Investing
SEC Proposes Long-Awaited Money Market Fund Reforms To Protect Investors From Runs; Agency Seeks Comments On Proposals
Thursday, June 06, 2013 11:53

Tags: sec

The Securities and Exchange Commission today voted unanimously to propose rules that would reform the way that money market funds operate in order to make them less susceptible to runs that could harm investors. A 90-day period will begin now in which the agency invites comments from the public and financial services experts on the proposal.

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The SEC’s proposal includes two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative.

 

"The proposal requests comment on whether a better reform approach would be to combine the two alternatives into a single reform package -- requiring that prime institutional funds have a floating NAV and be able to impose fees and gates in times of stress, and that retail funds be able to impose fees and gates," SEC chairman Mary Jo White said in remarks at an open meeting of the commission. " We specifically solicit and I am interested in commenters' views on this combined approach."

 

The SEC began evaluating the need for money market fund reform after the Reserve Primary Fund “broke the buck” at the height of the financial crisis in September 2008.

 

Invented in the early 1980s, money market funds are now a significant piece of the nation's financial system. They provide short-term financing to corporations, banks and governments and hold nearly $3 trillion in assets, the majority of which are in institutional funds. In September 2008, the height of the financial crisis, a money market fund "broke the buck" and could not offer the $1 NAV to its shareholders. Within the same week, according to White, investors  pulled approximately $300 billion from other institutional prime money market funds. "The contagion effect was rapid," White saiud. "The short term credit market dried up, and corporations had trouble borrowing to run their businesses. This reaction contributed to the significant disruption that already was consuming the financial system."

 

“Our goal is to implement effective reform that decreases the susceptibility of money market funds to runs and prevents events like what occurred in 2008 from repeating themselves,” said Mary Jo White, Chair of the SEC.

 

The public comment period for the proposal will last for 90 days after its publication in the Federal Register.

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A Good Week For The Keynesians: A Day After Lawrence Summers Tells Congress To Boost Deficit Spending, IMF Report Says Greek Crisis Was Worsened By IMF’s Austerity Measures
Thursday, June 06, 2013 10:36

Tags: economy

 

A day Lawrence Summers, a top economic advisor to two presidents, warned Congress against economic austerity in the U.S., the IMF said in a report that it had underestimated the “multiplier effect” of cutting government spending on the Greek economy, exacerbating the Greek financial crisis.

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“The (IMF) report said that the fund miscalculated the so-called multiplier, or the effect that adding or subtracting a dollar of government spending would have on the broader economy during the downturn,” according to The New York Times. “It underestimated the scale of what has proved to be a devastating Greek depression, fueled in part by sharp government spending cuts and tax increases.”
 
A day earlier, Summers, a former Secretary of the Treasury in the Clinton Administration and head of the National Economic Council for President Barack Obama until November 2010, offered testimony before Congress against cutting government deficit spending in the U.S.
 
Borrowing to support spending, either by the government or the private sector, raises demand and therefore increases output and employment above the level they otherwise would have reached. Unlike in normal times, these gains will not be offset by reduced private spending because there is substantial excess capacity in the economy, and cannot easily be achieved via monetary policies because base interest rates have already been reduced to zero. Multiplier effects operate far more strongly during financial crisis economic downturns than in other times.
 
It would not be desirable to undertake further measures to rapidly reduce deficits in the short run. Excessively rapid fiscal consolidation in an economy that is still constrained by lack of demand, and where space for monetary policy action is limited, risks slowing economic expansion at best and halting recovery at worst. Indeed, there is no compelling macroeconomic case for the deficit reduction now being achieved through sequestration, as the adverse impacts of spending cuts on GDP more or less offset their direct impacts in reducing debt.
 
Attention should be devoted to measures that reduce future deficits by pulling expenditures forward to the present when they have the additional benefit of increasing demand. It is important to recognize that just as increasing debt burdens future generations, so also does a failure to repair decaying infrastructure, or to invest adequately in funding pensions, or in educating the next generation burdens future generations. Wherever it is possible to reduce future public obligations by spending money today, we should take advantage of this opportunity especially given the very low level of interest rates. In particular, a major effort to upgrade the nation’s infrastructure has the potential to spur economic growth, raise future productive capacity and reduce future deficits. It should be a high priority.

 

 

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Could Japan's Long Struggling Economy Finally Be Pulling Out Of Its 25-Year Malaise?
Tuesday, May 21, 2013 08:28

Japan has been running a monetary experiment--shock therapy for its ailing economy. It's highly controversial. While it's similar to the liquidity injected into the Ameircan economy by the Federal Reserve since the financial crisis, the amount of liquidity being injected into Japan's economy is much, much greater. What's interesting is that it is working.

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Japan’s $5 trillion economy grew at a robust annualized pace of 3.5% in the first quarter. "The stock market has soared more than 60%over the past year, and the yen has lost more than a quarter of its value, lifting corporate earnings in a country that is dependent on exports," says The New York Times.  

 

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Budget Office Cuts Estimate Of Nation’s 2013 Deficit By 24%
Tuesday, May 14, 2013 16:33

The nonpartisan Congressional Budget Office has slashed its projections of the current-year fiscal deficit because of bigger-than-expected tax receipts and payments from Fannie Mae and Freddie Mac.

 

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According to The New York Times, in a periodic update to its projections, CBO on Tuesday estimated that the deficit for the current fiscal year, which ends on Sept. 30, would be about $642 billion, or 4% of economic output. Just three months ago, it projected that the current-year deficit would be $845 billion, or about 5.3% of economic output.

 

 

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ERISA Attorneys Confirm That Fiduciaries Must Vet Target Date Fund Selections
Friday, May 10, 2013 14:48

In a detailed new analysis, two ERISA attorneys make the case that fiduciaries are “responsible for the prudent selection and monitoring of” target date funds (TDFs) within defined contribution plans.

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Safe harbor provisions for Qualified Default Investment Alternatives (QDIAs) do not relieve fiduciaries of their obligation to vet TDFs, according to this in-depth analysis by attorneys Bernard T. King and Michael R. Daum of Blitman & King, published by Bloomberg Law.
 
Fiduciaries generally believe they are protected from litigation by two safe harbors in their selection of TDFs: Properly structured TDFs are Qualified Default Investment Alternatives (QDIAs) under the Pension Protection Act of 2006, and as long as they choose among the most popular TDF providers they should be OK.
 
However, relying on these two factors can lead to breaches of fiduciary duty that will bring lawsuits after the next economic downturn, as I explained last year in this article about the Safe Harbor minefield.
 
The U.S. Department of Labor released a guide for fiduciaries concerning TDFs in February that agreed with my analysis, and now two prominent ERISA attorneys have done the same. Here is a summary passage from the Bloomberg Law article:
 
“Regardless of whether the plan fiduciaries responsible for setting the plan’s investment lineup comply with Section 404(c)(5), or whether the mutual fund platform provider would qualify as a fiduciary, the responsible fiduciaries must understand the underlying details about the TDFs they are selecting as the plan’s QDIA. Although the fiduciaries can receive some protection from the QDIA safe harbor, they remain responsible for the prudent selection and monitoring of the TDF. Thus, at a minimum, the responsible fiduciaries should understand the TDF’s glide path, fees, and underlying assumptions. Then, having a general idea about the projected actions and attributes of the plan’s participants and beneficiaries, the fiduciaries should confirm that these characteristics are appropriate for the plan participants.”
 

For more guidance on selecting TDFs, see my Fiduciary Guide.

 

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