data to our customers, and we don't believe that you're getting - by not being transparent -a competitive advantage," Lydon said.