The SEC has not provided enough proof to support its own proposal to ban second-tier securities from money market funds, Fund Democracy Inc. and the Consumer Federation of America said today in a comment letter.
“Certain of the SEC’s proposals lack sufficient empirical support,” Mercer Bullard, Fund Democracy’s founder and president, and Barbara Roper, the CFA’s director of investor protection, wrote in a letter sent today.
Comments are due today on the Securities and Exchange Commission’s proposal to improve disclosure and reduce risky holdings in money market funds.
In the letter, Mr. Bullard and Ms. Roper noted that second-tier securities did not play a major role in the run on some money market funds last year, and holdings of such securities have been reduced to almost nothing, the letter added.
“It is easy [to] forget, in the wake of [the] recent high-profile failure of the Reserve Fund and the ensuing run on MMF assets, that MMFs historically have been a paragon of stability,” the letter said. “Reform of MMF regulation is needed, but only to the extent that identifiable benefits outweigh the costs.”
Instead, Fund Democracy and the CFA suggested that the SEC should evaluate the potential benefits of mandatory private-liquidity insurance.
The SEC also should clarify that employees of privately held fund managers, such as the manager of the Reserve Primary Fund, which dipped below $1 a share last September, are entitled to the same whistleblower protections under the Sarbanes-Oxley Act of 2002 as employees of publicly held fund managers.
“If one of the manager’s employees had blown the whistle on their employer, the employee would not have been protected by Soxa’s whistle-blower provision under incorrectly decided legal precedents,” the letter said.
Fund Democracy and CFA also strongly opposed the SEC’s proposal to permit a money market fund to freeze shareholder funds for five days following a money market fund failure. “The free timeout provision would increase incentives to run for the exits before the fund is closed and virtually guarantee that once the fund was reopened, a flood of redemptions will follow.”
Kevin Callahan, a spokesman for the SEC, said the agency does not comment on individual comment letters.
“We look forward to evaluating all of the comments that we’ve received during the public-comment period,” he said.