ABA comments on FSOC’s money market fund regulatory proposals

fsoc011811In a Friday comment letter to the Financial Stability Oversight Council, the American Bankers Association offered input on the council’s recommendations made to the SEC regarding the regulation of money market mutual funds.

“ABA’s member institutions interact with MMFs in numerous ways,” the ABA said. “Over 1,500 banks and trust companies use MMFs as a critical source for investments on behalf of their institutional and personal trust clients…In addition, many of our member institutions that offer corporate trust and securities processing services use MMFs to hold cash in connection with the issuance of both municipal and corporate bonds. Many of our members also use MMFs as investments for sweep accounts. Moreover, a significant number of our members sponsor and advise MMFs. Because of these many ways that banks and trust companies interact with MMFs, our members are keenly interest in the Council’s proposed recommendations.”

The ABA said that there is “very strong support for retaining a stable net asset value,” adding that regulations must avoid creating the perception that MMF investments are equal to deposit accounts in terms of supervision and that the SEC should consider the effect of 2010 reforms already in place.

Since the 2008 financial crisis, in which investors made a run on the Reserve Primary Fund, the SEC has proposed three possible alternatives for MMF regulations, including a floating net asset value, stable NAV with NAV buffer and “minimum balance at risk” and a stable NAV with a NAV buffer and other measures.

The ABA warned against the implementation of a floating NAV “would seriously undermine the MMF product as a popular and efficient way to invest short-term cash,” adding that the measure would have serious tax implications for banks investing on behalf of trust clients.

Additionally, the ABA warned that regulators should make it “abundantly clear” that MMFs are not regulated or guaranteed like bank deposit accounts.

“A consistent them of reform supporters has been that MMF investors believe that, because their shares can be redeemed at any time, their accounts are just like FDIC-insured bank accounts, despite clear disclosures to the contrary,” the ABA said.

The ABA said that many banker-members believe the SEC’s 2010 reforms to be adequate and that further reform is unnecessary.

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