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OVERSIGHT OF THE MUTUAL FUND 

INDUSTRY: ENSURING MARKET STABILITY 

AND INVESTOR CONFIDENCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JUNE 24, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–42 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

DAVID SCHWEIKERT, Arizona, Vice 

Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

JUDY BIGGERT, Illinois 

JEB HENSARLING, Texas 

RANDY NEUGEBAUER, Texas 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

NAN A. S. HAYWORTH, New York 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

ROBERT J. DOLD, Illinois 

MAXINE WATERS, California, Ranking 

Member 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

AL GREEN, Texas 

KEITH ELLISON, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 24, 2011 .................................................................................................... 1 

Appendix: 

June 24, 2011 .................................................................................................... 47 

WITNESSES 

FRIDAY, JUNE 24, 2011 

Bullard, Mercer E., President and Founder, Fund Democracy, Inc, and Associate Professor of Law, University of Mississippi School of Law ..................... 9 

Donohue, Andrew J., Partner, Morgan, Lewis & Bockius LLP ........................... 10 

Goebel, Scott C., Senior Vice President and General Counsel, Fidelity Management & Research Company ........................................................................... 12 

Stam, Heidi, Managing Director and General Counsel, Vanguard ..................... 14 

Stevens, Paul Schott, President and CEO, Investment Company Institute 

(ICI) ....................................................................................................................... 7 

Stulz, Rene M., Reese Chair of Banking and Monetary Economics, and Director of the Dice Center for Research in Financial Economics, Ohio State 

University ............................................................................................................. 16 

APPENDIX 

Prepared statements: 

Bullard, Mercer E. ............................................................................................ 48 

Donohue, Andrew J. ......................................................................................... 58 

Goebel, Scott C. ................................................................................................. 69 

Stam, Heidi ....................................................................................................... 89 

Stevens, Paul Schott ........................................................................................ 106 

Stulz, Rene M. .................................................................................................. 205 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Garrett, Hon. Scott: 

Written statement of the Association of Commerce and Industry (ACI) ..... 223 

Written statement of the Association for Financial Professionals (AFP) .... 226 

Written statement of various undersigned organizations ............................. 229 

Letter to Treasury Secretary Timothy F. Geithner from Davenport & 

Company LLC ............................................................................................... 231 

Written statement of the Dallas Regional Chamber (DRC) .......................... 232 

Written statement of Financial Executives International (FEI) .................. 233 

Written statement of the Fort Worth Chamber of Commerce ...................... 235 

Written statement of the Greater Boston Chamber of Commerce ............... 237 

Written statement of the National Association of Corporate Treasurers 

(NACT) ........................................................................................................... 239 

Written statement of the New Jersey Business & Industry Association ..... 241 

Written statement of the New Jersey Chamber of Commerce ..................... 243 

Written statement of the New Jersey State League of Municipalities ........ 246 

Written statement of the Chamber of Commerce of the United States 

of America ...................................................................................................... 248 

Maloney, Hon. Carolyn: 

Financial Times article entitled, ‘‘Don’t hobble money market funds,’’ 

by Robert Pozen and Theresa Hamacher, dated June 19, 2011 ............... 250 

Schweikert, Hon. David: 

Written statement of Federated Investors, Inc. ............................................. 252 

(1) 

OVERSIGHT OF THE MUTUAL FUND 

INDUSTRY: ENSURING MARKET STABILITY 

AND INVESTOR CONFIDENCE 

Friday, June 24, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:34 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Schweikert, Royce, 

Manzullo, Biggert, Neugebauer, Pearce, Fitzpatrick, Hayworth, 

Hurt, Grimm, Dold; Lynch, Miller of North Carolina, Maloney, 

Perlmutter, Donnelly, Carson, Peters, and Green. 

Also present: Representatives Renacci, Capuano, and Carney. 

Chairman GARRETT. Good morning. This hearing of the Subcommittee on Capital Markets and GSEs is called to order. And before I recognize myself to give opening statements, let me welcome 

the panel and say a couple of housekeeping things. 

We are going to do opening statements, and then, of course, we 

will hear the witnesses’ statements. We understand that near the 

top of the hour, or a quarter after, or somewhere in there, we are 

going to be called for votes. 

And so, we do not know how many votes, but if it is only one 

vote, then what we can probably do is just rotate through and have 

you all keep on testifying as I just pop in and out, and that sort 

of thing. We hope it goes that way. 

If it is two votes, unfortunately, then we will probably have to 

just take a brief 15- or 20-minute recess to allow us all to go vote. 

Okay. That is where we are. 

I now recognize myself for 4 minutes. And, again, as I said, welcome, everyone, to the hearing. We are here to explore a series of 

issues impacting the mutual fund industry. 

As you may know, it has been more than 6 years since this committee last held a hearing focused on mutual funds. This new Republican Majority has made it a priority to focus on oversight, not 

only of government regulators, but also of industries under its purview. Given that it has been over 6 years, this is a good opportunity now to reacquaint this committee with issues affecting this 

industry. 

There has been some attention in the media this week regarding 

how the Greek debt crisis may affect money market mutual funds. 

2 

And while that is not why this hearing was scheduled, it certainly 

is going to be a topic worthy of exploring to some extent. 

More broadly, though, there was the intent to focus today on different efforts and proposals to provide more certainty to policymakers, along with stability of the money market mutual funds. 

I do think the SEC’s recent 2a-7 reforms make significant 

progress in quelling systemic concerns about money market funds. 

But I also think it is worth discussing today, different ideas regarding potential so-called buffers for money funds. 

As safe as money market funds generally have been, unfortunately, the proverbial genie was let out of the bottle back in 2008 

when Treasury and the Fed stepped in to provide a temporary 

guarantee program for money market funds, potentially at the time 

putting taxpayers at risk. 

So this type of action definitely needs to be avoided in the future. 

And I think representatives of the industry on the panel before me 

today would agree with that point of view. 

As I said, I am interested in having a good discussion on some 

of what has already been done by the SEC in the past and what 

further could potentially be done going forward. 

With all that being said, I have not been convinced that the floating NAV is a proper avenue to go down in order to address the perception by some that the money funds represent a systemic risk. 

For one, I am not convinced that replacing a stable NAV with a 

floating one solves the worry about runs on the bank, so to speak, 

or runs on money market funds. 

Additionally, policymakers must take into account the impact 

that a floating NAV would have on the corporate and governmental 

issuers of debt and our broader economy, as well. 

There is compelling evidence that such an action would lead to 

a loss of access to a significant source of short-term funding. A 

floating NAV would also impact investors, basically of all shapes 

and sizes. 

And while I can understand some level of concern about money 

market funds, we can also ignore the concerns about banks, which 

is likely where much of that money now invested in money market 

funds would migrate over to, if you institute a floating NAV. 

While on the one hand our money market funds were a source 

of undeniable problems back in 2008, hundreds of banks have 

failed in the last few years, and the TARP program pumped literally hundreds of billions of dollars into banks during the depth 

of the crisis. 

So we cannot look at the potential victims of a floating NAV in 

a vacuum. That would be, I think, at considerable cost. 

Another issue I hope the subcommittee can explore today is the 

potential for the Financial Stability Oversight Council (FSOC) to 

designate asset management firms, such as mutual fund companies, as systemically significant financial institutions, or SIFIs. 

With the way that Dodd-Frank requires regulators to regulate 

SIFIs, there are a lot of questions as to how mutual fund firms, for 

instance, would be regulated under a regime largely set up, the 

same regime as the banks. 

Furthermore, today’s hearing may also touch on issues such as 

the 12b-1 fees, the Dodd-Frank Act derivative rulemaking issue 

3 

and its impact on mutual funds, fiduciary standard proposals, as 

well as proposed amendments to CFTC Rule 4.5. 

But more than anything else, I hope today’s hearing affords us 

an opportunity to have a good and robust discussion on many of 

the issues affecting the mutual fund industry today. So I very 

much appreciate the panel being with us. 

And with that, I turn—not to Ms. Waters—to Mr. Green for 2 

minutes? 

Mr. GREEN. Thank you. Thank you, Chairman Garrett. 

And I also thank the full committee chairman, who is not with 

us, but I thank him, as well. And, of course, the Honorable Maxine 

Waters. 

Mr. Chairman, I would like to commend you for holding this 

hearing. It is an important hearing. And I thank the witnesses for 

agreeing to participate. 

You have indicated that it has been about 6 years since we examined this topic in the committee, and I agree and concur that it is 

time for us to have another opportunity to visit these issues. 

I am eager to understand how we can adapt regulatory frameworks in governing the mutual money market funds such that we 

can avoid a run similar to the one that we experienced in the fall 

of 2008. 

I understand that my constituents, and our constituents, hold a 

lot of savings and retirement funds and accounts heavily invested 

in money market mutual funds because of their safety. And I want 

to ensure that future generations can continue to depend on these 

financial instruments. They are important to our economic stability, and they have been of great benefit to us. 

I am also interested in exploring the various options our witnesses bring to the table today, including industry-funded reserve 

buffers, a liquidity bank and two-tiered net asset value—that is 

NAV—classes for money market funds. 

Additionally, the recent economic climate in Europe has raised 

some concerns over risk to U.S. money market funds. With the 

knowledge that millions of Americans depend on stable savings and 

retirement accounts, I am concerned about the ramifications of a 

Greek debt crisis with regard to these mutual funds. 

This issue comes after particularly troubling times when retirement savings have already been severely diminished by the recent 

economic crisis. 

Further, I would like to examine the potential for individual mutual funds, or their managers, to be considered systemically important. I am very interested to explore the arguments for or against 

designating mutual funds as systemically important, along with 

what the potential impacts would be for both retail and institutional investors. 

So with all these issues—and they are all important to us—I am 

looking forward to this hearing, Mr. Chairman. I thank you, and 

I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

And I understand that Mr. Capuano and Mr. Carney would also 

like to participate in the hearing today. 

Without objection, it is so ordered. 

4 

At this time, I yield 11⁄2 minutes to the gentleman from California, Mr. Royce. 

Mr. ROYCE. Thank you, Chairman Garrett. 

When we look back at 2008, you had very little exposure to Lehman throughout the industry. But when Reserve Fund broke that 

dollar, broke the buck, you had a massive run on prime money 

market funds. And it really took some extraordinary steps by the 

government to put a halt to that run. 

And I think we have some questions here as to whether the 

events in 2008 prove that the structure of money market funds 

makes the industry today susceptible to that kind of a run. That 

is up for interpretation. 

What is not subject to interpretation, though, is that we are now 

left with an industry that is at least implicitly government-backed. 

And given recent headlines, noting the potential exposure of a 

European bank debt crisis, there are other questions that are going 

to have to be kicked around in this committee. 

We are going to have to ask, has the industry fundamentally 

changed since then? Is it in a better position to prevent an industry-wide run this time? Will the government be forced to intervene 

again in such a circumstance? 

But I hope that the hearing not only answers those questions, at 

the end of the day, I think we have to remove the perception that 

money market funds are risk-free or government-backed. And I 

think reducing investors’ incentives to redeem shares from distressed funds is going to result in more stable funds and a more 

stable financial system. 

How that can be achieved is the subject of this hearing. We have 

various competing ideas here that are going to be presented to us 

in terms of the best way forward. 

But I thank the chairman for holding this timely hearing. I think 

that these are subjects that need to be resolved. And I appreciate 

his leadership in trying to kick this off. Thank you. 

Chairman GARRETT. And I thank the gentleman. 

The gentleman from Massachusetts for 2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank the witnesses for appearing before this committee today and helping us with our work. 

As of April of this year, the combined assets of the mutual fund 

industry totaled about $12.5 trillion. From a systemic risk perspective, it is important that regulation maintain proper oversight of 

this industry. 

It is also important to recognize that the money market funds 

that have been noted in earlier remarks have been the most stable 

sector of the mutual fund industry and represent about $2.7 trillion 

within the industry. 

However, everyone does remember, as the gentleman from California mentioned, the event with the Reserve Fund breaking the 

buck back in 2008. 

But since that event, the SEC and other market participants 

have studied the mutual fund industry, and significant reforms 

have already been implemented in response to the Reserve Fund 

event. 

5 

One of these measures, Rule 2a-7, imposes requirements for 

asset quality and liquidity. The Commission has also reduced the 

amount of money that market funds can invest in lower quality, illiquid securities from 5 percent of a fund’s assets to 3 percent. 

And the President’s Working Group on Money Market Funds has 

also proposed requiring money market funds to allow their net 

asset value to float above or below $1 a share. 

Now, the goal—the stated goal, at least—of the proposal would 

be to help remove the perception that money market funds are 

risk-free, and reduce investors’ incentives to redeem shares from 

so-called distressed funds that break the buck. However, there is 

also countervailing evidence that allowing NAV to float would also 

undermine the value of those assets. 

I would like to hear the panel’s opinions on that point, how all 

of these reforms have affected the money market industry, and particularly how a floating NAV proposal might affect this financial 

tool, whether it would make it more or less attractive to investors, 

and how it improves safety and soundness. 

But I want to thank you, Mr. Chairman, for your courtesy, and 

I look forward to the testimony from our witnesses. And I yield 

back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Dold for 11⁄2 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. 

The mutual fund industry is a critical part of our economic system, and, I would argue, one of the most important investment vehicles millions of Americans use. With combined assets now exceeding $12 trillion, millions of Americans rely on the mutual fund industry for retirement funding, for college tuition funding, and for 

growing personal resources. 

Despite the mutual fund industry’s vital importance to so many 

Americans and to our economy as a whole, this committee has not 

held an oversight hearing since 2005. And since that last oversight 

hearing, we have seen the 2008 financial crisis, the Dodd-Frank 

regulation, the resulting rulemaking process and continuing dramatic industry growth, and so many other developments that impact the industry. 

So today’s hearing is very timely and important, and I want to 

thank the chairman for calling it. 

I also look forward to hearing from our witnesses about several 

specific topics, including fee reforms, potential FSOC designations, 

corporate government reforms, and the SEC’s effectiveness in regulating the industry. 

Most importantly, I am interested in how we might improve the 

safety and stability of money market funds which now contain assets approaching $3 trillion. 

As we have learned from the Reserve Primary Fund during the 

2008 financial crisis, there can be some risk to investors in money 

market funds. 

In that case, the Administration decided to expose taxpayers to 

trillions of dollars of potential liability by guaranteeing certain 

money market fund investments. 

6 

Fortunately, in that case, none of the guaranteed money market 

funds actually failed. But we must ensure that taxpayers are never 

again so badly exposed to such enormous potential losses. 

We all want smart and cost-effective regulation of the mutual 

fund industry, and I look forward to hearing from the witnesses 

about how we can get closer to that objective. 

And I yield back. 

Chairman GARRETT. The gentleman yields back, thank you. 

Mr. Carson for 3 minutes. 

Mr. CARSON. Thank you, Mr. Chairman. I want to thank the 

chair and the ranking member for holding this hearing. 

As the state of our financial markets and economy continue to be 

of utmost concern, as we will be specifically focusing on money 

market mutual funds today, I am very hopeful our witnesses will 

explain why or why not these funds are good for monies to be invested in. 

I understand these funds do provide for short-term financing for 

businesses, banks, and governments at all levels. There is a certain 

stability, as well as convenience, that these funds bring to the 

table. 

While a few money market funds have broken the buck or have 

gone below $1, the fund company or sponsor has stepped in to absorb the losses. 

I do, however, have concerns. I have some questions regarding 

the net asset value and your opinions on money market funds, assuming they float an NAV structure. 

I am interested in learning about what this change could do to 

not only the nature of a single investment vehicle, but also what 

further implications and consequences these would have for the entire system. 

I also have some questions on whether or not these funds could 

potentially be under some scrutiny for holding any Greek debt or 

other euro zone investments. I am also curious as to how the faltering billion-dollar Greek financial bailout threatens the industry. 

The money market fund industry has indeed, as you all know, 

come under heightened scrutiny in the wake of the financial crisis. 

It has brought to light concerns from both fund-specific and systemic risks associated with these funds. 

We are curious as to how we could distinguish these different vehicles, from our distinguished panelists, and really getting your insights and critiques and thoughts on an issue that is within the 

regulatory system, really explaining systemic risk without damaging money market mutual funds’ important role as a source of 

value to investors and funding to the short-term capital markets. 

Thank you, Mr. Chairman. I yield back. 

Chairman GARRETT. And the gentleman yields back. 

I believe those are all the opening statements that we have up 

here, so we will now turn to our esteemed panel. 

And as you, of course, know, your full written testimony has been 

already delivered to the committee. You are now recognized for 5 

minutes to summarize your statements. 

Mr. Stevens? 

7 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CEO, INVESTMENT COMPANY INSTITUTE (ICI) 

Mr. STEVENS. Chairman Garrett, Congressman Green, and members of the subcommittee, we welcome today’s hearing because of 

the central role that mutual funds and other registered investment 

companies play in helping some 91 million Americans achieve their 

most important long-term financial goals. Today, the assets of these funds actually total some $13.8 trillion, representing nearly one-quarter of the financial assets of U.S. 

households. As these figures suggest, the fund market is vibrant 

and highly competitive. 

One leading indicator of that competition is the cost of fund investing. Since 1990, average fees and expenses paid by mutual 

fund shareholders have decreased by more than half as a percentage of assets for both stock and bond funds. Over the same period, 

the range of services investors receive has increased just as dramatically. 

The key to the industry’s success is the comprehensive framework of regulation in which funds operate. That framework grew 

out of the great financial crisis of the 1930s and has proven its 

worth for over 7 decades. 

Its distinctive features include market valuation of fund assets 

each day, tight limits on leverage, unrivaled transparency, strict 

custody of fund assets, detailed prohibitions on transactions with 

affiliated parties, and strong governance overseen by independent 

fund directors. 

Fund regulation and our fiduciary culture helped ensure that 

funds were not at the center of the latest crisis, nor were funds the 

focus of the Dodd-Frank Act. Nonetheless, funds and their advisers 

remain concerned about how the Financial Stability Oversight 

Council will exercise its authority under Dodd-Frank to designate 

non-bank financial institutions as systemically important and subject them to heightened bank-type regulation. 

As we explain in detail in our written statement, funds are already among the most highly regulated and transparent financial 

companies in the country. They simply do not present the kind or 

extent of risks to financial stability that would merit SIFI designation. 

Moreover, quite apart from designation, there is ample regulatory power in Dodd-Frank and under other existing laws to address risks identified by the FSOC or other regulators. And regulators, in our view, should use those tools first. 

Money market funds are a good case in point. Regulators not 

only have the authority they need over these funds, they have already put that authority to use. 

After the financial crisis, our industry supported, and the Securities and Exchange Commission adopted, comprehensive amendments to its rules governing money market funds. 

Those amendments raised standards for credit quality. They 

shortened maturities. They improved disclosure. And for the first 

time, they imposed explicit minimum daily and weekly liquidity requirements. As a result, prime funds today have a minimum of $660 billion 

in highly liquid assets available to meet redemptions on a daily 

8 

and weekly basis. This far exceeds the $370 billion in outflows that 

we saw during the week of the Lehman Brothers failure. 

In short, we have come a long way in making money market 

funds more resilient, and the industry remains open to ideas to 

strengthen these funds further, including ways to enhance liquidity 

and minimize the risks of a fund breaking a dollar. 

Any further proposals, however, must preserve the utility of 

money market funds to investors. They also must avoid imposing 

costs that would make large numbers of additional advisers unwilling or unable to continue to sponsor these funds. Violating either 

of those two principles will undercut the important role that money 

market funds play in our economy. 

Bear in mind that these funds hold more than one-third of all 

commercial paper issued by American companies and more than 

half of all the short-term municipal debt outstanding. The funding 

they provide is part of the life-blood of jobs and communities, and 

in today’s economy especially, we can ill afford to disrupt it. 

One disruptive idea is the notion of floating the value of money 

market funds’ shares, forcing these funds to abandon their stable 

$1 per share price. Our investors, institutions and individuals 

alike, have stated clearly that they cannot or will not use funds 

that fluctuate in value for cash management purposes. 

And as Treasury Secretary Timothy Geithner recently noted, any 

further changes to money market funds must be made ‘‘without depriving the economy of the broader benefits that those funds provide.’’ 

We agree. 

Lastly, let me note our concerns about conflict and duplication 

that can arise when multiple regulators oversee the same entities. 

One compelling example is the CFTC’s sweeping proposal to amend 

Rule 4.5 and potentially subject many hundreds of mutual funds to 

regulations that duplicate or even directly conflict with those of the 

SEC. 

Why this is necessary, the CFTC has not adequately explained, 

in our judgment. Nor is it clear why the CFTC wants to so dramatically expand its regulatory reach now, when it says to Congress it does not have enough resources to do its basic job under 

Dodd-Frank. 

This committee has addressed the need to promote regulatory coordination and avoid market disruption by passing H.R. 1573. ICI 

supports the policy goals of that regulation. 

Mr. Chairman, members of the subcommittee, my written testimony touches on a wide variety of other issues, any of which I will 

be happy to discuss with you and your colleagues during the question-and-answer session. 

Thank you. 

[The prepared statement of Mr. Stevens can be found on page 

106 of the appendix.] 

Chairman GARRETT. Thank you very much. 

From the University of Mississippi, Professor Bullard? 

9 

STATEMENT OF MERCER E. BULLARD, PRESIDENT AND 

FOUNDER, FUND DEMOCRACY, INC, AND ASSOCIATE PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI SCHOOL OF 

LAW 

Mr. BULLARD. Thank you, Chairman Garrett, Congressman 

Green, and members of the subcommittee. Thank you for the opportunity to appear before you today. 

Recent events have provided useful lessons in the management 

of systemic risk, prudential regulation, and investor protection in 

the mutual fund industry. The performance of stock and bond mutual funds, for example, has demonstrated the remarkable resiliency of the investment company regulatory structure in times of 

extreme stress. As share values have plummeted, most shareholders in mutual funds have stood their ground. 

This confidence in the investment company structure reduces the 

likelihood of the kind of panic selling that contributes to systemic 

risk. This is one of the reasons that true mutual funds that price 

their shares based on their net asset value do not pose material 

systemic risk and should not be treated, for example, as systemically important financial institutions. 

Another reason is that they are already comprehensively regulated under the Federal securities laws by the SEC. 

In contrast, money market funds are not true mutual funds. 

They are not required to redeem their shares at the current net 

asset value, or, more precisely, they are permitted to round their 

net asset value to the nearest dollar. 

Money market funds’ stable net asset value can contribute to systemic risk. And in the wake of the 2008 run on money market 

funds, there can be no dispute that this risk is real. 

The question before regulators is, what steps, if any, should be 

taken to address this systemic risk? 

Money market fund portfolios are safer than they were before the 

crisis. They are better able to handle operational and liquidity 

stress, and they are subject to improved regulatory oversight. 

But they were safe before the crisis. The 2008 run did not result 

from shareholders’ judgments about the safety of individual funds 

in which they were invested. They made an undiscriminating judgment about the safety of prime money market funds as cash management vehicles. 

Any regulatory reform that seeks to address this kind of systemic 

run risk, therefore, must stand outside of the system for which the 

reform is intended to provide a backstop. In other words, it must 

retain the faith that the system it supports has lost. 

For example, capital requirements would operate within the very 

system in which shareholders have lost faith. When it is the system that shareholders doubt, safety mechanisms that are viewed as 

operating within that system will not prevent a run. The only 

meaningful preventive mechanism for systemic run risk is a guarantee, like the Treasury’s Temporary Guarantee Program, that 

shareholders believe to be derived from an external source. 

The strongest source of such a guarantee is the full faith and 

credit of the United States, as reflected by deposit insurance. And 

it is my view that deposit insurance should be extended to money 

10 

market funds in conjunction with weaning banks from investing insured deposits in anything other than short-term assets. 

However, deposit insurance is not necessarily the only external 

guarantee that could provide an adequate source of independent 

confidence. For example, a liquidity bank with access to the Fed’s 

discount window might be sufficient to quell the doubts of institutional money market fund shareholders who are likely to lead any 

money market fund run in a crisis such as that experienced in 

2008. 

In contrast, requiring money market funds to effect transactions 

at their net asset value—the so-called floating NAV proposal— 

would not mitigate systemic risk. This would, however, overrule 

the market preferences of tens of millions of money market fund 

shareholders. 

If the SEC’s money market fund roundtable is any indication, 

however, the preferences of these millions of small investors in 

money market funds appear to be an afterthought. 

In conclusion, I am also concerned regarding the SEC’s approach 

to being a prudential regulator. In January of 2008, I filed a rulemaking petition with a group of similarly concerned organizations 

to require money market funds to file their portfolios with the SEC 

on a monthly basis, to enable detailed monitoring of their portfolios. 

This is what we wrote in that letter, 9 months before the Reserve 

Funds broke a dollar: ‘‘No retail fund has broken a dollar, but we 

believe that it may be inevitable that a money manager will one 

day decline to bail out its money market fund. To prepare for this 

eventuality, the Commission should take steps to ensure that the 

damage to faith in money market funds is minimized.’’ 

The Commission finally adopted this proposal years after we submitted our petition, and I am concerned that it is not doing what 

it should be doing with that data. In the last week, we have seen 

headlines claiming that money market funds are vulnerable to European exposure. I read in Wednesday’s L.A. Times that Federal 

Reserve Chairman Bernanke said that he is keeping a ‘‘close eye 

on money market funds.’’ 

I found no public statements from the SEC on what it has found, 

leaving the rest of us to wonder whether banking regulators’ repeated announcements that money market funds are at risk may 

actually be true. 

Being a prudential regulator means proactively, directly, aggressively addressing concerns regarding the stability of money market 

funds. I hope that the SEC will set the record straight. 

Thank you. 

[The prepared statement of Mr. Bullard can be found on page 48 

of the appendix.] 

Chairman GARRETT. Thank you. 

Mr. Donohue? 

STATEMENT OF ANDREW J. DONOHUE, PARTNER, MORGAN, 

LEWIS & BOCKIUS LLP 

Mr. DONOHUE. Thank you, Chairman Garrett, and members of 

the subcommittee, for permitting me to testify before you. 

11 

My name is Andrew Donohue, and I am a partner at the law 

firm of Morgan Lewis & Bockius, and I was Director of the Division 

of Investment Management of the United States Securities and Exchange Commission from May 2006 until November of 2010. 

Prior to joining the SEC, I held senior positions in the investment company industry, most recently as global general counsel for 

Merrill Lynch Investment Managers. I have been associated with 

the investment company industry since 1975, and I have recently 

been elected to the Board of the Mutual Fund Directors Forum, a 

nonprofit organization of independent fund directors. 

The views I express today are my own and do not represent those 

of my firm, my firm’s clients or any other organization. 

Funds are subject to a comprehensive regulatory regime that has 

served fund investors well and played a significant role in the success of the fund industry. With the critical role that funds play in 

our economy and in the investment of American people’s hardearned money for savings and retirement, it is essential that this 

regulatory regime remain comprehensive, yet flexible enough to 

meet changing markets and investor needs, as well as to enable 

product innovation. 

During the financial crisis, funds and their investors were subject to many of the same challenges as other financial institutions. 

Funds performed quite well during this period with but a few exceptions. A few short-term bond funds had exposures to mortgagebacked securities that caused them to suffer unexpected losses. A 

number of closed-end funds had issued auction rate preferred securities that suffered auction failures in 2008, resulting in those securities becoming illiquid and losing value. 

Money market funds had liquidity, pricing, and credit issues that 

affected them during this period. The industry was quite supportive of their money market funds, with over 25 advisers providing liquidity and other financial support to over 100 money market funds. 

While only one money market fund broke the buck, some extraordinary steps were taken by the Treasury and the Federal Reserve 

to stabilize this area. 

Since then, the SEC has adopted amendments to its rules, significantly strengthening the regulatory regime for money market 

funds, and is currently considering additional measures. 

I am confident that the SEC and industry participants will be 

able to craft an approach that lessens the likelihood of a run on 

money market funds or a money market fund breaking the buck, 

while still preserving the benefits money market funds have historically provided to investors and the markets. 

While mutual funds and mutual fund complexes are important 

participants in the U.S. financial system and provide many benefits 

to their investors, I believe that the nature of mutual funds, their 

operations, and the comprehensive regulatory regime within which 

they operate, argue quite forcefully for them not being considered 

systemically important financial institutions. 

Mutual funds have regulatory requirements on the degree of leverage they can employ, the diversification and concentration of 

their portfolios, where and under what circumstances their assets 

are held, the valuation of their assets on a daily basis at market 

12 

value, the requisite liquidity of their investments, and limits on 

transactions with affiliates. 

These and other requirements have provided the sound structure 

for funds to operate in, in a manner that does not expose the U.S. 

financial system to the types of risk the Dodd-Frank Act was concerned with. 

For somewhat different reasons, I do not believe that asset managers should be designated as significantly important financial institutions. The asset management industry is quite different from 

that of other financial institutions, and those differences should 

militate against them being considered significantly important financial institutions. 

Asset managers do not put their balance sheet at risk, do not 

guarantee returns, and their clients bear the risk of the investments. The asset management industry is not concentrated, and it 

is quite competitive, and assets can be moved quite freely from 

manager to manager. 

The SEC has played a critical role in the comprehensive regulatory regime for funds. It has used the flexibility provided in the 

Investment Company Act to adapt a 70-year-old statute to changing markets and investor needs, and to facilitate innovation in the 

fund industry, such as money market funds and exchange traded 

funds. 

It has also used that flexibility to permit funds to engage in activities otherwise prohibited, by fashioning alternative means of 

achieving the safeguards intended by the statute. 

I want to thank you for the opportunity to testify today, and I 

welcome any questions that you might have. 

[The prepared statement of Mr. Donohue can be found on page 

58 of the appendix.] 

Chairman GARRETT. Thank you. 

And before you go, Mr. Goebel, I will just indicate to the panel 

and the rest of the members here, we are just going to continue. 

There is only one vote. It is on right now, so members are encouraged to dash over to vote and then come back, so that we will proceed as you are voting. 

Mr. Goebel? 

STATEMENT OF SCOTT C. GOEBEL, SENIOR VICE PRESIDENT 

AND GENERAL COUNSEL, FIDELITY MANAGEMENT & RESEARCH COMPANY 

Mr. GOEBEL. Chairman Garrett, members of the subcommittee, 

thank you for the opportunity to testify today. 

My name is Scott Goebel, and I am senior vice president and 

general counsel of Fidelity Management and Research Company. In 

this role, I am responsible for legal matters pertaining to Fidelity’s 

investment advisory businesses, including the Fidelity mutual 

funds. 

Fidelity Investments is one of the world’s largest providers of fi- nancial services, with assets under administration of $3.7 trillion, 

including managed assets of more than $1.6 trillion. We manage 

over 400 mutual funds across a wide range of disciplines. 

As you might have assumed, we are strong advocates for the mutual fund model and the benefits mutual funds provide to indiVerDate Nov 24 2008 18:08 Sep 15, 2011 Jkt 067937 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\67937.TXT TERRIE
13 

vidual investors. Mutual funds allow shareholders, at a low cost 

and for a small minimum investment, to obtain a professionally 

managed, liquid, diversified portfolio of securities, with the added 

safeguards of a robust regulatory regime and independent board 

oversight. 

For example, mutual funds operate under strict statutory borrowing limits. And, as a result, the vast majority of mutual funds 

do not use leverage to generate investment returns. Today, there are more than 7,500 funds, holding over $12.5 trillion in assets, offered by a host of financial services companies. We 

believe that these numbers illustrate the intense competition and 

low barriers to entry that have been the hallmarks of the mutual 

fund industry—forces that continue to drive mutual funds to innovate and improve product offerings. 

The assets in mutual funds belong to our shareholders. They are 

not proprietary assets. They are not Fidelity’s assets. And our mission each day is to put the interests of our shareholders first as we 

manage the assets of these funds. 

I want to focus today in my oral testimony on money market mutual funds. Money market funds offer a convenient way for millions 

of investors and institutions to invest short-term cash. For 40 

years, they have offered stability, liquidity, and income at a reasonable cost, and today provide an important source of funding for 

State and Federal governments and corporations. 

In 2008, during the worst economic crisis since the Great Depression, the credit markets became stressed as uncertainty rippled 

through the financial markets. 

As part of a broad range of efforts by the U.S. and foreign governments to stabilize the markets, the U.S. Treasury established a 

limited, fee-based insurance program to support money market 

funds. No money market fund drew upon this program, and the 

Federal Government actually earned $1.2 billion in fees. 

At the height of the crisis in 2008, one money market fund, the Reserve Primary Fund, dipped below the stable $1 per share price 

that money markets strive to maintain. 

In the aftermath of this financial meltdown, the SEC adopted a 

comprehensive set of amendments to Rule 2a-7, which have dramatically enhanced the resiliency of money market funds. 

To take just one example, the SEC rules now require that each 

money fund be able to liquidate 10 percent of its assets in 1 day, 

and 30 percent in 7 days. This change alone has created, by one 

estimate, more than $800 billion of new liquidity in money market 

funds. 

The question is, what comes next? Are there additional money 

market fund reforms that are necessary or appropriate? 

Some reform options under consideration, such as the floating 

NAV, would cause shareholders to leave money market funds in 

large numbers. Based on client surveys, we believe that these 

shareholders would shift to other investment options, including 

banks, offshore products, and other unregistered institutional investment options, all of which pose greater systemic risks than do 

money market funds. 

However, Fidelity understands that some Federal financial regulators, and others, believe that more needs to be done to increase 

14 

the resiliency of money market funds. Therefore, we are working 

with others in the industry on a proposal that would strengthen 

money market funds by creating a buffer within each fund. 

It is worth noting that this is a private market solution that does 

not rely on any government support. 

The idea is pretty simple. Each fund would be required to hold 

back a portion of the yield shareholders would otherwise receive. 

And this amount would grow over time to create a buffer, or cushion, that would help absorb any potential losses and help ensure 

liquidity by enabling money market funds to sell securities at a 

loss to meet large redemptions. Shareholders would continue to buy and sell shares at the $1 

price, but each share would represent assets of slightly more than 

$1. 

We arrived at this solution by asking ourselves, what is the problem that regulators are trying to solve? By and large, we believe 

that the issue is that some shareholders have—or think they 

have—an incentive to redeem first, in order to avoid paying for a 

portion of a potential loss in a money market fund. 

The NAV buffer concept eliminates this incentive to get out first, 

because as shareholders redeem, the buffer amount is spread over 

a smaller investor base. In other words, a shareholder redeems $1, 

and leaves the value of the buffer behind in the fund, which helps 

to protect the remaining shareholders. 

As regulators in the industry consider additional possible reforms, we submit that the question should not be, how do we prevent the next money market fund from breaking a buck; rather, the 

question should be, since so much has already been done to improve the resiliency of money market funds, how can we alter 

shareholder incentives to ensure that, if a money market fund 

breaks a buck in the future, shareholders and other funds are not 

affected. 

I would like to thank the subcommittee and staff for their work 

on these issues that are important to mutual funds and our investors, and for holding this hearing. 

I would be happy to answer any questions. 

[The prepared statement of Mr. Goebel can be found on page 69 

of the appendix.] 

Chairman GARRETT. And I thank you. 

Ms. Stam, please, for 5 minutes? 

STATEMENT OF HEIDI STAM, MANAGING DIRECTOR AND 

GENERAL COUNSEL, VANGUARD 

Ms. STAM. Thank you. 

Thank you, Chairman Garrett, and members of the subcommittee. I appreciate being here today. 

My name is Heidi Stam, and I am a managing director and general counsel of Vanguard and the Vanguard Mutual Funds. 

Vanguard is one of the world’s largest mutual fund firms. We 

offer more than 170 mutual funds with combined assets of approximately $1.7 trillion. We serve nearly 10 million shareholders. 

About 95 percent of the assets we oversee are owned by individuals, whether they invest directly with Vanguard, indirectly 

through financial advisers, or as participants in retirement funds. 

15 

In short, we are a big company that serves many, many small 

investors. 

We appreciate your interest in Vanguard’s views about the current state of the mutual fund industry, and we hope to lend to this 

hearing the perspective of the average investor from Main Street, 

not Wall Street. 

During the financial crisis, investor trust and confidence in the 

global financial system was severely damaged. Investor trust and 

confidence in mutual funds, however, was not. And this is a very 

important distinction. 

Indeed, assets entrusted to mutual funds and ETFs reached an 

all-time high of nearly $13 trillion at the end of last year. This is 

a tremendous testament to the trust that millions of investors 

place—and have placed over many decades—in mutual funds. 

Mutual funds are resilient. They have weathered every crisis 

from the Great Depression of yesteryear to the great recession of 

yesterday. 

Mutual funds are the most efficient, effective, and intelligent way 

to invest in the securities markets. Compared to other financial 

products, they provide superior liquidity, transparency, professional 

management, and diversification—all at a reasonable cost. 

We believe that strict regulatory oversight of mutual funds has 

played a vital role in their success. Mutual funds are subject to a 

comprehensive regulatory regime. And for more than 70 years, the 

SEC and the industry have shared an obligation to serve and protect the interest of investors. It is an obligation we do not take 

lightly. 

This shared obligation came to the fore in 2008, when the money 

markets were rattled by the most significant liquidity crisis in our 

history. The industry and the SEC moved to solve the problem 

quickly and thoughtfully. 

The industry formed a working group which began a thorough 

review of rules governing money market funds, and they developed 

a series of measures to address the funds’ ability to withstand the 

extremely unusual market conditions that existed at the time. 

Shortly thereafter, the SEC adopted enhancements to Rule 2a-7, 

which improved the liquidity, credit quality, maturity, and transparency of money market funds. 

We believe that these enhancements addressed the need for 

greater liquidity in money market funds and significantly reduced 

the risk that a future systemic market disruption would threaten 

the liquidity of these funds. 

If the SEC determines, however, that additional measures are 

needed, then we would encourage a solution that is tailored to address the remaining concern. 

Specifically, more liquidity may be required for institutional 

money market funds that have demonstrated a heightened need to 

make large, same-day redemptions. And we think this could be 

achieved quite simply by increasing the liquidity requirements for 

these funds. 

This approach, or other recent proposals that are discussed here 

today, are simply not required for mom-and-pop money market 

funds. The cost, complexity, and disruption that additional changes 

may cause small retail investors are not warranted, given the way 

16 

these money market funds are used—to pay the mortgage, send a 

tuition check, or save for a rainy day. 

We believe money market funds are well regulated and should 

remain solely under the SEC’s jurisdiction. That said, Vanguard 

understands the need for the Financial Stability Oversight Council 

to monitor risk across markets, institutions, and segments. 

It is important to emphasize, though, that none of the reckless 

lending, leveraging or financial engineering that led to the creation 

of FSOC related to mutual funds. 

Mutual funds do not have leverage exposures or off-balance sheet 

liabilities. They mark their asset value to market every day. Their 

portfolio holdings are transparent and reported regularly. 

Mutual funds do not engage in proprietary trading. They do not 

pose systemic risk. They do not have the attributes of systemically 

important financial institutions, based on the FSOC factors, and 

they should not be designated as such. 

Vanguard has always been willing to discuss the interest of mutual fund investors with legislators and regulators. We respectfully 

caution against duplicative regulation that has the potential to 

limit innovation, raise the cost of investing, stretch the resources 

and time of fiscal constraint—unless there are clear benefits to investors. 

We believe that mutual funds already benefit from multiple layers of investor protection in the form of strong securities laws, an 

effective regulatory agency, a keenly competitive industry, an educated consumer, and a vigilant news media. 

Thank you very much for this opportunity to share our views. We 

would be happy to answer any questions. 

[The prepared statement of Ms. Stam can be found on page 89 

of the appendix.] 

Chairman GARRETT. Thank you, Ms. Stam. 

Professor Stulz? 

STATEMENT OF RENE M. STULZ, REESE CHAIR OF BANKING 

AND MONETARY ECONOMICS, AND DIRECTOR OF THE DICE 

CENTER FOR RESEARCH IN FINANCIAL ECONOMICS, OHIO 

STATE UNIVERSITY 

Mr. STULZ. Chairman Garrett and members of the subcommittee, 

I thank you for giving me the opportunity to testify at this hearing. 

My name is Rene Stulz. I am a professor at the Fisher College 

of Business of the Ohio State University. 

Systemic risk is used everywhere, all the time within the regulatory community. At the same time, it is rarely defined and almost 

never quantified, which makes possible a lot of mischief. 

My definition of systemic risk is that it is the risk that the financial system becomes incapable of performing one or more of its key 

functions in a way that prevents normal economic activity. 

To justify regulation in the name of preventing systemic risk, it 

is important to assess both the costs and the benefits of that regulation. Any systemic designation should be based on objective and 

quantifiable criteria. 

On economic grounds, there is no reason to believe the specific 

mutual funds, mutual fund complexes or management companies 

should be designated as systemically important. 

17 

The asset management industry plays a critical role in our economy by managing the funds of investors. The failure of a player in 

that industry in performing its role does not create a systemic risk. 

If one player runs into trouble, another player can take its place. 

There is no evidence that the asset management industry created 

systemic risk during the recent crisis, except in one segment: the 

money market fund segment. 

Rather than designating money market funds as systemically important, it would make more sense to eliminate the features of 

money market funds that create systemic risk. 

By their very nature, money market funds are prone to runs. 

When investors run from funds, this forces funds to sell assets and 

disrupts the provision of short-term funding in the financial system. 

In 2008, the run was started by losses on Lehman investments 

at one fund, the Reserve Primary Fund, which was forced to redeem shares at less than $1. 

In the 2 weeks following the bankruptcy of Lehman, more than 

$400 billion left prime money market funds. Further, money market funds sold assets to become more liquid to cope with further 

redemptions. Runs and anticipated redemptions led to chaos in the 

commercial paper market as well as in the repo market. 

The point of reform of money market funds is not, therefore, to 

make investors in these funds safer; it has to be to make the financial system safer. 

Some might argue that reforms that have already taken place 

have eliminated the problem. This is not correct. Money market 

funds are still vulnerable to runs. 

Further, the large positions of the funds in European banks are 

a source of risk for these funds, as well as for the financial system. 

A recent study finds that the top 15 largest prime AAA funds have 

more than 50 percent of their assets invested in foreign banks—the 

lion’s share of these investments in European banks. 

The key reason why money market funds are prone to runs is 

that they allow investors to redeem at $1, when the market value 

of the fund’s assets is worth less than $1. If the market value of 

a fund’s assets is worth less than $1 a share, it can become rational 

for investors to run, since they receive $1 by redeeming immediately, instead of possibly receiving less if they do not. 

To make runs much less likely, the Squam Lake Group, a group 

of 14 economists of which I am a member, has proposed that the 

money market funds either should have a floating NAV, or should 

have a buffer that could be used to prevent the NAV from falling 

below $1 a share. 

By buffer, we mean resources committed by the management 

company, or by third parties, that absorb losses, so that the fund 

can keep redeeming shares at $1, even if it has made losses. The 

use of a buffer makes it possible to keep the stable value NAV 

mechanism, but largely eliminates the incentives for investors to 

run, since the buffer ensures that the mark-to-market value of the 

shares does not fall below $1, as long as the buffer is large enough 

to cover losses. 

18 

We proposed several mechanisms to create a buffer. Irrespective 

of how the buffer is implemented, we recommend that any buffer 

mechanism should have three important characteristics. 

First, the mechanism should be such that, in the presence of 

losses, the buffer could be replenished quickly. 

Second, a stable value fund should immediately convert to a 

floating NAV fund if the buffer is depleted, so that its value is 

below some minimum threshold. 

Third, once losses have been made, the buffer should be replenished within a short period of time; and if it is not, the fund should 

convert to a floating NAV fund. 

Thank you again, Mr. Chairman and committee members, for letting me testify. I would be happy to answer any questions. 

[The prepared statement of Mr. Stulz can be found on page 205 

of the appendix.] 

Mr. SCHWEIKERT. [presiding]. Thank you, Mr. Stulz. 

As a matter of fact, you are all very impressive. It is amazing 

how close you all came to hitting exactly the 5 minute-mark. 

A couple of odds and ends. One, I just finished, earlier this morning, reading something from the Federated Investors. I would like 

to actually put that into the record. 

And the Chair yields himself 5 minutes. 

I would like to actually continue where you were going, Professor 

Stulz, regarding what you call a buffer. If an account or fund puts 

that buffer, what has that done to its yield? 

Mr. STULZ. In the Squam Lake proposal, which is appended to 

my written testimony, we try to estimate the impact on the yield. 

And our conclusion is that the impact would be minimal. What 

would happen is that the funds would have incentives to be very 

transparent about the holdings. 

Mr. SCHWEIKERT. My concern was actually—and I was actually 

going through your proposal this morning—I was trying to get 

some understanding. Particularly, I come from having once been an 

institutional investor in these types of accounts, and just managing 

lots and lots of cash. 

Sometimes, I could only hold them for 45 days until I had to pay 

salaries for teachers or sheriff’s deputies. But that yield sometimes 

was the salary for another teacher. And so, I am always very, very 

yield-centric, if that buffer does much damage on that rate of return. 

Mr. STULZ. Our conclusion is that it would not do much damage 

to the rate of return. 

Mr. SCHWEIKERT. Okay. 

Professor Bullard, it is almost the same question. And then, you 

actually said something interesting in your testimony about access 

to the window. Could you also expand—first the question, and then 

expand on that? 

Mr. BULLARD. It is partly just a flat disagreement with the view 

that a buffer can change the fundamental causes of systemic runs. 

And to give you an example, I have read the Squam Lake proposal. They suggest that 3 percent might be a reasonable buffer. 

If the Lehman Brothers holdings had been 4 percent, Reserve 

would have failed, the buffer would have been exceeded, and then 

we still would have had a run. And everyone in the institutional 

19 

marketplace will know that. There is no relationship between that 

and what actually causes that kind of systemic failure of trust. 

A liquidity bank that has access to the discount window has the 

potential to create that kind of change in attitude of institutional 

investors, who really are the only ones who would lead a run. I 

think retail investors would have followed in September, but they 

were the only ones who would lead a run, and they are the ones 

we should focus on. 

But we cannot know that. And not being an economist, I am not 

willing to say that I do know the answer to that. 

I do know the answer that full faith and credit solves the problem. But I think a liquidity window certainly has a high enough 

probability of changing their attitude that it would actually prevent 

precisely the kind of run that a buffer would fail to prevent. 

Mr. SCHWEIKERT. And don’t harp on not being an economist. 

Around here, if you are an economist, we get two or three answers. 

Mr. BULLARD. I think it is a badge of honor. 

Mr. SCHWEIKERT. Mr. Stevens, give me pros and cons on floating 

up and down over the net asset value. 

Mr. STEVENS. I am harder pressed to do the pros than the cons. 

I think many of the people who have suggested floating the NAV 

understand implicitly that, as a result of that, we won’t have 

money funds as we know them any longer. And that would be just 

fine with them. 

If that is a pro, that is, I think, what they have in their minds. 

The con is that, as has been observed already, the money will go 

from institutions into unregulated parts of the financial system, 

and we will be replicating the same risks that are perceived here 

with respect to money funds. We will just be doing it elsewhere, 

where the SEC is not overseeing it and it is not as transparent. 

Much more importantly, though, we will put at risk the whole 

mechanism that funds corporations, and State and local governments, individuals who are accessing the credit markets. For that 

matter, even the Treasury’s auctions depend very substantially on 

money market mutual funds’ participation. 

So it would be a real shock to the current funding model, a real 

shock to those people who depend upon money market mutual 

funds for critically important financing. And it would not solve the 

systemic risk issue. 

Mr. SCHWEIKERT. Okay. And we probably barely have time to 

touch on this. 

Ms. Stam? 

Ms. STAM. Yes. 

Mr. SCHWEIKERT. In today’s world, with one of these funds, what 

do you think your regulatory cost is, compared to what it may expand to with some of the discussions? 

Ms. STAM. I have to say, interestingly enough, the Vanguard 

funds have been operating under very conservative money market 

regulations for some time. 

And so, the enhancements to Rule 2a-7 that were adopted recently are very consistent with the way we have managed these 

funds historically. So there has been not much of an incremental 

cost to those changes. 

20 

When we think about the other suggestions that have been put 

on the table—buffers of different types, and so on—there is certainly a cost associated with them. And that is something that we 

will have to evaluate as to whether these are workable solutions. 

We would hate to burden the money market fund investors with 

a cost that would essentially make the product unusable for them. 

Mr. SCHWEIKERT. I am over my time. And you will have to forgive me, but having been a treasurer of a large county, I was always—the safety of principal return was always number one. But 

that constant concern, that little bit of yield is what helped employ 

that next teacher. 

Five minutes to Mr. Green? 

Mr. GREEN. Thank you. I will yield to Mr. Lynch, and then I will 

proceed next in the rotation. 

Mr. SCHWEIKERT. Mr. Lynch? 

Mr. LYNCH. Thank you, Mr. Chairman. 

Thank you, Mr. Green. 

First of all, I want to agree heartily with the testimony of Mr. 

Stevens and Mr. Goebel in terms of the value and opportunity that 

mutual funds have created for working-class families that I represent in my district. 

I have companies like Procter & Gamble, Gillette—and I came 

out of the ironworker industry myself, the building trades, and I 

know there are a lot of hard-working families out there who, at a 

very low cost, are now able to invest and, over their working lives, 

accumulate significant wealth because of the structure and stability of mutual funds. There is great support here for that. 

I do want to talk about how most of the controversy here has 

been focusing on the Reserve Fund and breaking the buck. And I 

just know that there is less and less support in this body and in 

the Senate for government guarantees, where the good faith and 

credit of the American taxpayer is at risk. 

That is what intrigues me about your testimony, Mr. Goebel, regarding this buffer for the money market mutual funds as a private 

sector response to this, where the taxpayer is not at risk, and that, 

over time, incrementally, a buffer would be created. 

Could you go over that? I know that is an industry response. I 

think it is thoughtful. I think it is responsible. I think it could 

work. 

I just need to hear a little bit more about it, if you would. 

Mr. GOEBEL. Sure. Thank you, Congressman. 

The fundamental premise that we have is that, to the extent 

there is additional residual risk in the product that has not been 

resolved—and I should pause and say, that is still an ‘‘if’’ for us, 

the significant liquidity. 

One of the issues in Lehman and the crisis that followed from 

Lehman was that institutional investors did not know what was inside our portfolios. They did not have the visibility into what the 

actual holdings were. 

It is very common now, in the institutional space in particular, 

to disclose full holdings within a day or two. So there is much 

greater transparency. 

If there is an institutional investor out there who has questions 

or concerns about what is inside one of our funds, they can find out 

21 

very quickly and very easily. The liquidity changes, the transparency changes have really been significant. 

The idea of the buffer is to say that we do not think that the government should be standing behind these products. We recognize 

that there is some risk in them. They are an investment product. 

Shareholders are putting their dollars with us, and our job is to return stability of the principal, liquidity, and yield, in that order. 

So what our approach is, to say that yield, a piece of that yield 

over time, shareholders, we think, will accept a reduction in that 

yield in order to enhance the stability of the product. 

The question that was asked earlier of the panel was, how much 

of the yield, how much of a cost is this going to be? And the answer 

to that question is, you tell me how quickly you want to get to the 

buffer, and I will tell you how much it is going to cost. Because if 

it is 30 basis points, and you take 5 basis points a year, that is a 

6-year issue. 

One of the questions that we have with all of the issues with 

Basel III and banks increasing their capital liquidity is, how quickly can we get to the right level of protection? And we submit that 

this product is very safe and secure today. But the added idea of 

taking a little bit of the yield from time to time out of what shareholders would otherwise receive, fully disclosed, so shareholders 

can understand what they are getting, is a pretty elegant solution. 

And the reason for that, the reason why we think it works in the 

marketplace, is that a shareholder can make a decision about the 

yield that it or he or she is receiving on that product. And if they 

do not like the yield, they can go to another product. 

So over the last 20 years, roughly, money market—taxable 

money market funds have returned 150 basis points more than 

banks. We believe, in a normal rate environment, taking 5, 6, 7 

basis points of that yield and diverting it into this buffer idea is 

a reasonable trade-off, and shareholders will continue to invest. 

Mr. LYNCH. Okay. Thank you. 

I do agree that the situation with Lehman, the death knell there 

was really the lack of transparency, the uncertainty. No one knew 

what kind of product exposure was. And that is a much different 

situation than what we have here today. 

I know I am short on time, but Mr. Stevens, do you have anything you want to add to that? 

Mr. STEVENS. I think it is an idea that is worth very serious consideration, and I would say it is among a number that the industry 

participants and the institute have developed. 

And I would just reiterate the points that I made. As we consider 

these things, I think they need to be held up to two standards. Do 

they maintain the utility of the product to the investor, number 

one? And number two, are they going to still be consistent with 

maintaining a robust array of advisers who want to be in this market and to provide these funds? 

I think those are the two criteria appropriate to begin thinking 

about what additional reforms should be. 

Mr. LYNCH. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Mr. SCHWEIKERT. Thank you, Mr. Lynch. 

Mr. Dold for 5 minutes. 

22 

Mr. DOLD. Thank you, Mr. Chairman. 

Professor Stulz, a question for you. In your testimony, you urged 

regulators to refrain from designating financial firms as systemically important until they can accurately set forth an objective and 

quantifiable criteria to define the term. 

Can you give me some examples of some objective and quantifiable criteria Congress and the regulators can use to define a systemically important firm? 

Mr. STULZ. Financial economists have developed models that look 

at the impact of a shock to one firm on the rest of the financial system. And so, the use of models of that type would provide an objective benchmark for whether an institution is systemically important or not. 

So you would want to see, based on historical evidence or based 

on simulations, what would happen to the financial system if a particular institution runs into trouble. If such models were used, it 

is inconceivable to me that the asset management industry would 

show that it has a systemic impact. 

Mr. DOLD. Can you give me just some sort of an idea of how 

many firms out there right now would get the SIFI designation, 

that you believe are systemically important financial institutions? 

Do you have a number? 

Mr. STULZ. I do not have a number, but I believe that the number would not be in the hundreds; it would not be more than 50. 

I think we should be very careful in giving that definition, and we 

should make absolutely sure that there is enough objective evidence that the failure of the institution would have systemic consequences. 

Mr. DOLD. Okay. Thank you so much. So you are basically at 

about 50; I have heard a couple of dozen would be the most. 

Mr. Donohue, what is your assessment on that? How many firms 

do you think right now would qualify for an SIFI designation, or 

should be qualified? 

Mr. DONOHUE. I am not sure I am well informed enough to make 

that judgment. I would say, as I have said in my testimony, that 

absent extraordinary circumstances, I do not see asset managers, 

traditional asset managers or mutual funds being within that class. 

Mr. DOLD. Just continuing to follow up with you, sir. In your 

opinion, has the SEC oversight of mutual funds worked in the 

past? And what can be improved internally within the SEC to better regulate those funds? 

Mr. DONOHUE. I am a strong supporter of the SEC’s role in regulating mutual funds. I had an interesting seat during the financial 

crisis, heading up the Division of Investment Management. 

The expertise that exists inside the SEC, the understanding of 

the mutual fund industry and how it operates, and the way that, 

in fact, the SEC has operated with regard to mutual funds over the 

years, I think is a testament to the right regulation of an industry. 

And I think the growth of the industry during that period is testament to that. 

That does not mean that there are not challenges. It is a 70-plusyear-old statute that the Commission has to—they have a tool in 

order to adjust the statute, the ability to do exemptive and other 

23 

type of relief. But that is time-consuming and does take resources 

that the Commission then has to have in order to adapt. 

I think they have done it well. I think, if they do not have adequate resources in order to do it, then the robust regulatory regime 

that funds have had may be compromised. 

Mr. DOLD. Thank you. 

Professor Bullard, if I can ask you, in the absence of the government bailout under TARP, how many money market funds do you 

think would have failed? 

Mr. BULLARD. I am not sure there is any evidence that suggests 

that the TARP bailout had an impact on the survivability of any 

particular money market fund. And that was quite a different kind 

of exercise in the socialization of risk that we see banking regulators engaged in. 

So I would say, I do not think anyone can know the answer to 

that, but my guess is close to zero. 

Mr. DOLD. Okay. In light of that, do you think it is necessary 

that the government be a backstop to money market funds? 

Mr. BULLARD. There are a couple of different levels on which to 

answer that question. 

As an overall systemic regulation question, money market funds 

should be regulated considering the context in which all short-term 

cash is regulated, which is why I couple my recommendation of deposit insurance necessarily with weaning banks from their overreliance. 

Within the context of money market funds, I would probably say, 

‘‘no.’’ I have a somewhat iconoclastic view of what really happened 

in the crisis. Money market funds were safe before; they were safe 

after. 

I would not have supported any of the improvements the SEC 

has made to the safety of the objective portfolios that have been 

done to-date. I support the operational changes, the liquidity 

changes. 

But in terms of whether the product itself has actually become 

meaningfully safer, I think that is simply an incorrect assumption 

and has essentially been giving into political pressure. 

And what you are going to find in a few years is, the ICI is going 

to tell us how many basis points that shareholders in money market funds have lost because of it, without any real meaningful 

change in safety. 

On the other hand, systemic risk is a different thing. There is a 

good argument that there should be some kind of systemic risk 

management put into place. And for that purpose, as I said, it 

needs to be something that will force money market fund shareholders to think differently about money market funds as a structure. 

And the only way you can actually do that is not a buffer, is not 

capital requirements, is not increased liquidity, is not greater safety. There is only one thing out there, and that is some kind of Federal guarantee. 

And the discount window by itself probably would be sufficient 

to bring about that change in perception of money market funds, 

while costing the government as little as possible in terms of the 

costs of socializing risk as a general matter. 

24 

Mr. DOLD. Thank you so much. 

Mr. Chairman, I yield back. 

Chairman GARRETT. Thank you. 

Mr. Green? 

Mr. GREEN. Thank you, Mr. Chairman. 

And to the witnesses, thank you again for appearing. 

The financial system depends greatly on confidence, and confidence depends greatly on transparency. 

With reference to the money market system, is there sufficient 

transparency? Is there more that we can do to enhance transparency such that we enhance the confidence in the system as a 

whole? 

So let me just ask such that I do not go down to every person, 

if you think there is more that we can do in the area of transparency, would you just kindly extend a hand into the air? 

Anyone? All right. 

Yes, sir, Mr. Stevens? 

Mr. STEVENS. I would say, in the dialogue around this issue, 

there is a sense that some believe that shareholders do not understand the risks of money market mutual funds enough. 

We are almost victims of our own success here. Our track record 

in maintaining that stable NAV per share is really quite extraordinary. It has gone on for 30 years. Only two money market mutual funds have ever broken a dollar. 

In the case of the Reserve Primary Fund, shareholders lost a 

penny on a dollar under circumstances where many other investors 

would have thought that was a great day in the market for them. 

To the extent that they do not understand it—even despite the 

fact that the prospectuses say these funds are not guaranteed, they 

are not insured by the FDIC or by the United States Government— 

we can try to make sure, in blaring headlines, we communicate 

that to people. 

That might be a useful thing to remind everyone, that these are 

investment products. They have risks that are quite minimal. And 

people need to understand that as they invest in them. 

I would like also just to mention something about the systemic 

risk issue. And you have to think about money market funds in 

September of 2008 in a context. 

The context was essentially a paralysis in the short-term, fixedincome markets that affected every market participant, not money 

market mutual funds uniquely by any means. It was a crisis in the 

banking system that paralyzed the markets in which we invest. 

What we needed then, Congressman, was not a Federal guarantee. In fact, we never asked Secretary Paulson for a guarantee. 

We were kind of appalled, because we knew the consequences when 

it was extended. 

What we wanted was liquidity in the markets in which we invest, particularly the commercial paper market. 

And we may have another crisis one day in that market. Fixing 

money market mutual funds is fine, and we think that is important. But we also ought to attend to the reality that we are going 

to need to have liquidity provisions in that market, as well. And 

there is no possibility of that at the moment. 

25 

Mr. GREEN. As we review and reflect, obviously, Lehman comes 

to mind and the cascading impact that it had on the entire economic system. 

How do you avoid that, given that it generated a run? And once 

you get a run, it sometimes is difficult to stop the run. 

So how do you do that, and under those economic circumstances? 

I understand the liquidity argument. But how do you prevent, 

how do you stop the run or prevent it? 

Mr. STEVENS. We spent—as a result of the Treasury Department’s White Paper and the President’s Working Group Report 

suggesting the desirability of exploring a liquidity facility—the institute and its members spent almost 2 years putting together a 

very detailed model of how such a facility might work, formed as 

a commercial bank, capitalized by sponsors of prime money market 

funds and by shareholders in prime money market funds, and as 

a commercial bank regulated by the Fed and overseen as a bank, 

but available as a dedicated market-maker in commercial paper 

should there be a liquidity crisis in that market. 

It would be able to make a market for money market funds, 

prime money market funds, and in the worst circumstances, could 

access the discount window. 

Mr. GREEN. I am going to let you continue, but let me intercede 

for just a quick second. 

Is it anticipated that in the shadows, there will be the hidden 

hand of the government? 

Mr. STEVENS. I was going to say, the only hand of government 

here, other than overseeing the institution, would be that it would, 

just as every other commercial bank, have access to the Fed’s discount window in the worst kinds of circumstances. But it would do 

it with the haircut and at the expense of the institution and its 

participants, just as would be the case with every other commercial 

bank—so, no different than others. 

Mr. GREEN. Thank you, Mr. Chairman. 

Chairman GARRETT. And I thank you. 

I will recognize myself. 

Along those lines, first of all, as far as the glaring statements as 

to evidence that these things are not guaranteed by the government, of course, that was the case. 

I have a little bit in a fund, and any time you call up to have 

a transaction and find out what is going on, the recorded message 

there is exactly that. Right? It is telling you that this is not guaranteed by the Federal Government, until after the fact, you found 

out that it really was. 

Mr. STEVENS. And, Mr. Chairman, that is a circumstance that we 

would very much like to avoid ever again in the future. As an industry, we are not seeking a guarantee of any kind from the government. 

Chairman GARRETT. Right. 

Could you just elaborate a little bit as to what your protestation 

was at the time when this was going on, as far as to the Secretary. 

Were you saying, ‘‘Stay away, we do not want this?’’ 

Mr. STEVENS. No. We thought the problem was liquidity. And if 

the markets in which we invest could be jump-started—as eventuVerDate Nov 24 2008 18:08 Sep 15, 2011 Jkt 067937 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\67937.TXT TERRIE
26 

ally they were through the Fed’s facilities—then that would solve 

the problem. 

The guarantee was perhaps an appropriate response to an extraordinary crisis, and it certainly did bolster confidence. I think 

most people did not understand how limited the guarantee was. 

What the guarantee was, was if a fund is at risk of breaking $1, 

it would have to immediately suspend redemptions and liquidate 

its shares. The level of risk to the Treasury was intentionally very 

small. 

All of our funds participated and paid $1.25 billion in premiums. 

There were no claims against the guarantee. 

Chairman GARRETT. So one of the solutions out there that we 

talked about already is a floating NAV. 

The question then is, let us say we did that. Would that preclude—and I will just open this to anyone—would that absolutely 

preclude basically what we are talking about here, a next run on 

the bank, so to speak? 

Mr. GOEBEL. I would like to take a crack at that. 

Chairman GARRETT. Sure. Okay. 

Mr. GOEBEL. The floating NAV idea we have talked a little bit 

about. We do not think it works for several reasons. One is, we 

know shareholders do not want it. 

We have surveyed our shareholders. Depending on the segment, 

between 70 and 90 percent prefer the stable NAV. The tax and accounting issue is more complicated. 

If you believe that floating the NAV means that the product will 

go away, if that is the goal, then floating NAV may not be a bad 

policy choice. But if you believe that money market funds are an 

important vehicle for investor savings and an important element of 

the short-term funding that goes on for municipalities, then floating NAV is a bad idea. 

Chairman GARRETT. Let me just stop you right there. Part of the 

answer of why you do not want it, or why they do not want it, is 

because of that dependency for short-term financing by corporations. 

Is part of the problem then, maybe, that there is just too much 

reliance—you said municipalities, but others—on these funds for 

short-term financing? 

Mr. GOEBEL. I think—first of all, the business model that was 

the poster child for overreliance on short-term funding no longer 

exists. There have been significant changes in the marketplace. 

I know we are going to talk a little bit about European banks 

later, but as we get into that conversation, the lessons of overreliance on short-term funding have been learned by participants in 

the marketplace, as well. So there are very different approaches to 

liquidity, very different understanding of how much short-term 

funding ought to be used by a particular entity. 

Money market funds are investors investing in the very shortest 

part of the market, trying to get our money back. And we do, like 

other very short-term investors, see the problems that occur in the 

marketplace and react quickly enough to protect our shareholders. 

That is an element of how these products work. 

Chairman GARRETT. Okay. 

27 

Professor Stulz, there seems to be not much love for the floating 

NAV. 

Mr. STULZ. I still think that it should be pursued and that we 

should study it very carefully. 

The great advantage of the floating NAV is full transparency. 

The investors know exactly what the value of their investment is. 

Currently, they really do not 

They can withdraw their money at $1, but that is not the value 

of the shares. It is not the fair value of the shares. 

The floating NAV has the advantage of the transparency. It has 

the advantage of removing the free option that investors have 

under the current system that leads to runs. 

The floating NAV has some advantages. I agree that it has operational difficulties, and I think the ICI report describes them extremely well. 

Chairman GARRETT. I apologize, but I want to quickly get to you 

with regard to SIFIs and your comment that the regulators should 

not be declaring some of these financial institutions as SIFIs until 

they can accurately define what a systemically important institution is. 

Are you able to help set forth what that criteria should be? 

Mr. STULZ. Financial economists have come up with a number of 

models that are helpful in answering that question. 

And so, yes, the answer is that I could help. 

Chairman GARRETT. Okay, that has been one question we have 

grappled with here from the day that former Chairman Frank 

raised the issue, that we need to go after these systemically important institutions, to the time that we had Secretary Geithner here, 

and Chairman Bernanke. 

And we could never quite ever get anyone to actually define exactly what we were talking about in this situation. 

But I appreciate your answer. 

The gentleman from North Carolina is recognized. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

One striking lesson from the financial crisis is that there were 

enormous aspects of the financial system that no one knew anything about. Americans in general did not know anything about it. 

And really, no one in Congress knew anything about it, I don’t 

think, including members of this committee, including me. 

And I do not think it was because we lacked diligence—not in 

every case. It was because there was nothing to call our attention 

to some of what was going on, some of the changes in the market, 

in the financial system. 

And those who really did know about it did not see any percentage at all to calling our attention to it, one of which was the repurchase market, the repo market. At the time of the crisis, that was 

described in the press as a freeze in interbank lending. But it really was a traditional run. 

The only proposal that seems to—and, as I understand it, the 

repo market was approximately the same size every night in daily 

lending as all deposits. So, it was enormous. 

And no one knew the first thing about it, and there was no regulator even breathing on it. And the run in the repo market around 

28 

the time of Lehman—and really before that, Bear Stearns—is what 

precipitated most immediately the crisis. 

Has anything changed? There has certainly been no regulatory 

change. But is there any reason to think that the repo market is 

less vulnerable to a run? Is there any more market discipline in 

who financial institutions will lend to through the repo market? 

Professor Bullard, you talked about the possibility of runs in the 

money market, money market funds. Have you given any thought 

to that? 

Mr. BULLARD. I do not follow the repo market as such. But the 

problem with the repo market is that it gives a superficial sense 

of confidence, in that it looks like something that is almost immediate cash, and it is easy to forget that what stands behind it is 

a single counterparty, which presents a significant issue of risk. 

The Rule 2a-7, which regulates money market fund holdings, has 

long regulated repos in, I think, the right way, by understanding 

that you have an issuer standing behind that repo. And I am not 

aware of any problems in the money market fund world that have 

stemmed from repo liquidity or value as such. 

Mr. MILLER OF NORTH CAROLINA. Mr. Goebel? 

Mr. DONOHUE. If I could jump in, actually, when 2a-7 was 

amended, actually, the repo positions—position—in 2a-7, which is 

the rule that governs money market funds, was strengthened with 

regard to what is called the look-through rule on whether or not 

you had to look just to the counterparty or whether you could look 

through for the underlying collateral. And you can only look 

through the underlying collateral if it is government securities 

now. 

I think it has been strengthened inside money market funds, not 

because money market funds had issues, but rather looking forward to ensure that actually money market funds do not have 

issues going forward with regard to having to liquidate their collateral on repos. 

Mr. MILLER OF NORTH CAROLINA. But not all the repo market 

was through money market funds. Money market funds may have 

been participants in the market, but there were mutual funds who 

were participants beyond the money markets. Isn’t that correct? 

Mr. GOEBEL. Yes, that is correct. 

Mr. MILLER OF NORTH CAROLINA. Mr. Goebel? 

Mr. GOEBEL. That is correct. 

There is some work going on. The New York Fed has a tri-party 

repo commission. There was an understanding that there is a concentration of risk in certain aspects of the structure, the way repos 

are actually effected over the course of the day. 

There is a group that has been working on greater transparency, 

removing that intra-day risk, understanding how the confirmation 

process works, so there is better understanding in the tri-party 

repo market. There is also work to create different liquidity sources 

in case there are issues within the repo market. 

So there is definitely work under way to strengthen the way the 

repo market operates. 

If your observation is that there is an investment decision made 

every day by money market funds and others to participate in the 

repo market, that is certainly true. There is cash that needs to be 

29 

invested overnight. There are securities that are available for this 

market. And that is something that is important to the way the 

markets operate today. 

Mr. MILLER OF NORTH CAROLINA. Okay, I think, actually, the 

concern by the critics of the repo market was that there were not 

really decisions being made every day, it really was reflexive, until 

it got to the point that Bear Stearns got to, or till it got to the point 

that Lehman Brothers got to. 

Chairman Bair’s concern, and the FDIC’s concern, is that, instead of identifying a firm that was in trouble earlier when the resolution of that firm would not be quite so expensive or complicated, 

the run on the repos usually left—the collateral required and all 

the rest—left firms in a crater. They would hit Earth and leave a 

large crater, which made it very hard, much more expensive, and 

much more complicated, with much more systemic risk resulting 

from that. 

Mr. GOEBEL. Can I just say that, when we think about repo, we 

ignore the collateral. We receive full collateral for the investments, 

but we assume that we have to look to that counterparty to make 

that investment good. 

So we are very careful to evaluate the counterparty risk of every 

repo trade that we enter into. 

Mr. SCHWEIKERT. [presiding]. Thank you, Mr. Miller. 

Chairman Neugebauer? 

Mr. NEUGEBAUER. Thank you very much. 

I want to associate myself with some of my colleagues who spoke 

earlier about the fact that we have almost made an implied guarantee of money market funds by the fact that the government 

stepped in. 

And that is something we have to fix, because we cannot let companies pick up the profits, and the taxpayers pick up the losses. 

And so, I think this is healthy discussion. 

One of the things that—and I am not necessarily associating myself with the floating asset value concept at this particular point 

in time, but I do—we have to think about, if you are going to classify yourself as an asset manager, at that point where the value 

of the underlying securities is less than what you are obligated to 

pay, you are moving away from an asset manager to you have created a security that comes with an obligation to the firm managing 

those assets. 

And so, I guess one of the questions I would have of the panel 

is, where am I missing the fact that creating that additional liability then brings into question, why wouldn’t—if the taxpayers eventually pick that up, wouldn’t that have some systemic implications 

to it? 

Mr. STEVENS. Congressman, may I try to provide one part of the 

answer? 

Mr. NEUGEBAUER. Sure. Absolutely. 

Mr. STEVENS. We actually have looked very carefully at a group 

of money market funds and how the pricing of their portfolios has 

been done over time. While the funds transacted at $1 per share, 

they also marked their portfolios to market and carefully examined 

the extent to which the market value deviates from that $1 above 

or below. 

30 

We actually issued a paper, which I would be pleased to submit 

for the record here, and what we find historically is that the deviation up or down is extraordinarily minuscule, even if you bring 

several places to the right of the decimal. 

And the reason for that is because the securities in which the 

fund is investing are very short-dated, so they do not have much 

interest rate risk. They are extraordinarily high quality, so they do 

not have much credit risk. 

They are expected to be held to maturity and, therefore, can be 

valued at their amortized costs. And that is the accounting treatment that allows them then to maintain that $1 per share value. 

Mr. NEUGEBAUER. Let me stop you there for just a second. You 

talk about maturity and credit quality. How about concentration? 

Mr. STEVENS. Yes, the concentration is limited under the rule, as 

well, so you do not have exposure, overexposure in the fund to an 

individual name. There are new rules with respect to the weighted 

average maturity of the portfolio as a whole, the weighted average 

life of instruments in the portfolio. 

The experience of the industry under Rule 2a-7 over time has 

been—with the exception of glaring circumstances of the sort that 

the Reserve Fund found itself in with the credit difficulties that 

Lehman Brothers presented—that the transacting at $1 really does 

represent, from a shareholder perspective, the value of its, or his, 

or her interest in the portfolio. 

And the degree of success that was had is remarkable. There has 

actually been a third of a quadrillion dollars—we don’t think about 

quadrillions much, even in the Congress—but a third of a quadrillion dollars that has gone in and out of money market funds over 

their history without the loss of any principal to the shareholder. 

It shows you the level of success that these rules and the industry 

have had over 30 years. 

Mr. NEUGEBAUER. Yes, we try not to use that word around here, 

because we do not want the Congress to know that there is something after a trillion. 

[laughter] 

Mr. STEVENS. That is a thousand trillion. 

Mr. NEUGEBAUER. Yes, I know. 

I think the other question is, and when we go back and rewind 

the tape to 2008, what about the amount of underlying capital that 

an entity holds versus the amount of issue that they have and 

where they have the ability to maintain that commitment, if you 

are going to continue? 

Does one of the other panelists want to dive into that? 

Mr. GOEBEL. Just to clarify the question, are you asking about 

the size of capital that might be required to support any one of 

these ideas? 

Mr. NEUGEBAUER. Yes. 

Mr. GOEBEL. There are a couple of different theories. One that 

you heard was that there needs to be enough money set aside to 

avoid any fund ever breaking a buck again. In 2008, it was 3 cents 

on Lehman—in the Primary Reserve Fund, excuse me—and even 

though, eventually, shareholders received 99 cents. 

Our approach is different. Our approach is to say that there is 

a cushion, there is an amount of money that is appropriate to set 

31 

aside. And it is enough for shareholders to understand what is happening. It is enough to, over a period of a 10-day crisis—we have 

a chart in our attachment that explains what happens over a 10- 

day crisis, assuming certain lock-up in liquidity and diminution in 

value within the underlying securities and 60 percent of the fund 

leaves—you still have a dollar left for your shareholders. 

With a relatively small buffer, what you really do is buy time. 

You buy a chance for the markets to resettle. You will buy a chance 

for investors to really understand what is happening. 

And, ultimately, if a board, a mutual fund board and the adviser 

conclude that they have a product that is no longer viable, it 

should be okay, again, for a money market fund to shutter its doors 

and say, we are going to return your money to you, and the rest 

of the system can continue to operate. 

Mr. BULLARD. If I could just add one point to that? 

Mr. SCHWEIKERT. I hope you will forgive me. Any objections to 

another 30 seconds? 

Please continue. 

Mr. BULLARD. I just wanted to add that, thanks to a recent innovation, a really brilliant innovation that we have Mr. Donohue to 

thank for is that you can go online now. You can look historically 

at the NAV of these money market funds. 

I have done that. The first one I looked at was 1.000. The second 

one I looked at was 1.0000. I guarantee you, the first one to start 

showing up at 0.9999 is going to start losing assets. And that is, 

in some ways, the best answer to the point that Mr. Stevens was 

making. 

This is now very transparent. It is very obvious. 

I can tell you, if you took bank balance sheets and you started 

forcing them to do that, we would see very different behavior in the 

bank sector, as well. 

Mr. NEUGEBAUER. So you believe there is market discipline concepts built into the system? 

Mr. BULLARD. Yes. Enterprising financial journalists cannot wait 

to write the article about the money market fund that is routinely 

falling under that 1.0000 number. 

Mr. SCHWEIKERT. Thank you, Chairman Neugebauer. 

Mrs. Maloney? 

Mrs. MALONEY. Thank you, Mr. Chairman. 

And welcome to all the panelists. 

I would like to ask Mr. Stevens, you may recall during the DoddFrank markup that I offered an amendment, which was accepted, 

to include leverage as part of the criteria for deciding whether a 

non-bank should be designated an SIFI, a systemically important 

financial institution. 

As major financial firms were failing during this crisis, it seemed 

that one of the main problems was the degree to which they were 

leveraged to really outrageous levels. 

Mutual funds and their advisers are not highly leveraged. And 

I am wondering if you believe that the regulators are devoting 

enough attention to leverage. 

Mr. STEVENS. Congresswoman, I do recall the efforts that you 

made in Dodd-Frank, and we appreciated them. And I think your 

insight was exactly correct. Excessive leverage in the system was 

32 

one of the fundamental problems that visited upon us the financial 

crisis. 

One of the reasons that funds came through it so well is that our 

portfolios do not reflect any leverage of that kind. Our maximum 

leverage ratio is 1.5-to-1. And any borrowing that a fund does has 

to be covered by assets so that its indebtedness would be, if you 

will, secured. 

That has been in our DNA, if you will, since the Investment 

Company Act was passed in 1940. And I think it is a fundamental 

strength of our institutions. 

I hope, frankly, that it will be among many factors that would 

persuade the FSOC that SIFI designation is not appropriate in our 

case. 

Mrs. MALONEY. I would also like to ask you and Professor 

Bullard, I recently read an article in the Financial Times, which 

was written by Professor Robert Pozen, who is an economist and 

former mutual fund executive, and who is now a professor at Harvard University. 

And I request unanimous consent to place this article in the 

record. 

Mrs. MALONEY. So granted? 

Thank you. 

And in this article, Professor Pozen wrote that money market 

mutual funds that invest in tax-exempt, short-term instruments 

issued by States and municipalities offer investors an opportunity 

to invest in tax-exempt securities that banks cannot offer. 

If regulators decide that money market funds cannot maintain a 

stable net asset value of a dollar, what would the impact be on the 

availability of these types of investments for consumers? 

Mr. STEVENS. When we have talked to investors about this issue, 

they have told us, in essence, if it is not a dollar in and a dollar 

out, you do not get my dollar. That is true across-the-board. 

But this is a particularly compelling case that you cite, because 

in the municipal finance area, it is not apparent who could pick up 

the shortfall in funding, if you did not have tax-exempt money market funds available. 

There was a question earlier, why do people finance in the shortterm end of the spectrum? And they do it because, in many instances, it is lower cost. And because they are refinancing on a regular basis, they can keep a current rate of interest, in many instances lower than if they are borrowing on a longer term basis. 

For America’s communities around the country, access to that financing is extraordinarily important. And I think Bob Pozen’s 

piece, which I did read, is exactly right about what is at risk if we 

remove that funding from our State and local governments. 

Mrs. MALONEY. Thank you. 

Professor? 

Mr. BULLARD. I agree 100 percent with those comments. 

I would just add, Mr. Pozen is one of the smartest guys in the 

fund industry. I would listen carefully to what he has to say, and 

also reiterate that we are talking about people who are relying for 

their retirement on income that would be threatened by removing 

that product from the marketplace, especially as we inside the 

33 

Beltway know so clearly that exemption, just having been taken 

away from D.C. residents, I think, just in the last month. 

Mrs. MALONEY. Ms. Stam, in your testimony, you noted that the 

SEC’s recent amendments to money market fund rules have significantly improved the funds’ safety, liquidity, and resiliency under 

extreme market conditions. 

Do you believe that these recent reforms constitute a sufficient 

amount of reform to the money market fund industry? Or should 

the SEC pursue additional activities? 

And Professor Bullard, if you would respond, as well. 

Ms. Stam? 

Ms. STAM. Yes, thank you. I believe that the enhancements to 

2a-7 have gone an extremely long way to addressing many of the 

concerns that were mentioned here today by a number of the members commenting. 

The amount of increased liquidity, improvements to credit quality, the transparency that a number of members talked about being 

so important to making sure that the marketplace understands the 

value of the money market funds’ investments—we think really it 

has addressed in large measure the concerns that were faced in 

2008. 

To the extent that something is left yet to be done—and I think 

there are proposals worth considering, and we should consider 

them thoughtfully. But the problems that occurred in 2008 were 

really focused on the movement of large institutional investors who 

had a need for intra-day liquidity of their assets. And the run that 

precipitated at the Reserve Fund came from those investors. 

To the extent that we look to put further constraints on this 

product, we ought to think about tailoring the response to that 

market. 

Mrs. MALONEY. Could we have 30 seconds for Professor Bullard 

to respond? 

Mr. SCHWEIKERT. Without objection, 30 seconds. 

Mr. BULLARD. As I noted before, I agree as to the operational and 

liquidity reforms put in place by the SEC. But I disagree as to the 

need for those that go directly to the specific quality of the assets 

they held, with respect to which I do not think there was a good 

empirical argument that there were safety issues, with the possible 

exception of the treatment of auction rate securities. 

Mr. SCHWEIKERT. Thank you, Mrs. Maloney. 

Chairman Royce? 

Mr. ROYCE. Yes, let me ask a quick question to Mr. Bullard. 

You view the assertions as overstated in terms of the threat of 

a European debt problem reaching the point where it impacts 

money market funds here in the United States, in your report. 

Could you walk us through that in terms of—I might agree with 

you, but I just want to hear your thoughts on that. You think it 

is overstated and there isn’t that amount of debt in the money market fund system. 

Mr. BULLARD. What is misleading about the representations we 

have been seeing this week is the characterization of those holdings 

as simple European bank exposure. 

If you look at 2a-7 and the nature of the instruments that they 

would be allowed to hold, they would be essentially the safest, 

34 

shortest-term obligations issued by those banks, many of which are 

a lot safer than some of the banks in the United States. 

I think part of it is driven by a chauvinistic attitude toward anything that is offshore. Part of it is driven by banking regulators repeatedly making assertions about the quality of money market 

fund assets with respect to European banks, while at the same 

time their banks hold long-term obligations of those same European banks. 

What we need, I think, is the SEC to come out and do what prudential regulators do and do best, which is to say, ‘‘We have looked 

at the innards of these funds. We have looked at what they hold, 

and this is what we can tell you about them. They are safe. They 

are extremely short term. And money market funds are not vulnerable.’’ 

Mr. ROYCE. Let me go to a question where I disagree with you, 

and that is your proposal for Federal insurance for money market 

funds. 

It seems to me that moves in exactly the wrong direction, to do 

that explicit Federal backstop, to try to regulate these like a bank 

when they are not in that category. They do not have the leverage. 

They have very different terms of operation. 

It just seems to me that, if you put that backstop in, what it is 

going to do is encourage a whole lot of additional short-term financing, which is the opposite of what we want. 

And so, when economists talk about this moral hazard problem, 

why would we want to go down that path? 

Mr. BULLARD. I agree I would not go down it alone. What I would 

do is go down it on a path that, as I described in an article I wrote 

more fully about this issue, down what I call ‘‘the path of least insurance.’’ 

We need to look at the entire market and look at the total picture of distortions caused by insurance. And while there is a distorting effect of insuring short-term lending, nothing compares to 

the distorting effect and the systemic risk created by insuring longterm obligations, which is the foundation of the insurance that we 

provide for deposits held by banks. 

I agree with you. I would not do that by itself. I think that what 

we need is to move down a path where we are reducing the overall 

socialization of risk in the system, and that any insuring of money 

market funds and other short-term assets should be combined with 

a long-term attempt to reduce the scope of government insurance 

of private sector activity. 

And what has happened in the last 3 years is the opposite of 

that. We have seen a huge expansion of the socialization of risk, 

and I think that we need to look at the big picture. But I agree 

completely with your point as to just money market funds. 

Mr. ROYCE. Yes, I think the problem we have there is, you are 

explicitly expanding the safety net in one more area. And if it is 

60 percent of the financial economy now, you are just ratcheting it 

up. 

But I think, Mr. Donohue, you had something to say? 

Mr. DONOHUE. I wanted to respond to a couple of points. One is, 

I think that the debate that is going on about the European exposure of money market funds is precisely because of the transVerDate Nov 24 2008 18:08 Sep 15, 2011 Jkt 067937 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 K:\DOCS\67937.TXT TERRIE
35 

parency that money market funds have about their portfolio holdings, that may not exist inside other areas of the financial system. 

I think it is a healthy debate. One of the things that gives me 

a degree of comfort is that many institutional managers, many institutions that are very highly qualified, get to see those exposures 

on a frequent basis, and as my co-panelist had mentioned, in many 

cases daily. 

They have not moved their money. They are comfortable with 

those exposures. They have kept them there. 

Mr. ROYCE. Let me go to Mr. Goebel for a question. 

Mr. Goebel, you mentioned that the net asset value buffer funded 

by the money market funds as an alternative would mitigate the 

potential for runs, without, of course, increasing taxpayer exposure. 

And what I wanted to ask of you, Professor Bullard does not believe this is enough to prevent a run. What do you think? Explain 

that argument, if you will. 

Mr. GOEBEL. I differ with the professor. 

What we are trying to do is create an appropriate signal to 

shareholders that they do not need to leave. 

If you imagine you have 30 basis points of extra benefit, extra 

buffer in a fund, the shareholder has a decision. If he or she believes that there is a risk in the fund that they want to get out of 

before that share price drops, they can go. But by going, they leave 

behind a bigger buffer for those who stay. 

So it is both an incentive not to leave, because you can see every 

day that your share is worth more than a dollar. And if you choose 

to leave anyway, those who do not are protected. 

Now, over time you could imagine a massive credit problem, a 

significant crisis in Europe or some region of the world, that 

swamps the buffer. And so, we concede that this is not a solution 

that solves every issue. 

But we think that the buffer, coupled with an understanding by 

shareholders that the Federal Government is not a backstop and 

not a guarantee, this is a private order solution. And you need to 

decide where your dollar is going. Not all money market funds are 

equal. 

We believe we have a very talented group of people who spend 

all day long, resources that are devoted to making sure the credit 

is correct, that we are doing the trading appropriately, that the 

portfolio management is working. And we think that people invest 

with the name of Fidelity, not just because there is a rule out there 

that says you get a dollar back, but because of what we offer. 

And we think that is appropriate in the marketplace for shareholders to be able to make differentiations and really makes the 

whole industry work better. 

Mr. ROYCE. And you think there is enough time to ramp up with 

that? 

Mr. GOEBEL. In the current— 

Chairman GARRETT. And that will be your last question, because 

we do have votes after this. I want to get all the questions in before 

the next vote series. 

Mr. GOEBEL. Certainly. So briefly, we do not think that the—we 

need some time to build the buffer, just like we would need any 

sort of capital support, just like the banks need to get to Basel III. 

36 

We recognize that this is an approach that will take some time to 

build up, but we think that is appropriate. 

We do not want to do something that is so precipitous that the 

product becomes uneconomical, or shareholders decide they do not 

want it. 

One has to strike a balance as to what the end state is and how 

you get there. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman GARRETT. The gentleman from Colorado? 

Mr. PERLMUTTER. Thank you. 

And I want to thank this panel. This is a very interesting conversation that we are having. And, several of us having lived 

through this, as did you, the 2008 collapse, experienced a little 

post-traumatic stress syndrome. 

And to be 2, 21⁄2 years out now, to look back, and try to be objective, Professor Stulz says, as objective as we can be in determining 

what are realistic, reasonable precautions to take to avoid something like this happening again. 

But I guess, when this all occurred, and when it was starting to 

occur, terms came up that I had never heard of before, and I have 

been a litigator sort of in the financial arena for a long time. 

And so, when you said we need to have objective, defined terms 

for what systemic is—and I agree with you, except that is easier 

said than done. 

And now, it made me think of, do any of you know what the gastrocnemius is? Anybody suffered a gastrocnemius? It is a tear of 

the upper calf. I never knew what the heck it was until I did it 

a couple of days ago. But it sure changed my system. I cannot play 

in the baseball game. All right? 

And I had no clue what auction rate securities were, or 

collateralized default swaps. You never know where it is going to 

come from. That is all I am saying. 

As you try to come up with your objective criteria, be a little 

more expansive than narrow. That is all I wanted to say on that. 

This is about confidence, and it is about fear. And when there is 

confidence—and Secretary Paulson, did that overnight guarantee, 

in effect, to bring confidence to the system, where there was a run 

on the system. That was my experience of that day or those weeks. 

FDR did a banking holiday. 

Now, we are back to normal—as normal, I hope, as we can get— 

and continue to develop confidence in the system. 

What I really want to understand—because people do look at this 

as cash. Out there on the street, it is cash. 

Explain to me the difference, really, so I can understand it, between the buffer and the liquidity bank, if you would, Mr. Goebel 

and Mr. Stevens? 

Mr. GOEBEL. Sure. The idea of the buffer is actual dollars that 

sit in the fund, that shareholders can see, that is subject to board 

oversight, that does not involve the Federal Government, to ensure 

that people understand that the incentive to leave does not need 

to be there, if there is one, in a stable NAV product. 

Mr. PERLMUTTER. Is this a fund-by-fund-by-fund buffer? 

Mr. GOEBEL. Yes. 

Mr. PERLMUTTER. Okay. 

37 

Mr. GOEBEL. Every fund would have a buffer. 

Mr. PERLMUTTER. All right. 

Mr. GOEBEL. It would be mandated. 

You could imagine different kinds of funds might have a different 

level of buffer. There are a lot of details to be worked out. But in 

essence, yes, every fund would have its own buffer. 

And so, the real risk that we talk about in money market funds 

is this contagion effect, where somebody goes down across the 

street. I have to worry about what my money looks like over here. 

If that happens, the idea is that there is no collective socialization of the risk. Every mutual fund and every complex has its own 

buffer. 

Mr. PERLMUTTER. All right. So let me stop you, because Mr. 

Schweikert talked about being a treasurer. And I can tell you, a 

lot of treasurers in the State of Colorado—because they were in the 

primary fund. Okay? And we had to deal with the bankruptcy and 

all of that stuff. 

Is the liquidity bank different? Is it a general backstop, Mr. Stevens? 

Mr. STEVENS. Yes. And you can think about the two proposals in 

this way. 

One is designed to make sure that there is not the first fund that 

breaks the dollar. The liquidity facility is designed to, if a fund 

breaks the dollar for credit reasons, to make sure that it does not 

have a knock-on effect by making the markets in which other funds 

invest illiquid as a result of massive redemptions. 

It is a way of helping funds meet shareholders’ demand to get 

their cash out of the fund. It socializes not credit risk, by any 

means; it socializes liquidity available to the industry— 

Mr. PERLMUTTER. Okay. 

Mr. STEVENS. —building it up over time, and essentially dedicating it as a market marker, particularly in the commercial paper 

markets, where there is no one else who serves that function. 

That, it seems to me, was part of the lesson of the crisis, that 

we need to make sure that those markets function well, because 

they are so essential for American businesses. 

The liquidity facility would allow, if you will, money market 

funds to have an opportunity to exchange money, good commercial 

paper, for U.S. Treasury obligations or cash that they then could, 

in turn, meet redemptions with, and it would be put together as 

a commercial bank under the normal supervisory arrangements 

with the banking regulators. 

Chairman GARRETT. Will the gentleman yield back? 

Mr. PERLMUTTER. I was just going to thank the panel, if I could. 

Chairman GARRETT. You got it. 

Mr. PERLMUTTER. Because this is a very good conversation. And 

I think we have to continue it, because now we can look back properly on what happened without just some knee-jerk reaction, and 

really do this, I think, in a good way. And I appreciate the testimony. 

Chairman GARRETT. Thank you. 

Mr. PERLMUTTER. Now, I yield back. 

Chairman GARRETT. There you go. 

Mr. Fitzpatrick? 

38 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I also want to thank the panel for your testimony this morning. 

Professor Bullard, in a recent op-ed opinion piece, you wrote that 

the Department of Labor’s fiduciary duty proposal, as it related to 

401(k)s and pension plans, missed the mark. I think those were 

your words. 

Can you elaborate on how Labor’s rule is flawed and discuss for 

us how you would proceed, or what action we should take? 

Mr. BULLARD. The proposal, I think, is right on the mark in the 

sense that the use of the term ‘‘fiduciary’’ has been unnaturally 

limited by the Department for decades. 

Beyond that, however, the way that the Department approached 

the problem was to put the cart before the horse and expand the 

fiduciary definition that very many people in the industry would 

not be able to conform to in a reasonable period of time. 

And this is because the Investment Company Act, actually, 

ERISA, which is the statute they are interpreting, has a kind of 

shadow set of statutes. There are exemptions. And those exemptions are actually the way that money managers who have ERISA 

clients operate. They live under those exemptions, for the most 

part, not under the actual statute. 

And DOL went ahead and redefined the term ‘‘fiduciary’’ without 

laying out how it was going to modify those exemptions to accommodate the expanded category that it created. 

Now, it may be, and I might agree with them, that some of them 

should not be expanded. But that is a debate that has to be had, 

and is functionally a debate that has to be had, before you expand 

the category. That is what you might call a pro-industry view of 

what is wrong with it. 

The shareholder point of view is that, at the same time it put the 

cart before the horse, it created an exception to the prohibited 

transaction exemptions—prohibitions—that completely swallowed 

the rule. 

It created what is known as a seller exemption that allows you 

essentially to say that, because I am a seller, I do not owe you a 

fiduciary duty. 

And DOL already has a prohibited transaction exemption, I 

think it is PT–71, that covers exactly the kind of transaction. And 

the proposal it created swallows the exemption, greatly expanding 

that category, without any real thought as to whether it is appropriate, especially as to retail investors. 

And to give you an example, it would mean that a mom-and-pop 

who goes and buys a municipal security from their broker would 

not be protected from ERISA, to the extent it should apply. 

That is really just the beginning of the problems that a short oped can deal with. There are problems in the drafting of the rule. 

There is a fundamental problem of the Department’s consideration 

of extending it to individual retirement accounts, which are, fundamentally, not really ERISA vehicles. 

And then finally, a significant problem that is really what caught 

my interest is that the DOL proposal is now interfering with what 

I think should be a primary agenda item for this committee, and 

that is the issue of the fiduciary duty as applied to broker-dealers 

when providing retail, personalized investment advice. 

39 

Mr. FITZPATRICK. How would you suggest that we deal with the 

flawed rule then? Any recommendations? 

Mr. BULLARD. I think that the committee should go ahead and 

narrowly focus on the SEC’s role and use as much persuasive 

power as possible to get DOL not just to delay, but essentially put 

its process on hold until we see how that unfolds. 

The SEC’s fiduciary will overlap precisely with a large percentage of those Commission-based brokers who will become—who may 

become—fiduciaries under the SEC rule and become fiduciaries 

under ERISA. 

And that double whammy is not an appropriate way to go about 

extending regulation, especially when the way the law is structured, it is much more appropriate for the SEC to go first to see 

how that system works before you attack the industry with ERISA, 

which has far many more restrictions, and is far more difficult to 

comply with, than the Federal securities laws. 

Mr. FITZPATRICK. Do any of the other panelists wish to comment 

on that? 

Ms. STAM. I would say that, we have paid a lot of attention to 

this rule. And I think that one of the concerns of the fiduciary 

standard as proposed is that it has the unintended effect of interfering with key services that may be provided to plan participants 

or holders of IRAs. 

And I think it is something that, actually, DOL could address 

quite simply with some thoughtful re-proposal of the provision. We 

are hoping that they could address that. It would be a pity to cut 

off some of the types of services just because there are sort of technical problems with the definition of ‘‘fiduciary.’’ 

Mr. FITZPATRICK. Ms. Stam, my district is Bucks County and 

Montgomery County, so I have quite a few constituents who are 

employees of Vanguard. 

As a significant sponsor of mutual funds, aside from this fiduciary duty issue, what do you think the Congress should be focusing on? 

Ms. STAM. One of the things that we said in our written testimony is that mutual funds have really fared quite well. And when 

we think about what is important to us going forward, we really 

think about the strength and the efficiency and the transparency 

of the market. 

It is why—we are in the financial markets every day on behalf 

of our clients. We expect those markets to be strong and transparent. And we would spend our time looking to make sure that 

those conditions continue to exist. 

It is why we care deeply about the derivatives markets and 

strong regulation of those markets. It is why we care about transparency in municipal markets. It is, frankly, why we care that the 

regulatory activities of the various regulatory agencies are consistent and not duplicative, so that we can deliver efficient and effective returns to our clients. 

Mr. FITZPATRICK. Thank you for your testimony. I appreciate it. 

Chairman GARRETT. The gentleman yields back. 

Mr. Peters? 

Mr. PETERS. Thank you, Mr. Chairman. 

40 

And thank you, panel, for being here with some very interesting 

discussions. 

First off, I want to thank the mutual fund industry for what you 

do. The products that you provide for middle-income Americans 

allow them to save efficiently and invest in important lifetime objectives that we all have, like retirement and saving for our children’s education. And that would not be possible without the variety of products that the mutual fund industry offers. So I appreciate what you do in that regard. 

I want to change gears a little bit in some of the questions that 

have been asked to a different subject, but I know you are all very 

involved in this area. 

Along with one of my colleagues, John Campbell, from the other 

side of the aisle, we have introduced legislation to reform the housing finance market, the GSEs, and unwind Freddie Mac and 

Fannie Mae. There are a number of proposals that have been floating around here in Washington right now to deal with that. 

But as an industry, you invest hundreds of billions of dollars in 

GSEs with your products. I just want to get a sense of some of your 

principal concerns that you have as an industry, as Congress is 

looking at reforming the GSEs. And so, I would open that up. 

It is a wide discussion, but I am just kind of curious as to some 

of your principal concerns that we need to be focused on as we reform the GSEs. 

Mr. STEVENS. Congressman, maybe I can begin the answer. I 

think one important realization is that there are a lot of legacy securities out there that are held very widely in the marketplace. 

And while we very much support the Congress’ direction of 

unwinding or significantly limiting the GSEs and moving the Federal guarantee, or limiting it in some fashion, I think it is very important that we not do anything that disturbs the guarantees that 

exist with the outstanding legacy securities. That is something that 

we have been seriously concerned about. 

I know that there has been interest in the committee in the development of a covered bond market, and the dealer firms have expressed some very serious interest in that. That is a conversation 

we are currently having with our membership, and look forward to 

acquainting the subcommittee with our findings. 

But I do applaud you and your colleagues here for looking at alternatives that would remove what perhaps is the largest of the 

moral risks that we experienced as a result of the recent crisis. 

Mr. GOEBEL. I guess I would add that, by merely asking the 

question, you have gone a long way toward answering our concern, 

which is that we think that this is obviously a very important market to us. And we are sensitive to whatever the changes are that 

come about, that they are transparent and signaled in advance, so 

we can make appropriate portfolio management decisions. 

We also—I would echo Mr. Stevens’ comments that there are a 

great deal of legacy assets out there, and particular evaluations 

were made of those securities based on the terms as they exist 

today and at the time. 

So we are very interested in making sure that there are limited 

disruptions to that and an understanding going forward of exactly 

41 

what the changes will look like and how that will happen, so we 

can make sure that we minimize any impact on our shareholders. 

Mr. PETERS. Anybody else? 

As far as concerns about the legacy and the guarantees that are 

in that, there is a question going forward as to whether or not 

there still is a government role when it comes to securities. 

The proposed bipartisan legislation that I have with Mr. Campbell still has a government role, although there is considerable private capital ahead of any sort of government guarantees. But the 

idea is that some sort of government guarantee is necessary to attract investors into those securities, particularly if they are longterm securities. 

Do you share that view as an industry, generally? 

Mr. GOEBEL. The types of investors and the decisions about what 

portfolios those securities are appropriate for certainly depends on 

the existence of the guarantee. So whether there is another market, or different types of investors, or different types of rates that 

might be required in order to incent the purchasers, I guess the answer is, it sort of depends on what that looks like. 

Mr. PETERS. Right. Okay. 

The other point that I think bears repeating, and I have heard 

it over and over again today, is the concern about the net asset values and if you are off that dollar. 

I spent 20-some years in my private sector career in the investment business dealing with private clients, and I can assure you 

that they all wanted the $1 NAV. And I know that your studies 

show that 70 percent of people will not invest. I think it was probably close to 100 percent of my clients who would have said that 

is the product they want, to make sure that they have that $1 

value. 

So I think it is very important that we preserve that and I will 

continue to work with you to preserve that, because it is a necessary part of not only financing, as you mentioned, the government short-term securities to our municipalities, but also to our 

other companies and manufacturers. 

I am in a manufacturing State. I am from Michigan. We have 

Chrysler and the auto companies that go in for short-term financing, and commercial paper in particular. 

Maybe, if someone could just elaborate for us, too. If money is 

pulled out of the money market funds—you have already talked, 

Mr. Stevens, about the impact on our municipalities and how difficult it will be to fund—what about corporations? Where will they 

go for that short-term money? And if there are not adequate places, 

what sort of consequences does that have? 

This NAV is more than just investors not wanting to invest; the 

NAV breaking that dollar will have an impact on the economy and 

on jobs, I presume. Is that accurate? 

Mr. STEVENS. There is no question in my mind about that, Congressman. 

The commercial paper market represents funding for payrolls, 

represents funding for inventories, represents funding that is essential to maintain employment. 

And if that market constricts greatly, and the corporation’s cost 

of financing goes up, their ability to tap the short-term markets is 

42 

compromised, it is going to have a real impact on their operations. 

It is an example of how embedded money market funds have become in the broad economy. 

And what we have said over and over again in meeting after 

meeting is, fine, let us address whatever reforms are needed here, 

but let us not throw the baby out with the bathwater. 

Mr. PETERS. Thank you. 

Mr. DONOHUE. I would, if I could, just interject two things. One 

is that I think many of the institutional investors that are in 

money market funds may themselves do one of two things, which 

is, either they will pull the money out of the money market funds, 

if that is their selection, and they may directly go into the commercial paper market, which is what they had done 15, 20 years ago. 

Alternatively—and this is something that I think would not be 

a very good result for anyone—is that they can go into unregulated 

pools, where there is no transparency, where there is no 2a-7, there 

is no regulatory regime around that, and obtain many of the same 

benefits that they believe they are getting from money market 

funds, but actually not. But I think that is the worst answer. 

Chairman GARRETT. All right. Thank you. I thank you for the follow-up question. 

Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. I will be brief. 

I think Mr. Fitzpatrick asked the question that I have the most 

concern with, because many of your companies’ representatives 

have come in to me and have raised the concerns about the Department of Labor’s proposed rule changing about fiduciary when advising, particularly, retirement plans. 

I have asked the question to both the SEC and to the Department of Labor, at various hearings that we have already had, 

whether they were working together, so that there would not be a 

difference as far as what each of these agencies would come up 

with. 

And both of them said that they were working together. But it 

does not appear that really is the case. 

I think that the SEC has already came out with a study, and it 

kind of, I think, gives us an idea of what their rule will be. And 

the Department of Labor has now come out with a rule, a proposed 

rule, although we have not really seen it. And I do not think that 

they are the same. 

So I wondered, how are we going to solve that problem, if there 

are different rules? 

And I think we could have headed it off, but I would assume that 

the Department of Labor wants to get the rule right. And what can 

we do, then, to further bring those two back together? 

Maybe, Mr. Bullard, you seem to be the most knowledgeable. 

Mr. BULLARD. I certainly would not say I am necessarily the 

most knowledgeable. 

But I was actually in the office under Mr. Donohue’s predecessor 

who was responsible for that communication with DOL. And I assure you, the communication is going on, but there is undoubtedly 

disagreement between the two. 

And there is also a limitation to the extent they can work together, because the effects of being a fiduciary under ERISA are so 

43 

different and so much more onerous than under the Federal securities laws. 

Another reason is that, to a great extent, broker-dealers’ conduct 

is in many contexts already subject to a fiduciary duty. The SEC’s 

proposal really goes primarily to the public enforcement mechanism; whereas, DOL’s proposal is very much a private liability 

issue, and predominantly a private liability issue. 

Those are just two examples of the way in which those simply 

are not processes that necessarily can be coordinated. But that does 

not mean that you should not see the outcome of the SEC’s sort 

of more fundamental, ground-level approach before you go ahead 

and subject ERISA to many of exactly the same people whose activities under the SEC standard may solve a lot of DOL’s concerns. 

Mrs. BIGGERT. And I would agree. It seems to me, though, who 

is going to get it out first? And I think that will cause problems. 

But I appreciate what you are saying. 

And I yield back. 

Chairman GARRETT. The gentlelady yields back. 

The gentlelady from New York? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

Of course, we have talked a bit about SIFI designation. And for 

banks, of course, SIFI carries with it potential advantages in terms 

of how creditors might view that guarantee. And, of course, there 

are costs, as well, to SIFI designation. And indeed, I am skeptical 

of that designation in its entirety. 

But in terms of the proposal that perhaps SIFI designation 

should also be applied to mutual funds, could any of our panelists 

elaborate on—and perhaps we can start with Mr. Stevens—the implications more specifically of SIFI designation on our mutual 

funds? 

Mr. STEVENS. If a fund, or a fund complex, or a fund adviser 

were designated as a systemically important financial institution, 

under Dodd-Frank there would be two consequences: one, they 

would be targeted for heightened prudential supervision by the 

Federal Reserve; and two, they would be subject to capital and 

other kinds of requirements. 

Prudential supervision is an alien concept in our world. While 

Professor Bullard has talked about the SEC perhaps becoming a bit 

more prudential, the fact of the matter is, its regulatory model has 

never been of a nature that is omnipresent in our businesses and 

telling us how to operate them in the way that the Federal Reserve 

and other banking regulators do with respect to depository institutions. 

The implications of that are unknown, perhaps unknowable. And 

I have heard Federal Reserve officials say that they are kind of 

puzzled by it, too, if they had to move in that direction. 

The capital issue is even more murky, because, to a very large 

degree, advisers, while they need capital to assure that they have 

sufficient robustness to fund ongoing operations, do not have capital requirements of the sort that banking institutions do. And mutual funds, you can either look at as having zero capital or 100 percent capital. 

44 

So it is a question, I think, that I am not exactly sure what the 

answer is. And I would tell you, Congresswoman, I hope we do not 

have to find out. 

Dr. HAYWORTH. Agreed. 

Any of our other panelists? 

Ms. STAM. Yes, I could add to that. I think that, interestingly 

enough, the reasons why there was a determination that there 

should be the designation of systemically important financial institutions are the type of issues that occurred in 2008. 

But if you think about mutual fund structure and regulation, it 

is sort of the antidote to all of those concerns, so you do not have 

the leverage, you do not have the lack of transparency and a lot 

of the questions that were raised that cause the attention to the 

sort of unregulated or uncovered segment of the industry. 

Clearly, I think we all agree on this panel that mutual funds or 

their advisers were not intended. But it is really important to understand that the mutual funds themselves are separate entities, 

and there is no bleeding over between the funds and the adviser. 

And so, difficulties with an adviser would not impact a mutual 

fund. 

And the other thing, I think it is really important to note that 

size is indicated as a factor to be considered. But in the mutual 

context or in a mutual fund complex, the fact that you have assets 

under management are really irrelevant, because of the mutual 

fund structure that oversees those assets, and they are individually 

owned by millions of individual investors, and the adviser has no 

ownership rights to those assets. 

So we are hoping that reason will prevail when the designations 

are made. 

Mr. GOEBEL. I just want to expand. I think that Ms. Stam got 

exactly the right point, which is, as I mentioned, we have over 400 

mutual funds. We think that the designation would be required on 

a fund-by-fund basis. Each entity is a different entity. Some of 

them are organized as trusts, so it would not be 400 designations. 

But it would be more than a dozen, more than a couple of dozen. 

You could designate it an adviser. But are you designating the 

adviser, and then turning around and worrying about the capital 

in the funds in another place? 

What is a capital standard that applies to an adviser that has 

a particular balance sheet that looks very different, because it does 

not own the assets of the fund? 

That relatively basic structural point of mutual funds makes it 

very hard for any of us to answer questions about how these rules 

apply, because they just were not designed for the way we operate. 

Mr. BULLARD. Yes, if I could just add to that. I think that the 

SIFI question really has two parts: first, whether there is an inherent systemic issue raised by a structure; and second, if there is, do 

we already have a comprehensive regulatory regime in place dealing with that? 

As to both one and two, the answer for non-money market funds 

is clearly that they should not be SIFIs. If you ask—any question 

you ask that someone thinks represents systemic risk, the answer 

for non-money market funds is ‘‘no.’’ 

45 

But I strongly disagree with Mr. Stevens that the SEC is not a 

prudential regulator as to money market funds. If Rule 2a-7 is not 

prudential regulation, I do not know what it is. 

The answer for money market funds, to the first question, is 

clearly that it is systemically important in some respects. 

I think that the second question, though, is the one we really 

need to deal with, whether the current regime and the current regulator is the right one to do it. If Mr. Stevens’ point about the SEC 

not being a prudential regulator goes that deeply into its structure 

that it cannot do the job for money market funds, then we need to 

re-think whether it is a good idea to have what is essentially a free 

market regulator also being a prudential regulator. 

But we cannot lose sight of the fact that money market funds are 

prudential regulation, and their regulator needs to act like one. 

Mr. STEVENS. I think this is a definitional squabble more than 

anything else. 

But from where I sit, it makes no sense to designate 642 money 

market mutual funds as systemically important financial institutions and saddle them with Federal Reserve oversight and capital 

requirements. If there is a deficiency here, if there are reforms that 

are needed, they should not be arrived at through the designation 

process. That is my key point. 

Dr. HAYWORTH. Thank you all. It sounds as though that kind of 

designation would take an awful lot of energy out of our money 

market funds, etc., when we desperately need more energy in the 

marketplace. 

And I yield back my time. Thank you, Mr. Chairman. 

Chairman GARRETT. The gentlelady yields back her time. 

I want to extend another 30 seconds to the gentleman from Colorado. He indicated that he had the most salient and poignant question of the day. 

[laughter] 

Thank you. 

Does the gentlelady have anything? Okay. 

Before I dismiss the panel, we have, without objection, several 

letters with regard to the hearing to be entered into the record: 

from the New Jersey State Chamber; from the New Jersey Business and Industry Association; from the New Jersey State League 

of Municipalities; from the Chamber of Commerce of the United 

States of America; from the Greater Boston Chamber of Business; 

from the Association of Financial Professionals; from the Dallas Regional Chamber; from the Association of Commerce and Industry; 

from the Fort Worth Chamber; from the National Association of 

Corporate Treasurers; from Davenport and Company; and from the 

American Public Power Association. 

And I guess from all the rest, and among others: the Council of 

Development Finance Agencies; the Council of Infrastructure Financing Authorities; the Government Finance Officers Association; 

the International City Council Management Association; the International Municipal Lawyers Association; the National Association 

of Counties; the National Association of Local Housing Finance 

Agencies; the National Association of State Auditors; the National 

Association of State Treasurers; the National League of Cities; and 

the U.S. Conference of Mayors. 

46 

And without objection, those letters with regard to today’s hearing will all become a part of the record. 

And speaking of the record, the record will remain open for 30 

days for additional questions for members who are here, or other 

salient and pointed questions from the gentleman from Colorado, 

which he should make, as well. And your responses will also be 

made a part of the record. 

On that point, I think there was only one question which I did 

not use additional time for, which was Professor Stulz. And you 

said you had some comments that you wish to make. If you would 

so kindly, I would appreciate getting a note back with you. That 

was on the point before we were raising about as far as defining 

our criteria for systemically important institutions like that. 

If you would like to submit that in writing, that would be most 

beneficial. 

And to the rest of the panel, we very much appreciate it. It was 

an interesting and informative panel. And where do we go from 

here? We will just begin to digest everything that you have said. 

Thank you so very much. I appreciate it. 

And the hearing is adjourned. 

[Whereupon, at 11:50 a.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

June 24, 2011 

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