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The SEC’s Roundtable Discussion on Money Market Funds and Systemic Risk

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In May, Capital Advisors Group was invited to the Securities and Exchange Commission’s headquarters in Washington, D.C. to participate in a roundtable discussion on money market fund risk and to help consider potential policy changes for money market funds (the archived webcast can be found here). After years of publishing research on money fund risk, we were honored to be included among this intimate group of leading thinkers on this topic. The policy decisions faced by the SEC are extremely complex yet crucial for the stability and viability of money funds and their primary function as a liquidity vehicle for investors. Additionally, money funds serve as an important funding mechanism for corporate America. Therefore, any policy decisions will have a compounded impact on not only investors but corporate borrowers as well.

The challenge facing the commission now is how it will distill the President’s Working Group’s recommendations, along with the extensive industry comments that they have collected over the past year, into a final set of guidelines. The May meeting provided a final forum for 12 outside managers, academics and researchers to openly discuss the tradeoffs of various policy options with five SEC commissioners and representatives of the Financial Stability Oversight Council. Capital Advisors Group’s views and comments throughout the afternoon were centered on risks and investor behavior trends that were a reflection of our own published research and data collected through our FundIQ® money market fund research. Our comments specifically supported the advantages of a diversified liquidity option for the corporate investor.

The core challenge of money fund management is the assumption of investment risk. While legally, the burden of risk is on the investor, the constant dollar share price of money funds shifts a certain assumption of risk to the sponsor, which may be a contributing factor to systemic risk in the market. Our belief is that money funds, or any pooled investment products for that matter, must be analyzed individually to understand risk relative to each other. We believe investors should never assume sponsor support but instead evaluate risk exposure based upon the funds’ relative risk assessment. This process serves to identify and reward specific positive risk characteristics among individual funds and challenge the popular view that money market funds are a homogenous group of investment vehicles with similar risk profiles. Our Fund IQ® research provides a relative risk assessment for the corporate treasury community and will continue to do so regardless of the outcome of money fund regulation. This month, given our recent participation in the SEC roundtable discussion, we thought a review and analysis of that discussion might be enlightening for our readers.

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Best Regards,

Ben Campbell
President & CEO

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