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Thursday, September 12, 2013|
Schwab Critiques SEC Money Fund Proposal
Charles Schwab [profile] has joined Fidelity [profile] and others in writing a letter to the S.E.C. with its opinions on money fund reform. Marie Chandoha, president of Charles Schwab Investment Management, signed the letter, which supports some of the reforms but suggests a few key changes. The 30-page letter outlines a number of issues Schwab has with the reform, such as cost of compliance, stress testing and daily redemption limits, to name a few.
One of the company's main qualms with the current reform is the cost of compliance. The SEC estimated the costs of systems modification to support a floating NAV to range from $1.2 million to $2.3 million, but Schwab estimates it to be closer to over $10 million. The company also estimates that communicating rules changes and educating and training employees to be in the range of at least $4 million and at least half a million in annual costs afterwards.
Schwab takes issue with the $1 million redemption limit, saying it's too low, and suggests upping it to $5 million. The company also proposes that instead of distinguishing between institutional and retail investors with a dollar fire, the commission should look at concentration risk.
Chandoha also commented that the stress testing proposal, which is meant to strengthen the information available to fund boards in order to assess the risks in money market funds, is "costly, impracticable in parts, and in some cases, fails to the core intent."
Charles Schwab disagrees with the proposal requiring money market funds to aggregate their exposures to afflicted entities because it says the SEC makes assumptions on how PMs would react, writing that money funds could be forced to purchase securities of issuers with credit ratings lower than those of the affiliated issuers.
Chandoha also recommended that municipal money funds be exempted from the floating NAV part of the proposal, saying that the funds are less risky and provide more liquidity than prime funds. In a conference call, Chandoha said, "In the height of the financial crisis they were resilient. We don't think they pose a systemic risk," adding that "State and local governments depend on them for financing."
Jeff Brown, senior vice president of government and regulatory affairs at Charles Schwab, said the industry will have "divergent views" on the issue.
"As for how the industry will respond, there is no broad industry consensus," Brown said.
Brown said he expects that the proposal would likely be implemented in the first quarter of next year at earliest. Brown said of the regulatory process, "We've been pleased with the overall process. They've focused attention on risk and funds investing in corporate debt. They're identifying large institutional investors and that makes sense because they are the ones who did run in 2008."
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