On June 21st, the Senate Banking Committee held a hearing entitled "Perspectives on Money Market Mutual Fund Reforms." During SEC Chairman Mary Schapiro's testimony, she reiterated her view that money market funds pose a systemic risk to financial markets. She also argued that although the 2010 money market fund reforms had made funds more resilient to runs, they did not "address the structural features of money market funds that make them susceptible to runs." She stated that additional reforms are needed to:
(1) change the incentives of shareholders to redeem if they fear that the fund will experience losses; (2) fundamentally change the dynamics of a run, which, once started, will quickly burn through the additional fund liquidity; (3) prevent early redeeming, often [by] institutional investors [which results in losses being shifted to] remaining, often retail[,] investors [and] (4) enable money market funds to withstand a "credit event" or the loss in value of a security held by a money market fund, precisely what triggered the run on the Reserve Primary Fund.
An SEC proposal for money market fund reform is expected soon, possibly as early as July. Chairman Schapiro described the two proposals being strongly considered by the SEC: (1) requiring funds to float their NAV and (2) allowing funds to retain their stable value but imposing a capital buffer, possibly combined with restrictions or fees on redemptions. Several Senators raised concerns about the effects these reforms would have on the industry and financial markets as a whole. In general, the SEC reform proposal received, at best, a tepid response from the Committee.
Other hearing witnesses included Nancy Kopp, the Maryland State Treasurer; Christopher Donahue, President, CEO and Director of Federated Investors, Inc.; and Paul Schott Stevens, President of the ICI. A webcast of the hearing and copies of written testimony from all hearing witnesses can be obtained here.