August 11, 2012
As a retail investor and active user of money market funds in brokerage accounts and in mutual funds, I would like to express my strong interest in your allowing money market sponsors to maintain the $1.00 value to their funds rather than diminishing their value. We retail investors view money market funds as temporary positions and interchangeable with cash, awaiting permanent investment allocation decisions or use for college education, health expenses or meeting everyday living expenses.
In exchange for maintaining the security of the $1.00 per unit value, the SEC should expand the full disclosure requirements of all money funds to detail the exact dollar amounts and percentage holdings in each class of security they invest in, indicating the published credit ratings of all items above a certain holding threshhold such as $100,000 or of 2% or more. I am well-aware of the multiple mention of Prime Reserve holding Lehman CP in its portfolio which caused its demise, but this was only one fund that failed, not a dozen or hundreds, as occurred with banks, S&Ls, credit unions or other banks and non-bank financial institutions.
The greatest risk to an investor such as myself holding money market funds is insufficient knowledge of what the fund contains. At the height of the 2008 financial crisis, even money market funds with retirement accounts held with Fidelity Investments and Vanguard, would not tell me or were unable to tell me the dollar amounts and proportions of their fund holdings in mortgaged-backed securities, corporate bonds, CP, or other forms of short-term debt instruments. The unfortunate part of most Prospectuses and Offering Memorandums describing money market funds is that they have an all-encompassing ability to hold a variety of securities to give the fund manager maximum operating flexibility, but little accountability in terms of disclosing the exact nature or the instruments they hold and in what proportions. Consequently, the investor is left blind as to how well they are being managed, the quality of securities that each fund holds, the settlement and clearing risks in performing a buy and sell trade when the counterparties are in trouble, including bank dealers and clearing banks.
The public is much more sophisticated than regulators give them credit for, and would welcome better disclosure as to exactly what funds held, so that even before a financial crisis, they could decide to only invest in money market funds holding US government securities, high grade corporate CP or investment grade bonds. The description of asset-backed securities for example, in a money market fund or general financial institution paper is too broad to make any sense of. If these are near-cash investments for retail investors such as myself, then Prime Reserve has no business investing in speculative Lehman Brothers holding company CP, and I for one, would never invest in this type of fund. We could try to avoid therefore a "run" on the mutual funds, as we would know in advance how to rank the funds, their managers and their underlying instruments in terms of their levels of riskiness.
Many thanks,
Edward Tan