[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                      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

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
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

                   Larry C. Lavender, Chief of Staff
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois


























                            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


                      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. 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 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.
    At this time, I yield 1\1/2\ 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.
    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 1\1/2\ 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.
    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?

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 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?

  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 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.
    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 hard-earned 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 
mortgage-backed 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 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 financial 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 
individual 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 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.
    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 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.
    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.
    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 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.
    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 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.
    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-plus-year-old statute that the Commission has to--they have 
a tool in order to adjust the statute, the ability to do 
exemptive and other 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.
    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, 
fixed-income 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.
    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 
eventually 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.
    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 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 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.
    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 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 
Dodd-Frank 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 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 
short-term 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 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, 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 long-term 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 
transparency 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. 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, 2\1/2\ 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.
    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?
    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 op-ed 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.
    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.
    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 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 long-term 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 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 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.
    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.''
    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.
    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.]



















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                             June 24, 2011

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