[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                       EXAMINING THE SEC'S MONEY
                       MARKET FUND RULE PROPOSAL
=======================================================================

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 18, 2013

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-44




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             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            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York           MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida
ANN WAGNER, Missouri
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 18, 2013...........................................     1
Appendix:
    September 18, 2013...........................................    49

                               WITNESSES
                     Wednesday, September 18, 2013

Bair, Hon. Sheila C., Chair, Systemic Risk Council, and former 
  Chair, FDIC....................................................    10
Chandoha, Marie, President and Chief Executive Officer, Charles 
  Schwab Investment Management, Inc..............................    12
Gilligan, James P., Assistant Treasurer, Great Plains Energy, 
  Inc., on behalf of the U.S. Chamber of Commerce................    14
McCoy, Hon. Steven N., Treasurer, State of Georgia, on behalf of 
  the National Association of State Treasurers (NAST)............     8
Stevens, Paul Schott, President and Chief Executive Officer, the 
  Investment Company Institute (ICI).............................    15

                                APPENDIX

Prepared statements:
    Moore, Hon. Gwen.............................................    50
    Bair, Hon. Sheila C..........................................    52
    Chandoha, Marie..............................................    59
    Gilligan, James P............................................    72
    McCoy, Hon. Steven N.........................................    84
    Stevens, Paul Schott.........................................   111

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Letter to the SEC from 12 Federal Reserve Bank Presidents, 
      dated September 12, 2013...................................   123
    Letter from the Mutual Fund Directors Forum, dated September 
      17, 2013...................................................   132
    Written statement of the Financial Services Roundtable.......   133
Lynch, Hon. Stephen:
    Letter to the SEC from Massachusetts Governor Deval Patrick, 
      dated September 17, 2013...................................   136
    Letter to the SEC from the Massachusetts Municipal 
      Association, dated September 9, 2013.......................   138
Chandoha, Marie:
    Written responses to questions for the record from 
      Representative Ellison.....................................   140
    Written responses to questions for the record from 
      Representative Hultgren....................................   143
Stevens, Paul Schott:
    Written responses to questions for the record from 
      Representatives Garrett and Sewell.........................   147


                       EXAMINING THE SEC'S MONEY
                       MARKET FUND RULE PROPOSAL

                              ----------                              


                     Wednesday, September 18, 2013

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Neugebauer, 
Westmoreland, Huizenga, Grimm, Stivers, Mulvaney, Hultgren, 
Ross, Wagner; Maloney, Sherman, Lynch, Moore, Perlmutter, 
Scott, Himes, Peters, Ellison, Watt, Foster, Carney, and 
Kildee.
    Ex officio present: Representative Hensarling.
    Chairman Garrett. Greetings and good morning. This hearing 
of the Subcommittee on Capital Markets and Government Sponsored 
Enterprises is hereby called to order.
    Today's hearing is entitled, ``Examining the SEC's Money 
Market Fund Rule Proposal,'' and I thank all the members of the 
panel for being with us today. We will be looking to you for 
your comments in a moment.
    I also thank the members of our committee who are here to 
examine this important issue.
    We will now have opening statements, and I will begin by 
yielding myself 6 minutes.
    Following the events of the financial crisis, in which some 
of the money market funds, as you know, experienced heavy 
investor redemptions, the SEC had proposed a rule for which the 
stated intent was making money funds less susceptible to future 
runs and improving the transparency of money market fund risk.
    The process leading to the SEC's current rule proposal 
reflects the good, the bad, and the ugly of agency rulemaking. 
In fact, it is really a tale of two different rules.
    The first iteration of that would become a current rule 
proposal considered by the SEC more than a year ago, as a 
cautionary example of agency rulemaking gone wrong, both in 
terms of process and substance.
    As SEC Commissioner Dan Gallagher described it, the 
original proposal was presented to the Commission by the then-
SEC Chairman as, ``inviolate fait accompli, having already been 
fully-baked and blessed by other agencies without the input of 
the Commissioners and lacking in adequate economic analysis.''
    But thanks to the efforts of Chairman Issa and his staff on 
the House Oversight and Government Reform Committee, we are now 
able to construct a picture of what appears to have been a 
wildly, closely coordinated effort by the SEC Chairman and FSOC 
and the Federal Reserve to develop the substance of the 
original rule proposal and to exert undue political influence 
on the Commission to accept it.
    To highlight just one example, documents obtained by 
Chairman Issa's committee appeared to show certain individuals 
of the SEC working together with the Fed to draft a letter for 
FSOC back to the SEC, pressuring the Commission to adopt 
specific money fund reform measures, and then dangling the 
possibility that FSOC would take those matters into its own 
hands.
    This collaboration appears to have occurred well before the 
Commission was even set to vote on the original rule proposal. 
Then, after the original rule proposal ultimately failed to 
gain the support of the majority of the SEC Commissioners 
necessary to bring the matter to a vote, what happened?
    The FSOC doubled down, again pressuring the SEC to act on 
specific money market fund reforms by issuing and seeking 
comment on its own reform recommendations. So, given the 
significant intrusion of banking and systemic risk regulators 
in the SEC process, it should come, then, as no surprise that 
the focal point of the original rule proposal was a requirement 
that money market funds implement what is commonly called 
capital cushion, or buffer.
    So while this capital buffer requirement was reportedly 
designed to make money market funds better able to withstand 
heavy redemptions during times of market stress, I believe that 
it was, and it continues to be, an entirely inappropriate 
option for money market funds.
    First, money market funds are fundamentally a securities 
product. And I believe the consumer should think of them as 
such. Forcing money market funds to hold bank-like capital will 
only foster the false perception and impression among many 
investors that these funds are more like federally-insured bank 
accounts and security products.
    Second, as the SEC itself has since concluded, the capital 
buffer contemplated in the original rule proposal would likely 
be insufficient to absorb very large losses on the level 
experience during the financial crisis. But a buffer high 
enough to do so would be too costly to be practical.
    And third, as Commissioner Gallagher has pointed out, the 
only real purpose for the proposed buffer was to serve as the 
price of entry into a emergency lending facility at the Federal 
Reserve that they could construct during any future crisis.
    In short, the buffer would provide additional collateral to 
provide a Fed bailout to the troubled funds.
    With the Obama Administration's precedent-setting bailouts 
of the auto industry and Fannie Mae and Freddie Mac, costing 
literally billions of dollars, we simply cannot afford to 
extend yet another taxpayer-funded bailout, and the moral 
hazard that goes with it, to money market funds.
    When rulemaking is done correctly, it is a deliberative and 
thoughtful process based off of hard economic pattern. 
Fortunately, the second iteration of the SEC's money fund 
proposal, the rule proposal that we are going to be taking a 
look at today, seems to be more in line with that standard.
    The current rule proposal sets forth three alternatives, in 
addition to certain enhanced dislosure requirements, and I will 
run through them.
    First, it has a floating net asset value (NAV) requirement 
for specific types of money market funds called prime 
institutional funds. Second, it has mandatory liquidity fees 
and discretionary temporary redemption gates for all 
nongovernment money market funds during the times of market 
stress. And third would be a combination of these two 
alternatives.
    So, unlike the original proposal, the current proposal was 
informed by the results of a study of money market funds 
conducted by the SEC's division of economic and risk analysis, 
which show the heaviest redemptions during the financial crisis 
were where? In the prime institutional funds.
    Moreover, I was pleased to see that the current rule 
proposal does not include a capital buffer or alternative that 
enshrined taxpayer bailouts and makes security products look 
more like bank products.
    I believe that the decision to exclude a capital buffer 
from the SEC's current rule proposal is very much an important 
step in resisting the push to remove substantially all of the 
risk from security products.
    It is what ultimately hurt investors by reducing their 
ability to generate much-needed returns on their investment and 
their retirement dollars.
    And so, while I may not necessarily agree with every single 
aspect of the SEC's current proposals, and I am sure we will 
hear from the panel today, and recognize that many of the 
important questions remain outstanding, I appreciate the SEC's 
commitment to engage in a thoughtful and deliberate process 
this second time around.
    Ultimately, I believe it is critically important that we 
strike the right balance between ensuring that money market 
funds can survive during periods of market stress, and 
preserving their role as an important investment and cash 
management tool for all types of investors. To that end, I do 
look forward to a robust debate this morning on the positive, 
and the negative, of the SEC's proposals.
    And with that, I yield to the gentlelady from New York, 
Mrs. Maloney, for 5 minutes.
    Mrs. Maloney. I thank the chairman for holding this 
important and timely hearing, and for doing so in such a 
bipartisan way. Nearly 50 million investors use money market 
funds, which collectively hold about $2.9 trillion in assets. 
This is a huge market, which is why this issue is too important 
to get bogged down in the usual partisan politics.
    The SEC has put forward a thoughtful proposal to reform 
money market funds, and it deserves a serious discussion. To 
encourage this, the chairman and I have tried to ensure that a 
broad range of views are represented on the panel today, and I 
very much look forward to your testimony and to the debate that 
follows.
    Before we get into the SEC's proposed reforms, it is 
important to remind ourselves why reform is needed. On 
September 16, 2008, the Reserve Primary Fund, a $62 billion 
money market fund that had invested in Lehman securities, broke 
the buck, meaning the value of its shares fell below $1.
    This was only the second time a U.S. money market fund had 
ever broken the buck in U.S. history. This event sparked a 
massive, and I would say terrifying, run on the money market 
fund. Never has my phone rung so much off the hook in the 
middle of the night, during the day, ``run on the funds, are we 
going towards a depression, what is happening,'' but by the end 
of the week, investors had withdrawn over $300 billion from the 
prime fund, and on September 19th, just 3 days later, really 2 
days later because they didn't announce they broke the buck 
until the end of the first day, the Treasury Department and the 
Federal Reserved bailed out the entire money market industry by 
effectively guaranteeing over $3 trillion of money market 
shares.
    I think it is safe to say that obviously, we do not want 
this to happen again, and we look forward to working together 
to prevent it. To its credit, the SEC in 2010 adopted some very 
substantial money market reforms which include the quality of 
the securities that money market funds can hold, and 
established minimum liquidity requirements for money funds.
    However, as the SEC noted at the time, the 2010 reforms did 
not address the fact that money market funds are still 
susceptible to devastating investor runs that can destabilize 
the entire financial system.
    The question before us today is what reforms are needed to 
prevent future runs on money market funds. In June, the SEC, 
under the leadership of Chair Mary Jo White, issued a proposed 
rule that is intended to answer this question. The Commission 
proposed two alternatives, both of which take into account the 
considerable progress the SEC made with the 2010 reforms, and 
they are both narrowly focused on the problems that emerged in 
2008.
    While most of the attention is focused on the SEC's 
floating NAV proposal, I am interested in the witnesses' 
thoughts on the so-called ``gates and fees'' proposal. Are 
liquidity fees a strong enough deterrent to prevent runs, and 
would the prospect of going 30 days without access to your 
money prompt investors to withdraw their funds at the first 
sign of any trouble? These are two questions I would like 
answered in your testimony today, and I look forward to 
exploring other questions during the hearing.
    Thank you for being here, and I yield back.
    Chairman Garrett. The gentlelady yields back. The gentleman 
from Virginia, Mr. Hurt, is recognized for 2 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank you for 
holding today's subcommittee hearing to examine the SEC's 
proposed rules for money market mutual funds. I know our panel 
will provide their views on the SEC's current proposal, but my 
concerns also extend to the process by which we came to this 
proposed rule.
    After former SEC Chair Schapiro was unable to pass a money 
market fund proposal through the SEC, the FSOC inserted itself 
into the rulemaking process by proposing its own guidelines 
pursuant to its authority under the Dodd-Frank Act.
    This action by the FSOC raises concern for the development 
of financial regulation in the future and carries significant 
consequences for government and industry. Congress entrusts 
financial regulatory responsibility to specific regulatory 
bodies with specific areas of expertise and jurisdiction. Here, 
the SEC has overseen the regulation of money market funds for 
decades, and it understands the product best. Presumably, 
Congress did not establish FSOC's authority under Section 120 
as a means for a new regulatory body to undermine the decisions 
of the specialized, independent regulatory agency.
    Additionally, as a Commission dominated by political 
appointees, FSOC, armed with this authority, has the ability to 
pressure regulators whose actions do not align with the current 
Administration's views. FSOC remains outside of the 
congressional appropriations process, further allowing for this 
potential politicizing of financial regulation outside of 
appropriate congressional accountability.
    Finally, FSOC is proposing its money market fund rules did 
not establish guidelines for future uses of their enhanced 
authority, thereby leaving the door open to the possibility of 
numerous encroachments in the regulatory purview of other 
financial regulatory agencies.
    Ultimately, independent agencies with five members must be 
allowed to work their will. The FSOC's authority leaves the 
offending regulatory body, in this case the SEC, with the 
choice of yielding or being forced to implement a final 
rulemaking designated by FSOC on any topic, let alone money 
market funds.
    Either option lessens the effectiveness of regulatory 
agencies that are directly accountable to Congress, and 
ultimately, to the American people. I want to thank our 
witnesses for being here today. I look forward to their 
testimony, and I thank you, Mr. Chairman.
    I yield back my time.
    Chairman Garrett. Mr. Lynch?
    Mr. Lynch. Thank you, Mr. Chairman. And I thank the ranking 
member, as well.
    I would also like to thank the witnesses for their 
willingness to come before the committee and help us with our 
work. Today, we are looking at a proposed rule by the 
Securities and Exchange Commission to impose a floating net 
asset value on prime institutional money market funds, create 
liquidity fees and redemption gates when a fund falls well 
below the healthy liquidity levels, or some combination of 
these two things. But before we talk about the rule itself, I 
think it is important to remember why the reforms are so 
necessary.
    First and foremost, money market funds are an important 
cash management and investment tool for a variety of investors, 
and they serve an important role in the overall financial 
landscape as an alternative to big banks. However, as the 
ranking member pointed out, in September of 2008 when the 
Reserve Primary Fund broke the buck, we all realized that there 
were fundamental structural flaws in the industry that made it 
susceptible to runs.
    To stop that run, which could have sent the economy off the 
cliff, the Federal Government stepped in and guaranteed 
investments in those funds, exposing taxpayers in an unexpected 
and troubling way. So, we need to find a better way to prevent 
the kind of panic that caused a run on the money market funds 
back then, but also that preserves the important role that they 
play.
    The SEC issued a rule in 2010 which made money market funds 
more stable and transparent by improving the liquidity and 
credit quality of the securities that those funds hold, and 
this was a good first step, but I support the SEC's efforts to 
continue to address the weakness in the money market funds 
exposed by the financial crisis.
    The SEC rule we are examining today is narrowly targeted at 
the weakness exposed by the crisis, while trying to preserve 
the retail funds and government funds which perform relatively 
well under that stress. I think that is probably the right 
approach, however I am concerned that some of the definitions 
the SEC uses to separate prime institutional funds from retail 
funds and government funds may have a negative effect on local 
governments that rely on those money market funds.
    I hope the witnesses here today will help the committee 
understand the effect that this rule will have on municipal 
government financial ability because this area of money market 
funds played an important public role that we may want to 
preserve. Thank you, Mr. Chairman, I yield back.
    Chairman Garrett. Mr. Hultgren for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Thank you all for being here.
    Having served in local and State government before my time 
in Congress, I do want to recognize the direct and immediate 
impact the SEC's reform could have on municipal finance, as my 
colleague has mentioned as well. Money market funds provide a 
unique and widely-used municipal cash management product that 
may no longer be available as the DNA of money market funds has 
changed.
    I am also concerned that the SEC's inclusion of tax-exempt 
municipal money market funds will drive away money market 
investors, dampening these funds' interest in municipal 
securities. Currently, over 50 percent of outstanding short-
term municipal debt is held by money market funds. If this 
demand dries up, municipalities will see higher issuance costs.
    Finally, I share some concerns highlighted in testimony 
relating to the SEC's effective subsidy of Federal Government 
debt. Excluding Treasury and GSE debt from the proposed reforms 
isn't bad, but giving these products special treatment only 
enables the Federal Government's fiscal irresponsibility at the 
expense of States and localities.
    I welcome the witnesses' testimonies, and I thank the 
chairman for holding this hearing. I yield back.
    Chairman Garrett. The gentleman yields back the time.
    Mr. Perlmutter, the gentleman from Colorado, for 2 minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    And to the witnesses, thank you for being here.
    My first comment is in response to the chairman and to Mr. 
Hurt. The oversight council is doing what it is supposed to do, 
which is to oversee a financial system and to look for places 
where there may be problems and bumps and humps and all of that 
sort of stuff.
    And so to the process, I disagree with the gentlemen in 
terms of their opening. I also would say, just as a matter of 
record, any assistance to Fannie Mae and Freddie Mac came at 
the end of the Bush Administration, so it wasn't an Obama 
bailout.
    Now, to get to the substance of the rules, I would like 
testimony today about the floating net asset value proposal, 
because I think we actually floated that. It was floated 3 
years ago.
    And from my perspective, having watched the reserve fund 
break the buck, then pursue bankruptcy, which the SEC then had 
to oversee, folks didn't get a dollar back. They got something 
less than a dollar. And because of the securities-type nature 
of the investment, I think they got what they deserved.
    And so I know the effort here is to mark everything each 
day, and if something is worth 95 cents that individuals know 
that, but they know going in that they are buying a security. 
Disclosure was part of the rule as it was written 2 or 3 years 
ago. So I don't know that having a floating net asset value 
changes the picture very much.
    And even though I approve and I applaud the process where 
the oversight council was participating in this rulemaking, I 
think that is appropriate, I would just say that I am not sure 
that this answer is--and this rule is going to make any 
difference.
    Chairman Garrett. And finally, for the last word, I 
believe, Mr. Scott.
    Mr. Scott. Thank you, Chairman Garrett. First of all, let 
me welcome Mr. Steven McCoy, who is the treasurer of the great 
State of Georgia. It is good to have you here. Say hello to the 
folks back home.
    First of all, I do want--I think Mr. Perlmutter really put 
his finger on it in terms of the floating net asset value. And 
what we are talking about here is a net asset value per share 
instead of a value of $1 per share price.
    Now while proponents of a floating net asset value claim, 
as I understand it, that it would make markets more flexible 
and allow funds and markets to remain open and functioning 
during a crisis--that is basically that argument, and I 
appreciate that.
    But we must also at the same time be sure to address 
concerns that such a reform would eliminate prime money market 
funds, and State and local governments in turn would lose a 
valuable tool in money management and would drive up the cost 
of financing short-term borrowing. That to me seems to be the 
crux of where we are.
    What I think what we need to reach for here is a delicate 
balance where we can accommodate both. I just simply want to be 
able to keep regulations in place that are strong, that are 
effective, that protect our consumers, while at the same time 
being able to quickly respond to the ever-changing economic 
climate and justify a policy accordingly where needed.
    And so, I think that is our challenge today. I think we 
need a delicate balance. I yield back.
    Chairman Garrett. The gentleman yields back. And before we 
go to--the gentleman from Georgia just entered. While he sits 
down, I just wanted to, without objection, enter into the 
record a letter from the Financial Services Roundtable on this 
topic, and also a letter from the Mutual Fund Directors Forum. 
Without objection, it is so ordered.
    If the gentleman from Georgia is prepared, we have I 
believe another minute for the gentleman.
    Mr. Westmoreland. Thank you, Mr. Chairman. And I want to 
take a moment to welcome Mr. Steven McCoy, the treasurer of my 
home State of Georgia. It is always good to see a Georgian 
represented on the panel. I look forward to your testimony on 
how the SEC rules impact the way Georgians invest their hard-
earned money as taxpayers.
    The subject matter of this hearing might be technical, but 
for me the bottom line is we need a broad array of financial 
products for investors of all shapes and sizes to choose. With 
the Federal Reserve depressing interest rates for savers, many 
retail and institutional investors choose money market funds 
because they provide a better return on investment.
    Congress, the SEC, FSOC, and yes, even the bank regulators, 
must pursue regulations and policies that create diverse, 
liquid financial markets. I urge careful consideration of all 
the unintended consequences of this rule. I yield back.
    Chairman Garrett. The gentleman yields back, and I thank 
the gentleman.
    So now, we turn to the panel. There is a gentleman who has 
been recognized twice now for your work in Georgia, the 
treasurer from the State of Georgia, Mr. McCoy, you are 
recognized. I know most of you have been here before, but I 
always restate this.
    You are recognized. You will be recognized for 5 minutes, 
and we ask you to make sure that when you speak, you pull your 
microphone as close as you can, so that we can hear you. Make 
sure the light is on. And of course, as you all know, you have 
5 minutes. The yellow light gives you a one-minute warning, and 
the red light means you are out of time.
    So Mr. McCoy, you are now recognized for 1 minute.

STATEMENT OF THE HONORABLE STEVEN N. McCOY, TREASURER, STATE OF 
    GEORGIA, ON BEHALF OF THE NATIONAL ASSOCIATION OF STATE 
                       TREASURERS (NAST)

    Mr. McCoy. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. On behalf of NAST, I 
thank you for providing us the opportunity to testify on the 
SEC's proposed money market fund reforms.
    NAST is a bipartisan association. It is comprised of all 
State treasurers and State financial officials throughout the 
country. Treasurers, given their role within each State of 
ensuring proper cash management, do have a unique perspective 
on money market fund regulation, and we appreciate being able 
to share our perspective on this.
    Money market funds are an important investment tool for 
many State and local governments throughout the country. They 
rely on money market funds as short-term investments that 
provide liquidity, preservation of capital, and diversification 
of credit risk.
    But then also, as we have heard in the Congressmens' 
statements, they are very important to State and local 
governments since we are issuers of short-term debt. And the 
short-term debt--the municipal money market funds are the 
largest purchasers of short-term debt. And any reform that 
would limit the attractiveness of money market funds to 
purchase municipal bonds would--and reducing the demand would 
increase our financing costs.
    But additionally, and the place I would like to spend the 
most of my time today, since I think the other panelists are 
going to deal with the purchasing of money market funds, the 
two primary issues of floating NAV and liquidity in gating, and 
also with municipal money market funds.
    But one of the things that I would like to focus on is 
local government investment pools. Most States have created 
them over the years. They go back over 30 years with a history 
of pools. And they are a safe and efficient method of investing 
State and local government funds.
    Changes to the regulation of money funds, even though local 
government investment pools (LGIPs) are not registered with the 
SEC, that still these reforms could indirectly impact our 
operation and viability because GASB has two regs, 31 and 59, 
which require externally-managed pools to be 2a-7 light in 
order to use amortized cost accounting and preserve a stable 
NAV.
    So what I would like to do is just focus on the potential 
impact on LGIPs of the proposed regs. LGIPs operate for the 
exclusive benefit of governmental entities within each State. 
They are distinguished from money market funds in that they are 
not open to the public.
    Instead, LGIPs serve only governmental entities that 
otherwise would have difficulty investing public funds safely 
and efficiently. This is both large and small government 
entities that, while these State statutes governing LGIPs 
differ, LGIPs generally accept deposits from cities, counties, 
colleges, school districts, authorities, public hospitals, and 
various commissions and boards.
    In some cases, like Georgia, we also commingle the State's 
short-term assets in our local government investment pool to 
create economies of scale so the local governments can benefit 
from the economies of scale that we use, and they can also 
benefit from our credit research and our experienced investment 
officers.
    LGIPs are often used by participants to invest funds that 
are needed on a day-to-day basis or on a near-term basis. And 
so even though they are exempt from SEC regulation under the 
Investment Company Act of 1940 because of sovereign ownership, 
the SEC's proposed changes could have some unintended 
consequences that would indirectly impact our ability to 
continue to offer these safely and efficiently.
    For instance, converting an LGIP to a floating NAV or 
imposing liquidity fees and gatings, both would be in violation 
of many of the States' statutes, and also prudent investment 
policies. As government entities, we cannot tolerate loss of 
principal on operating funds, trust funds or bond proceeds 
because we have no method of replenishing losses.
    So we have to be very careful to preserve capital and have 
liquidity. We need it to make--so liquidity constraints, 
preservation of capital and preservation of liquidity is very 
important to us. That we cannot accept liquidity constraints 
that could prevent us from funding or local governments from 
funding critical public needs, of paying debt or other 
obligations when due.
    Local government investment pools hold money, provide an 
attractive yield, and provide liquidity so that all 
participants know their money is there and available and safe. 
Some may point to bank deposits as an alternative, but States 
typically require collateral on bank deposits. And so those--
they have to be collateralized sometimes, in our State for 
instance, at 110 percent with marketable securities.
    So the cost associated with collateralizing public bank 
deposits limits many banks from providing competitively-priced 
alternatives. Also, the availability of eligible collateral 
will limit the amount of bank deposits, collateralized deposits 
that banks, especially in smaller communities, would accept.
    In wrapping up, I would like to say that we appreciate the 
opportunity. We have asked that the SEC include a comment just 
that they do not intend this to be applicable to LGIPs. Thank 
you, sir.
    [The prepared statement of Mr. McCoy can be found on page 
84 of the appendix.]
    Chairman Garrett. Thank you. And now, we welcome back Ms. 
Sheila Bair, the former Chair of the FDIC, who is now Chair of 
the Pew Charitable Trusts, Systemic Risk Council. Welcome once 
again to the panel. And you are recognized for 5 minutes.

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIR, SYSTEMIC RISK 
                COUNCIL, AND FORMER CHAIR, FDIC

    Ms. Bair. Thank you, Chairman Garrett, and Ranking Member 
Maloney. As a number of Members have noted, 5 years ago this 
week, the Reserve Primary Fund, a massive money market fund 
that held just 1.3 percent of its assets in Lehman Brothers 
debt, announced it would break the buck, and the financial 
markets froze.
    In just 2 days, the $62 billion fund received requests from 
investors to return approximately $40 billion of their money. 
The money fund quickly depleted cash reserves and tried to sell 
assets. This not only further depressed the value of its 
holdings, but depressed the value of other money market mutual 
funds as well.
    Because the Reserve did not have capital or a deep-pocketed 
parent who could subsidize its losses, the fund had to reprice 
its shares going from $1 to 97 cents. Reserve investors waited 
months for full access to the remaining cash and, based on 
recent press reports, the dispute between the SEC and the 
Reserve is still ongoing.
    The run on Reserve, however, quickly spread to other money 
market funds. During this week, 5 years ago, investors withdrew 
$310 billion from prime money market funds.
    To meet these requests, other money funds, just like the 
Reserve, began to sell more securities into illiquid markets, 
further reducing their values and putting other money funds, 
stable $1 NAV, at risk.
    Many sponsors subsidize their funds to defend the $1 NAV. 
Further fearing redemptions, many funds limited new investments 
to cash, Treasuries, and overnight loans.
    U.S. corporations and municipalities seeking to access the 
short-term markets for cash were out of luck. Short-term 
interests rates spiked and credit markets froze.
    On September 19th, the government stepped in with massive 
and unprecedented taxpayer support. The Federal Reserve created 
a special liquidity facility to aid money market funds and the 
Treasury Department used the Exchange Stabilization Fund (ESF) 
to guarantee trillions of dollars in shareholders' money fund 
holdings.
    Almost every money fund opted to this after-the-fact 
insurance policy created almost overnight by the Federal 
Government. While the bailout worked to calm the short-term 
markets in 2008, Congress prohibited the Treasury Department 
from again using the ESF to guarantee money funds.
    And while some modest reforms were put in place in 2010, 
the core structure risk and money funds that nearly brought the 
financial system down in 2008 still remain and threaten our 
financial system today.
    The core structural risk is a special SEC rule that allows 
money funds to price their shares at one dollar even when the 
value of their underlying assets is not worth a dollar.
    This special treatment called the stable NAV is what makes 
money funds different from other mutual funds and so 
susceptible to destabilizing runs. It effectively pays first-
movers to run and imbeds losses on remaining shareholders.
    Even if shareholders don't want to run, they do not want to 
risk paying for someone else's losses.
    While the SEC recently proposed some modest changes to the 
structure of money market funds, the proposed reform options 
have too many holes and exceptions to adequately protect the 
financial system.
    One proposed option, the limited floating NAV option, would 
leave the structural risk in money funds that cater to retail 
investors or invest large portions of their assets in agency 
securities, including Treasuries, the Federal Home Loan Banks, 
Fannie Mae, and Freddie Mac.
    As we know, these assets are not free from risk, but the 
SEC proposal is treating them as if they are.
    Moreover, this special treatment for money funds that make 
investments in those firms over firms that make investments in 
other U.S. companies effectively further subsidizes Treasuries, 
the Federal Home Loan Banks, Fannie Mae, and Freddie Mac, over 
private market competitors.
    That is a mistake at a time when the government should be 
working to reduce government subsidies which distort capital 
allocation. This goes in the opposite direction.
    The other ``gates and fees'' approach is actually worse 
than current law because it will encourage investors to run 
sooner in order to avoid the ``gates and fees.''
    A better approach is to treat all money funds like other 
mutual funds and require a simple, floating NAV. As seen during 
the 2008 crisis, the rigidity and destabilizing effects of a 
stable NAV can shut down markets and make crises even worse.
    A floating NAV is much more flexible and allows funds and 
markets to remain open and functioning in a crisis. Moreover, 
while other crises may occur, they would no longer be caused or 
exacerbated by the stable NAV.
    Finally, a strong floating NAV approach, as outlined in my 
written testimony, would help level the playing field for 
investment companies and investors by helping ensure that 
investment decisions and competitive outcomes are based on the 
quality of asset allocation decisions not the moral hazard of 
potential sponsor support.
    This is the same, simple, regulatory framework that applies 
to all other mutual funds, a framework that the SEC has 
implemented successfully and without systemic risk or taxpayer 
bailouts since 1940. Thank you very much.
    [The prepared statement of Ms. Bair can be found on page 52 
of the appendix.]
    Chairman Garrett. Thank you.
    And next, we will hear from Ms. Chandoha, the president and 
CEO of Charles Schwab Investment Management, Inc. You are 
recognized for 5 minutes.

  STATEMENT OF MARIE CHANDOHA, PRESIDENT AND CHIEF EXECUTIVE 
      OFFICER, CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.

    Ms. Chandoha. Chairman Garrett, Ranking Member Maloney, and 
members of the subcommittee, my name is Marie Chandoha. I am 
president and chief executive officer of Charles Schwab 
Investment Management, Inc., the asset management business of 
the Charles Schwab Corporation.
    Thank you very much for the opportunity to discuss Schwab's 
perspective on the SEC's money market fund proposal. Schwab is 
one of the largest managers of money market funds, with 3 
million accounts and nearly $170 billion of assets.
    The vast majority of these assets are held by individual 
investors. Approximately 88 percent are held in sweep funds 
which automatically invest cash balances while providing 
investors with convenience and liquidity.
    These sweep accounts allow retail investors to easily buy 
and sell stocks, bonds, and mutual funds and also allow them to 
write checks and pay bills electronically.
    Even in the current environment of historically low yields, 
individuals continue to use money market funds as a central 
element of their financial lives.
    We generally support the SEC's reform proposal. It is a 
serious and substantial proposal that strikes the right balance 
between reducing the likelihood of runs while also preserving 
money market funds as an extremely important cash management 
vehicle for individual investors.
    We further support combining the two alternatives that the 
SEC has proposed requiring institutional money market funds to 
move to a floating net asset value and allowing, but not 
mandating, a fund's board to impose redemption gates or 
liquidity fees if necessary during times of stress.
    We believe that redemption gates and fees could be a useful 
mechanism for an orderly liquidation of a fund that is in 
trouble.
    We agree with the SEC that the rule should focus on the 
greatest areas of risk by proposing a clear distinction between 
institutional and retail investors. Retail money fund investors 
have shown no propensity to run. Even in the financial crisis 
of 2008, retail investors did not run. Runs have been triggered 
by institutional investors who have large amounts of cash in 
the funds and who have the resources and technology to redeem 
very quickly.
    Targeting the area of greatest risk is the goal of any 
sensible regulation and we believe that the SEC has achieved 
that with their proposal. However, we do think that the 
proposed rule has a number of areas that can be modified in 
order to maintain the viability of this crucial investment 
product for the individual investor.
    Let me make two brief points. First, municipal money market 
funds should continue to have a stable NAV. These funds are 
much more liquid than prime funds and therefore much more 
resistant to runs.
    Both the SEC's analysis and our own experience shows these 
funds have been resilient in times of stress. Even in the midst 
of the 2008 financial crisis, municipal funds did not 
experience the redemption levels of prime funds.
    Second, the tax problems related to a floating NAV must be 
resolved before implementation so that investors are not forced 
to track and report hundreds of capital gains and losses. That 
would be an administrative nightmare for taxpayers.
    While we support the proposal, the rule is likely to result 
in significant outflows from prime money market funds. On one 
hand, this will reduce the size of the industry which 
ultimately reduces the systemic risk, but it is not clear where 
the outflows would go as investors still need to invest their 
cash.
    Some would undoubtedly flow to government and Treasury 
money market funds, but there is some question as to whether 
there would be enough of these type of securities to absorb the 
inflows.
    We also want to observe that the cost of implementation and 
the potential impact of the reforms on the financial system are 
both significant. We urge the SEC to carefully analyze whether 
these costs are outweighed by the benefits.
    In our comment letter, we list some recommended changes 
that would ameliorate some of these costs while still achieving 
the policy goals of this reform. Even with these changes, the 
costs remain significant.
    In closing, let me be clear. The SEC has proposed a serious 
set of reforms that will have enormous ramifications for the 
money fund industry. They will be costly for Schwab and other 
firms to implement, and they represent a fundamental overhaul 
of a product investors of all types have relied on for more 
than 4 decades.
    But we do support the proposed reforms because they are 
targeted at the most serious risks. Other regulators have 
called for a one-size-fits-all approach that would destroy the 
product for individual investors. We believe the SEC has found 
a tough yet pragmatic solution that will boost investor 
confidence, deter destabilizing runs, and ensure that 
individual investors can continue to rely on this critically 
important product. Thank you very much for inviting me to 
testify, and I look forward to answering your questions.
    [The prepared statement of Ms. Chandoha can be found on 
page 59 of the appendix.]
    Chairman Garrett. Thank you.
    Next up, for 5 minutes, we will hear from Mr. Gilligan, who 
is representing the U.S. Chamber of Commerce.

  STATEMENT OF JAMES P. GILLIGAN, ASSISTANT TREASURER, GREAT 
 PLAINS ENERGY, INC., ON BEHALF OF THE U.S. CHAMBER OF COMMERCE

    Mr. Gilligan. Good morning, Chairman Garrett, Ranking 
Member Maloney, and members of the subcommittee. I thank you 
for the opportunity to discuss the potential impact of the SEC 
proposal on money market funds on the business community.
    My name is James Gilligan, and I am the assistant treasurer 
of Great Plains Energy Incorporated, which is the holding 
company of Kansas City Power & Light Company and KCP&L Greater 
Missouri Operations Company based in Kansas City, Missouri. Our 
electric utilities serve over 830,000 homes and businesses in 
47 counties in Missouri and Kansas.
    I also serve as the chairman of the Association for 
Financial Professionals Government Relations Committee, and I 
am here today testifying on behalf of the U.S. Chamber of 
Commerce and the thousands of corporate financial professionals 
who are tasked with managing their companies' cash flows and 
ensuring that they have the working capital and liquidity 
necessary to efficiently support their operations.
    There are several important points I wish to stress to the 
subcommittee today. Money market funds have existed for over 4 
decades. These funds are used by businesses throughout the 
United States to meet their cash management and short-term 
funding needs.
    They are an integral part of a tightly interwoven system 
for low-cost, short-term business financing of unrivaled 
liquidity and efficiency. This system has served the American 
economy well, and provides a competitive advantage for American 
businesses in global markets.
    The Chamber and the corporate treasury community believe 
that the major rule changes to money market mutual fund 
regulations that were implemented in January 2010 were well-
conceived and strengthened the product to withstand significant 
market stress.
    As the SEC considers moving forward with additional 
regulation, it is incumbent on the Commission to take a 
balanced and data-driven approach to further strengthen money 
market funds while preserving the critical role they serve for 
U.S. businesses and nonprofit organizations. If the floating 
NAV proposal is adopted for institutional prime money market 
funds, it would fundamentally alter the product, eliminating 
stability and liquidity, the key attributes that attract 
investors.
    Thus, money market funds would no longer remain a viable 
investment option to many treasurers and financial 
professionals. Consequently, with fewer investors and less 
capital to invest, money market funds would no longer remain a 
significant purchaser of corporate commercial paper. The 
reduced demand would drive up borrowing costs significantly by 
forcing companies to fund their day-to-day operations with less 
efficient and more costly alternatives.
    Currently, Great Plains Energy offers interest rates to 
investors on our commercial paper in the current range of 30 to 
70 basis points.
    If, instead, we had to use our revolving credit facilities 
with our banks for overnight borrowings, those borrowings would 
be priced at the prime rate, plus a spread, which at current 
rates, is at least 3.3 percent, or 330 basis points--10 times 
higher than where we can place overnight commercial paper.
    In addition, the company would be required to borrow at 
least $1 million, whereas commercial paper can be sold in 
increments of $100,000; and to request a more comparable LIBOR-
based borrowing from our bank group would require 3 days prior 
notice, have a minimum term of 30 days, and be for a minimum 
amount of $5 million, and it would still be at a rate of about 
125 basis points higher than our commercial paper for the same 
term.
    This is a cheaper option, but again, it is up to 4 times 
more expensive than commercial paper.
    The SEC's proposal acknowledges that a floating NAV will 
not necessarily reduce the risk of widespread redemptions 
during times of market stress, and given the uncertainty as to 
whether this proposal will protect against a run on money 
market funds, we believe it is inappropriate to implement the 
proposal since it will undermine the value and key attributes 
of money market funds while driving up costs drastically.
    The Chamber does support greater transparency with respect 
to the holdings of money market funds and the daily disclosure 
of a shadow NAV that many funds currently report--provide 
investors with the benefits of a floating NAV without 
jeopardizing the viability and utility of money market funds.
    In conclusion, the cost of the floating NAV far outweighs 
the benefits and is another case of where the medicine may kill 
the patient. This concludes my statement and I am happy to 
answer any questions. Thank you.
    [The prepared statement of Mr. Gilligan can be found on 
page 72 of the appendix.]
    Chairman Garrett. Thank you.
    And finally, from the Investment Company Institute, Mr. 
Stevens is recognized for 5 minutes.

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CHIEF EXECUTIVE 
        OFFICER, THE INVESTMENT COMPANY INSTITUTE (ICI)

    Mr. Stevens. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. It is a pleasure to 
be with you this morning.
    The SEC rulemaking that you are examining really is vitally 
important to some 61 million individual investors, and 
literally thousands of institutions in our country, including 
businesses, State and local governments, and nonprofits that 
depend, today, on money market funds as a low-cost, efficient 
cash management tool, and one that provides a high degree of 
liquidity, stability of principal value, and a market-based 
yield.
    For 5 years, ICI and its members have worked diligently 
with the SEC, with the Congress, and with other regulators to 
develop ideas about how to make money market funds more 
resilient under even the most adverse market conditions.
    I would observe that the SEC has 40 years of success in 
regulating these funds. Its expertise and its experience mean, 
in our judgment, that the Commission is in the best position to 
implement any further reforms.
    In our work on money market funds, we stress two principles 
consistently. First, the reforms should preserve the 
fundamental characteristics that make money market funds so 
valuable to investors and to the economy, as you have heard on 
the panel this morning.
    And second, that we should preserve choice for investors by 
insuring a continued robust and competitive money market fund 
industry.
    Now, applying those two rules to the SEC's rulemaking, 
those two principles, I would offer 5 summary conclusions. By 
the way, I would note for the subcommittee's benefit, we did 
file yesterday about an 80-page comment letter on these, so 
this is, in fact, just the top line.
    First, we agree with the Commission that there really is no 
reason to apply structural changes to funds that invest 
primarily in Treasury or other government securities--
collectively, government money market funds.
    Second, funds that invest primarily in short-term debt of 
State and local governments should be exempted from these 
structural changes. The characteristics that the SEC attributes 
to government funds apply with equal force to those of tax-
exempt municipal funds.
    There is no evidence that investors in tax-exempt money 
market funds redeem en masse during periods of market stress. 
Moreover, these funds hold the great majority of their assets 
in highly liquid securities that can be liquidated to make 
redemptions.
    Experience also shows that credit deterioration in 
securities issued by one jurisdiction does not tend to affect 
other jurisdiction's securities. Given the vital role that they 
play in financing State and local governments, tax-exempt funds 
should not be subjected to disruptive and expensive structural 
changes.
    Third, in discussions with our members and their 
shareholders, one thing has become crystal clear--combining the 
SEC's two proposals would render money market funds entirely 
unattractive to investors.
    The Commission's proposals, in effect, confront investors 
with a choice: sacrifice stability, in the case of floating net 
asset values on prime institutional funds; or face the prospect 
of losing liquidity under extreme circumstances, through the 
proposal for liquidity fees and redemption gates.
    We have found that some investors place more of a premium 
on principal stability, while others value ready access to 
liquidity more strongly. But, and I want to emphasize this, 
virtually every ICI member tells us that no investor would 
purchase a floating value money market fund that was also 
subject to constraints on liquidity. Investors have, frankly, 
other less onerous options readily available to them.
    Fourth, if regulators do feel that it is necessary to 
require some money market funds to float their values, it is 
critical that we address the significant burdens on investors 
in the tax and accounting treatment of gains and losses. This 
will require action by Treasury, the IRS, and perhaps even by 
the Congress.
    Unless these issues are resolved in advance, investors are 
unlikely to accept floating value money market funds and 
significant disruption of short-term credit markets is highly 
likely.
    And fifth, we support the Commission's recognition that its 
proposal should be appropriately targeted, and that funds 
intended for retail investors should be exempt from any 
requirement to impose floating NAVs. We have significant 
concerns, however, about the practicality and costs of the 
SEC's proposed definition of retail funds, based on daily 
redemption limits.
    Instead, we recommend the use of Social Security numbers as 
the fundamental characteristic to identify investors eligible 
to invest in retail funds. This approach would be far less 
costly than other methods of defining retail funds and far 
easier for investors to understand.
    In the 5 years since the financial crisis, the fund 
industry has strongly supported the SEC's efforts to make money 
market funds ever more resilient, even as they continue to play 
their valued and important role for investors in the economy. 
We appreciate deeply the support that many members of this 
committee and subcommittee have shown for our efforts. I look 
forward to your questions.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Stevens can be found on page 
111 of the appendix.]
    Chairman Garrett. Thank you. And I thank the panel.
    We will now go to questions, and I will recognize myself 
for 5 minutes.
    And I will start, I guess, with Mr. McCoy. My general 
question is going to be what your opinion is of the effect of 
these rules on municipal money market funds; but, something you 
brought up during your testimony with regard to the LGIPs, and 
you said something about the banks that are--is there is an 
overcollateralization requirement? So, can you answer both of 
those questions, just quickly on the overcollateralization?
    Mr. McCoy. Yes. On the collateralization requirement, 
there, local investment pools no longer could remain 2a-7 
like--
    Chairman Garrett. Yes.
    Mr. McCoy. --to be stable value. One of the alternatives a 
lot of people look at is moving money into banks.
    Chairman Garrett. Right.
    Mr. McCoy. The problem is, banks have to post collateral in 
mark-to-market daily to secure public deposits. And at 110 
percent level, the cost of the bank, both has to be a bank that 
is willing to accept a public deposit, pay some rate of 
interest comparable to any other investment; but also, the 
availability.
    We have found, recently, two colleges, as their deposits 
grew larger, working with a smaller community bank, they did 
not have collateral sufficient to cover those deposits, and 
they did ask that the accounts be moved to larger banks.
    Chairman Garrett. Okay, I can agree with that--
    Mr. McCoy. Probably in a lot of smaller communities, there 
are not banks available--
    Chairman Garrett. I get where you are going. Okay.
    Mr. McCoy. And then, on the other, on the municipal money 
market funds that we have, we do feel like that municipal 
security--short-term securities, should receive the same 
treatment as the U.S. Government obligations, as to have an 
exemption for them in that they are not retail funds. A lot are 
institutional investors, so they cannot qualify under the 
retail exemption the SEC has proposed. So, we have asked that 
they receive an exemption.
    Chairman Garrett. All right, great. Thank you.
    Ms. Bair, you raised the point--an interesting one with 
regard to if you have the gates and the restrictions on there 
that may accelerate the withdraws, right?
    Can't a thing be said, or can't it be said with regard to a 
floating NAV that if you have a floating NAV as the investor 
sees it--``oops, it is down, it broke the buck, so to speak, 
and all of the sudden, that is my first cue to pull out as 
well,'' so is one worse than the other?
    Ms. Bair. That is going to be true with any mutual fund. 
Frequently, what you find what you get into downturned 
situations is that people take their money out of lots of 
mutual funds. They reprice, they go into Treasuries, they fly 
to safety.
    The issue is whether the government is going to give them 
an incentive to run. And so with the stable NAV, they are, 
because you are a smart, one of the so-called smart money and 
you are seeing, ``Oh, the assets in this fund are only worth 97 
cents, I can still get out at a dollar--I am going to go out. 
The government is giving me an affirmative incentive to run.''
    Chairman Garrett. Okay.
    Ms. Bair. That is the inherent source of instability.
    Chairman Garrett. Another question--another point you 
raised during your testimony, do you believe now that the law 
would prohibit a bailout, if you will, and assure of the funds?
    Ms. Bair. I do.
    Chairman Garrett. Okay. That is because of--
    Ms. Bair. Because of the--yes, that was put into law--was 
it the TARP legislation, I think--
    Chairman Garrett. Yes.
    Ms. Bair. There is a specific statutory ban, and remember 
ranking others have affirmed--
    Chairman Garrett. So, what about--
    Ms. Bair. It has no intention to bail them out, they don't 
feel like they have authority to--
    Chairman Garrett. Yes, well, they don't have any intention 
to bail out of things.
    So, what about under Section 13.3, would they be--if they 
were not an individual firm or--but as a same last time, if it 
is systemic to the entire economy and the Fed identifies an 
entire industry that needs to be preserved or protected under 
13.3, wouldn't they have the authority to do so there?
    Ms. Bair. If it is generally available, that is right. But 
there are special prohibitions for money market funds. So, I 
think, that is really--
    Chairman Garrett. So, it is a question of which law 
prevails, whether they--with the prohibitions, or--
    Ms. Bair. I don't know. I think that the more--the greater 
likelihood is if we leave this structural instability in place, 
and we have another problem, they are going to be coming to 
Congress and asking you to vote for a bailout.
    That is what is going to happen, because I don't think they 
feel like they have the authority to do it, and so, it is going 
to be on Congress' head, to vote or not. This is the way it was 
in court and a lot of you face some tough reelections; some of 
you lost those, because of that vote.
    Chairman Garrett. Okay. So many more questions. Can you 
kind of speak to the issue?
    Mr. Stevens, I think you brought it up with regard to the 
shadow NAV, and the effect--the positive effects that could 
have, and the transparency element, and I guess if you want to 
do them and you answered one of my questions already, would 
simply transparency, and I know--
    Would simply the transparency aspect of the rule and 
putting in some temporary limitation gates be adequate?
    Mr. Stevens. If I could take the first part of that, I 
really would recommend to the subcommittee a report that Dennis 
Beresford, who is a former Chairman of the FASB, has prepared. 
And it examines how we maintain a stable NAV and money market 
funds. It is done through something called amortized cost 
evaluation of the securities in the portfolio.
    Amortized costs is an accounting convention which is 40 
years old. It is not a fiction; it is a convention. In fact, it 
is a convention that Ms. Bair has recommended very strongly be 
applied to the banking industry. But apparently in our context, 
it is not a convention, but a fiction. The reality is that as 
Beresford's report points out, the mark-to-market value of 
these portfolios fluctuates from $1 only infinitesimally on 
average, maybe a basis point or so up and down.
    So the value is, in fact, I think a reality, and 
Beresford's report makes it clear that this is a fair way to 
value money market funds. It is not a fiction.
    Chairman Garrett. Okay, I am going to try to contain my 
time as I do with everybody else, so I appreciate that motion. 
If you can give me some further answers on the rest of the 
questions, I would appreciate it.
    Mr. Stevens. I would be happy to, Mr. Chairman.
    Chairman Garrett. The gentlelady from New York is 
recognized.
    Mrs. Maloney. Thank you. On the liquidity fee proposal, of 
the fees that are intended to deter investors from withdrawing 
their money in times of stress, and I would like to ask James 
Gilligan, in the SEC's proposal, the maximum size of the 
liquidity fee would be 2 percent, and as an investor, do you 
think a 2 percent liquidity fee would be enough to deter you 
from withdrawing your money during times of crisis?
    Mr. Gilligan. Recall in my testimony, I am not a net 
investor, so this is speculation on my part, but I think that 
liquidity gates and redemption limitations are not palatable to 
corporate treasurers in any sense of the word, and they would 
not be attracted to investing in money market funds to begin 
with.
    That is our point, that this could destroy the product of 
money market funds and have repercussions that are far more 
extensive than what are being contemplated by imposing that. I 
don't frankly know if a 2 percent liquidity limit will keep 
people from redeeming or not. They are not going to like that 
there is going to be a gate on their redemptions, period.
    Mrs. Maloney. There is some proposal to raise the amount 
that the 2 percent is not doing the job of, Ms. Bair, you 
testified that this would not help, that this would make the 
problem worse. Do you want to elaborate, and Mr. Stevens, your 
comment on this too?
    Ms. Bair. I do think it would make it worse. The prospect 
of the agencies will again give affirmative incentive to people 
to get out before the gates and fees go down, and I worry that 
again, that is going to be the more sophisticated investors who 
understand what is going on.
    That is why you saw retail not running, although I don't 
know that we can assume that won't happen again. One of the 
reasons retail didn't run is because the government quickly put 
a program in place, but they are going to be left, because, so 
a product that is designed for giving people the impression 
they have ready access to their cash, that their cash is fully 
protected, all of a sudden they are going to have to pay a lot 
of money to get their money out or perhaps even have to wait 30 
days. But I think from an investor perspective, that is very 
ill-advised.
    And the thought, I think the industry is being somewhat 
inconsistent by suggesting that as a good approach. On the one 
hand they say, ``Well, this is a very, very important market,'' 
which it is. It is a huge market, despite potentially 
destabilizing. But on the one hand, they say, ``this is very 
important,'' but then it is okay to lock it down for 30 days, 
and not let people pay their bills or make their payroll or 
whatever. That makes no sense to me, so I think this is not a 
good option. I hope the SEC drops it. It is an alternative to 
the floating NAV, and I think it is very ill-advised.
    Mrs. Maloney. And Mr. Stevens, your position on the 
liquidity and fees?
    Mr. Stevens. Thank you, Mrs. Maloney.
    The reality is that the SEC staff report agreed with us in 
our recommendation with respect to the consideration of the 
liquidity gates and fees, that if you cast your mind back to 
2008, it is the recommendation that would have stopped a 
cascade of redemptions.
    But I would say that in the industry, no one would wish to 
flirt with the triggers that would impose those gates or those 
fees. As the SEC has conceptualized it, if a fund's weekly 
liquidity falls to 15 percent of its portfolio, it would then 
be required to consider these two measures. That would mean 
that weekly liquidity had fallen by 50 percent.
    The requirement, if it were adopted into a rule that would 
be internalized by portfolio managers across the industry, 
would be to stay very well north of 15 percent liquidity. In 
fact, if you look across taxable money market funds today, 
their required weekly liquidity is $700 billion. Their actual 
weekly liquid assets maintained in their portfolios as of July 
was $1.3 trillion.
    Mrs. Maloney. And I would like to get Mr. McCoy's comment 
on this, and also, does anyone know where these fees go? The 
rule was very vague in where these fees go. Where do they go? 
Does anyone know? Just in the general Treasury? It doesn't say 
where it goes.
    Ms. Bair. They go back into the fund.
    Mrs. Maloney. Pardon me?
    Ms. Bair. They go back to the fund.
    Mrs. Maloney. They go back to the fund, and would be 
distributed among the other people?
    Ms. Bair. Yes.
    Mrs. Maloney. Mr. McCoy, your position on the--
    Mr. McCoy. I know that is correct on money market funds. 
There is a concern on most of investment pools as to who we 
even legally impose liquidity fees, or gates in that could we 
actually take money from some local governments that are 
behaving one way, they want their money out, and pay it to 
others that are staying in.
    Mrs. Maloney. And on the floating NAV, can anyone estimate 
the average variability in the NAV of time funds if the SEC 
adopts the floating NAV plan. What does it mean? If it is near 
$1 or near $10, would they shift to that area? Any comments--
    Mr. Stevens. Can I take a try at it? Actually, in order to 
force these funds' portfolios to float, for their NAVs to vary, 
the SEC is actually proposing a valuation method which is not 
characteristic of mutual funds, generally. It would require 
these funds to basis point round their portfolios 4 places to 
the right of the decimal. That requirement is intended to force 
a float which the normal pricing of mutual funds' experience 
would not display.
    So it shows you the portfolios here are really quite 
stable, and in order to make them float at all, the SEC has to 
depart from what is the convention with respect to other funds.
    Mrs. Maloney. Thank you. Any other comments?
    Chairman Garrett. No, and with that, the gentleman from 
Virginia is recognized.
    Mr. Hurt. Thank you, Mr. Chairman. I wanted to ask Chairman 
Bair, who obviously is very familiar with what happened in 2008 
and was on the ground, if either or both of these proposals 
were in place in 2008, can you kind of walk us through what you 
think would have been the effect, and whether or not this would 
have had, either of them would have had a positive effect, why 
or why not?
    The second thing I was hoping you could also offer up is 
your view of how this regulatory proposal fits into what is 
being developed overseas and in other countries, and how that 
affects our competitiveness?
    Ms. Bair. Right. So I think the gates and fees would have 
made it worse. I think the floating NAV--look, if we never had 
this special SEC rule that allows a stable NAV, I don't think 
you would have seen such a huge shadow market develop. I don't 
think you would have seen other financial institutions that 
were relying on short-term money, so I think if we had that, 
the money fund industry from the get-go would be smaller, and I 
think it would have behaved like other money funds.
    You would have seen a lot of redemptions. You would have 
seen a flight to quality. You see, that is how markets work. 
They reprice in times of stress, but no, I don't think we would 
have had or seen the implosion that we had in 2008.
    This proposal, I believe, is weaker than what they are 
talking about in Europe. They are saying do a floating NAV or 
have 3 percent capital. If you want to have a stable NAV, you 
want to promise your investors you are going to have a dollar 
no matter what, put some capital behind it. They are saying 3 
percent, so--
    Mr. Hurt. So what is your view of the effect of our 
competitiveness, and what is available to the folks that Mr. 
Gilligan is speaking for in terms of having an efficient 
marketplace, and being able to have the most choices for the 
least cost?
    Ms. Bair. So look, implicit government subsidies always 
allow people to do business more cheaply. Guarantees of that 
capital behind them always allow people to do business more 
cheaply, but those models work until they don't, and they don't 
work in times of distress. So I think you need to think how it 
works in good times, which is it saves everybody money, and how 
it works in bad times, when it costs taxpayers, we know it did 
cost or forced them to take a lot of risk. Fortunately, it 
didn't end up costing anything.
    So I think that those are the tradeoffs you have to make, 
and again Europe is being tougher, and they don't seem to be 
worried about putting themselves in a less competitive position 
to us.
    Mr. Hurt. I also wanted to ask Ms. Chandoha, Mr. Gilligan 
and Mr. Stevens about what Mr. Gilligan testified to, and that 
was that the floating NAV proposal would deprive significant 
choices and impose significant costs.
    Ms. Chandoha, you testified that clearly the imposition of 
these rules or the floating NAV proposal would lead to 
migration out of money market funds. How do you respond to that 
concern that the cost is greater than the benefit at the end of 
the day? Are you able to respond to that, and then I would love 
to hear follow up from Mr. Gilligan and Mr. Stevens on that 
question.
    Ms. Chandoha. We really feel the 2010 reforms strengthened 
the money fund industry, but there still remain some perceived 
risks in the money fund industry. We think the SEC has taken an 
approach to identify the remaining areas of risk in the money 
fund industry, and we feel that the proposal will have an 
impact on corporate treasurers. I think there was an eloquent 
discussion of that, and we do think that there will be 
shrinkage of the industry. So there will be some costs, but it 
will reduce some of the perceived risks of the industry.
    Mr. Hurt. Okay.
    Mr. Gilligan. My response is, the floating NAV is not a 
solution to what I think the problem is that is trying to be 
solved, which is a run on money market funds.
    I implore everyone to consider, even if you go back to 
2008, when the reserve fund broke the buck, and we had a flight 
to quality from investors who withdrew significant amounts of 
money from money market funds--all money market funds. The 
commercial paper market froze in 2008. So, that is an example 
that I hold out to you of what I think will happen to money 
market funds for different reasons.
    You impose these new regulations, they make them 
unattractive to investors, you will see them move funds out of 
the money market funds. You will see a complete freeze-up of 
the commercial paper market, like we saw in 2008, which will 
drive companies like mine to higher-cost alternatives, which 
will have an immediate impact on borrowing costs--which, in our 
industry, will eventually--
    Mr. Hurt. Thank you.
    Mr. Gilligan. --get passed down into our rate payers--
    Mr. Hurt. Got it.
    Mr. Gilligan. --and out of the pocketbooks.
    Mr. Hurt. Thank you, Mr. Gilligan.
    Mr. Stevens, I apologize, but my time has expired.
    Chairman Garrett. The gentleman yields back.
    Next, Mr. Ellison is recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman. And I wanted to thank 
all the panelists.
    Ms. Chandoha, I have a question for you. And I want to 
thank you for being here today.
    In 2011, Schwab became the first and only brokerage to 
insert clauses into your customer service contracts banning 
your customers from participating in any class-action lawsuit 
against your company. This is in addition to the requirement in 
your agreements, which is also used by other brokerages, 
mandating that disputes with individual clients be settled 
through arbitration.
    Your regulator, FINRA, is challenging the legality of your 
class-action waiver as a violation of its member rules. And I 
believe your firm issued a statement on your Web site on May 
15th--which I can't locate now, by the way--announcing a 
temporary suspension of the practice pending the resolution of 
the FINRA action against you.
    My question is why Schwab, alone among brokers, feels that 
its clients should have to give up their right to participate 
in its class actions?
    Ms. Chandoha. I run the Asset Management Subsidiary of the 
Charles Schwab Corporation. The broker-dealer is a different 
subsidiary, so I am not the right person to answer that 
question. I am not very familiar with that particular issue. 
But we can certainly have someone get back to you on that, and 
answer that question.
    Mr. Ellison. I would appreciate that. I would just like to 
put a few other questions on the record for you. Maybe you can 
answer them, maybe you can't. But I would like to also know why 
Schwab can't put an end to this practice of not allowing their 
customers to participate in any class-action lawsuit.
    And then also, if Schwab is successful in stopping FINRA's 
legal challenge, is Schwab planning to re-insert the class-
action waiver into the account agreements? Are those questions 
you can answer?
    Ms. Chandoha. Those aren't questions that I can answer, but 
we will certainly take those questions back, and we will have 
someone get back to you on that.
    Mr. Ellison. And also, I am curious to know if Schwab is 
going to re-evaluate whether taking away the right to go to 
court is fair to customers. So, I assume you can't answer that 
question, but I assume also that you will bring it back to the 
people who can.
    Ms. Chandoha. Yes, we will.
    Mr. Ellison. And I would also just like to express my 
concern about small investors having access to the courts. 
Putting aside the question of whether or not it is legal, I 
would like to know whether you believe, or whether you can get 
back to me on whether or not you believe it is fair for small 
investors to be forced to waive all rights to go to court to 
settle disputes before a dispute even occurs or can be 
understood against a company of significant size such as 
Schwab?
    Again, I am sure, this is for the record, and I am urging 
you to take it back. And I also want to express my concern that 
Charles Schwab believes it can establish a trusted relationship 
with clients while requiring every single one of its clients to 
give up its legal rights to go to court before they can work 
with you.
    So, I would like to just put those questions on the record. 
I will submit them to you in writing. And I just want to make 
it clear that this is an issue I am quite concerned about. 
Actually, we have crafted some legislation to address the 
issue. And I just want to underscore that we believe that the 
small investor needs to have a voice, and our concern about the 
practices in which Schwab is engaged.
    So, thank you for being as responsive as you can today. But 
please convey to your colleagues this is an ongoing issue, and 
this is not going to be dropped.
    Also, I would like to point out that I think this whole 
issue underscores why Congress sought to restrict the use of 
these contracts in Dodd-Frank, Section 921, and why we probably 
should have gone further. And it is also, again, why I 
introduced H.R. 2998, the Investor Choice Act, which would 
prohibit such forced arbitration contracts, when used by 
brokers to abridge the rights of their clients.
    And so, Mr. Chairman, whether by statute or the legislation 
or rule, the Federal Government has a duty to see that 
arbitration is not abused, and that investor rights are not 
further eroded by these types of clauses in broker-dealer 
contracts.
    So, thank you.
    I think I have--I am on my yellow light, so I would like to 
direct a question to Chairwoman Bair.
    Could you offer your views, ma'am, on how you would 
evaluate this proposed rule from the SEC with the three 
proposed reform alternatives set forth by the Financial 
Stability Oversight Council?
    Mr. Hurt [presiding]. Mr. Ellison, what I am going to do 
is, I am going to ask that the witness respond in writing. And 
if we have time at the end, we can--
    Mr. Ellison. Oh, yes. I see we are at the red light--
    Mr. Hurt. So, time has expired.
    Mr. Ellison. Thank you. I yield back the time I don't have. 
Thank you.
    Mr. Hurt. Thank you, Mr. Ellison.
    Next, Mr. Stivers is recognized for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. And thank you to the 
witnesses for being here.
    I want to follow up on something that the chairman of the 
subcommittee asked before he left. And I would like all the 
witnesses to sort of go down and give me their view of this 
issue.
    I believe that a floating net asset value will actually 
exacerbate the problem, because it will encourage people to 
redeem as soon as possible, because the risk is that your money 
will be worth less tomorrow, or 5 minutes from now, or 
whatever.
    So, I guess I want to ask all the way down the panel what 
your view is on that. I believe it makes the problem worse, not 
better, as far as rush to redemption. Could each witness tell 
me their opinion on whether they think it makes the problem 
better or worse?
    Mr. McCoy. We believe it would make the problem worse. And 
as institutional investors, we are concerned that it would make 
the problem worse. We also believe that the nuances of daily 
pricing--it will create some problems and confusion in the 
marketplace. It does not give time for any pricing errors to be 
reconciles and mitigated before damages are done.
    And so, we do think there are a lot of issues. We think it 
would make the problem worse.
    Mr. Stivers. Thank you.
    Ms. Bair. A floating NAV would make the problem--it deals 
with the core problem, which is that, with a stable NAV, if it 
is only worth 97 cents, you can pull out of the dollar. You are 
given an affirmative incentive to run.
    Markets reprice all the time, but if you get with a 
floating NAV, if you get it out, you will have to take a loss.
    Ms. Chandoha. We do think a floating NAV will increase the 
transparency. Schwab voluntarily chose to disclose our shadow 
NAV's earlier this year, so we do think that helps 
transparency, and reduces the surprise factor. So, if there is 
a discrepancy between the--
    Mr. Stivers. My question is, will it increase the race to 
redemption, not does it increase transparency. Could you answer 
that question?
    Ms. Chandoha. Yes. I do think it helps mitigate the run 
risk.
    Mr. Stivers. Okay.
    Mr. Gilligan. I agree very strongly with you, sir. And 
also, I would echo the comments of Mr. McCoy.
    Mr. Stevens. We actually saw during the financial crisis 
funds that had floating net asset values per share experience 
massive redemptions. French money funds that had variable NAV's 
experienced them. Short-term bond funds in the United States 
experienced them.
    And more generally, we think that what happened with the 
Reserve Primary Fund was not attributable to its ``breaking a 
buck.'' It was a flight to quality. It was a flight to 
Treasuries and other quality instruments that was 
characteristic of the broad market.
    Two-thirds of all the dollars that flowed out of U.S. prime 
funds during that period flowed into Treasury and government 
agency funds. So, I don't think it was a fear of the ``breaking 
the buck.'' It was a general preference for safer assets. And 
if the Reserve Primary Fund had been floating at the time, you 
still would have found that a factor.
    Mr. Stivers. Thank you.
    Ms. Bair, if the floating net asset value results in a 
massive change in the size of the money market mutual funds 
market, which it probably will, from, say, $3 trillion to $1 
trillion, and $2 trillion flows into banks that are government-
insured with a government guarantee, doesn't that exacerbate 
the too-big-to-fail problem we have?
    Ms. Bair. The deposit limit is $250,000, so those are going 
to be uninsured deposits. And I don't know if that is where it 
is going to go. I am skeptical of some industry, not every 
one--some industry's predictions that this is going to result 
in a massive downsizing of the money fund industry. There will 
be some downsizing.
    Mr. Stivers. But there is a government guarantee up to 
$250,000.
    Ms. Bair. Up to $250,000. And there is also--the banks--
unlike the--banks aren't perfect. And I am not singling out 
money funds. There are a lot of reforms I would like to see 
with banks. The deposits--we do not have a systemic problem 
with deposits. Deposits have not run. Because we have a whole 
elaborate system of deposit insurance of access and Federal 
reserve lending. Banks have to hold capital and unsecured debt, 
which by statute, take first loss before you can get to 
deposits.
    So, that part of the banking system works well.
    Mr. Stivers. But it makes the banks bigger if the funds 
flow to the banks? That is correct, isn't it?
    Ms. Bair. If those deposits flow into banks, yes, it will. 
Yes.
    Mr. Stivers. Thank you.
    The next question I have is for the two treasurers, Mr. 
Gilligan, and then the State treasurer, about what would 
happen--what would you do if you didn't have a stable net asset 
value in money market mutual funds? Would you be able to use 
them to invest in?
    Mr. Treasurer?
    Mr. McCoy. At the State of Georgia, our focus would be--
because--at the local governments cannot invest in straight and 
in privately managed money market funds. They can invest in the 
State and local government investment pool.
    If we could not operate the stable value, we would explore 
how to operate as a stable value.
    It may not be a 2a-7 light fund, but we could not under the 
current State laws, and I don't think it would be prudent to 
change our State laws to take away the preservation of 
principal as a top priority to actually move to a floating NAV. 
So we would explore how to restructure local government 
investment pools, as I think other States would too.
    I think also I would like to comment--
    Mr. Hurt. Mr. McCoy?
    Mr. McCoy. --on your other question. Banks are--there are 
also--
    Mr. Hurt. Mr. McCoy?
    Mr. McCoy. --bank stiff funds.
    Mr. Hurt. The time of the gentleman has expired. Thank you 
for your answer. The Chair now recognizes the gentleman from 
California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman. I realize it is a bit 
unfair to my colleagues to just walk in right before it is time 
for my questions. I just arrived at the airport half an hour 
ago. It was pretty meaningless anyway.
    In crisis circumstances, the funds may have been worth 
quite a bit different than the exact $1. But today, how big is 
the variation? Are we talking about every fund being between a 
dollar and a tenth of a penny or minus a tenth of a penny? Or 
if we really knew the shadow NAVs, how big a difference is 
there? Chairman Bair?
    Ms. Chandoha. I can answer that question. The variability 
is very minuscule. It is out several decimal places and is in 
the range of a tenth of a penny. So, it is very tiny.
    Mr. Sherman. But if you have $10 million to invest and you 
just have to move your money from a fund where you are down a 
tenth of a penny per dollar over to a fund where you are up a 
tenth of a penny per dollar, if you have $10 million, that--
    Ms. Chandoha. There are very few funds right now which are 
below a dollar. Most funds are above a dollar.
    Mr. Sherman. Above a dollar by more than a tenth of a 
penny?
    Ms. Chandoha. In that range. But it is very, very small 
around a dollar.
    Mr. Sherman. Could we meet the needs for stable investment 
vehicles if we had a fixed dollar on U.S. Government investing 
funds, Mr. McCoy?
    Mr. McCoy. For governments, no. Local governments and State 
governments, no. In fact, we would run into a problem if it was 
a government-only fund during a period like we had last 
September, I think it was September 28th, when Treasuries went 
into negative rates for a short period of time when there was a 
flight to quality.
    We cannot buy a security that would have a loss in 
principal. And so actually when you have negative interest 
rates, which we have seen in some European countries and we 
have seen for one day in U.S. short-term Treasuries, that they 
really would not be even applicable or eligible for us to 
purchase.
    Ms. Bair. I think--was your question with this, a stable 
NAV with government funds, would that actually meet the need of 
having payment processing which would be less risky than prime 
funds? And I think that is a question--
    Mr. Sherman. Yes. Thank you for restating the question.
    Mr. McCoy. But from our perspective, it would be that we 
could not necessarily manage a local government investment pool 
with government only and meet the qualifications because we may 
have to--
    Mr. Sherman. Because of what?
    Mr. McCoy. Because the requirement of the amount of U.S. 
Treasuries that we would have to keep short, if we see a flight 
to quality that we--for instance, managing a local government 
investment pool, some of the--
    Mr. Sherman. If I can interrupt, are you referring to 
circumstances where the government paper has a negative yield?
    Mr. McCoy. That is one. Also, we do have some other 
requirements for State governments in managing pools. For 
instance, our bank deposits would not qualify. So there are a 
lot of issues with local government investment pools that is 
not an option.
    Mr. Sherman. Does anyone else on the panel have a comment 
on that?
    Ms. Bair. I think that is a great question. As I say, I 
think there are significant downsides to letting--using a 
stable NAV for government funds which I articulated in my 
testimony.
    But I do think for those who suggest that the SEC's 
proposal is somehow going to disrupt the ability of large 
corporations or municipalities or whatever to have a place 
for--with a stable NAV for payment processing, they could use 
government funds under the SEC proposal. I think that is a good 
thing to note.
    Mr. Sherman. Okay. I want to yield the rest of my time to 
the gentleman from Massachusetts.
    Mr. Lynch. Okay, thank you. This is going to be a great 
opportunity. First of all, I want to thank all of the 
panelists. You have offered some very thoughtful testimony 
here.
    Ms. Bair, in your expanded written testimony, you really do 
point to the stable NAV as the culprit and the inducement to 
run. Now if Mr. Stevens and what my colleague Mr. Sherman has 
suggested, if this differential is very small, isn't that an 
insurable risk?
    If the delta is so small, why can't we have insurance for 
those parties investing in these funds so that if we did bump 
up against the dollar the insurance would kick in? There 
wouldn't be an inducement to run. The delta would be insured 
and we wouldn't have the flight to quality that we see now, or 
am I just moving the goal post?
    Mr. Hurt. Mr. Lynch, I think your time has expired. Mr. 
Sherman's time has expired. What I would like to do is 
recognize Mr. Hultgren for 5 minutes, and then the witness can 
answer your question.
    Mr. Lynch. Sure, that's great. Okay, fair enough. Thank 
you.
    Mr. Hurt. The gentleman from Illinois is recognized for 5 
minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. Thank you all for 
being here again. I think this is a very important topic that I 
certainly want to understand, and I know my colleagues do as 
well.
    And just to recap, I think my understanding is pretty clear 
from your testimony, from the questions that certainly for 
investors two of the most attractive features of money market 
funds are stable NAV and also liquidity.
    It also seems fair to say that these features, if they are 
compromised by floating the NAV or imposing gates or fees, we 
would likely see--most of you had said this--we would see money 
flow out of the products and we would see less demand for money 
market funds.
    Mr. Stevens, I wondered, this movement out of money market 
funds, would that also be seen in institutional prime funds as 
well as municipal funds?
    Mr. Stevens. I think it would be across-the-board, assuming 
that the requirements were applied uniformly, particularly if 
they were applied in combination. And we have given a lot of 
thought over these past 5 years to where the money would go.
    One of the convictions I think, particularly for retail 
investors, is that it would flow into bank deposits and 
probably be concentrated in the largest of our banks. With 
respect to institutions which have more alternatives, there are 
private funds that they could use. There are offshore vehicles 
that they could use. None of them have the transparency or the 
regulation that are characteristic of today's money market--
    Mr. Hultgren. Treasurer McCoy, if I can ask you a quick 
question, if we expect an exodus of investors from municipal 
tax-exempt funds, couldn't this mean a cost spike for State and 
local government financing?
    Mr. McCoy. It would. Anything that would reduce the demand 
for our issuance of bonds would increase our borrowing cost.
    Mr. Hultgren. So it is really--the potential is the new 
rules could indirectly burden our constituents, the taxpayers, 
with highest costs for States and municipalities. Is that true?
    Mr. McCoy. Absolutely. It would drive up our borrowing 
costs.
    Mr. Hultgren. Okay. Mr. Stevens, jumping back to you, 
quoting from your testimony, the SEC--as you stated--released 
proposals to exempt government money market funds from further 
structural reform because of, among other things, the 
following: Government money market funds are not susceptible to 
the risks of mass investor redemptions. Their securities have 
low default risk and high liquidity, and interest rate risk is 
generally mitigated.
    Could the same be said of municipal funds as well?
    Mr. Stevens. Yes. In fact, we believe that the municipal 
security market reflects many of those same characteristics. In 
addition, we have looked at the Detroit bankruptcy, the 
experience in September of 2008, and the problems in Orange 
County historically and have discovered that those major shocks 
in the market did not precipitate outflows en masse from tax-
exempt money market funds.
    Mr. Hultgren. Ms. Chandoha, in your testimony, I gather 
that you would agree with ICI's conclusion that municipal money 
market funds are particularly resilient, to quote your 
testimony, and don't pose a systemic risk. Is that true?
    Ms. Chandoha. That is true. I agree with what Paul said, 
that the municipal money funds are much more liquid than prime 
funds, so they are far more resilient. They proved that in the 
financial crisis. We didn't really see flows there.
    They are also--they represent 10 percent of the whole money 
fund industry, so they are very small relative to the entire 
industry, but yet have outsized importance for State and local 
governments to finance themselves.
    Mr. Hultgren. Okay. Treasurer McCoy, I wonder if you could 
help me further understand. I have met with some State 
treasurers, but I want to ask if you could briefly lay out the 
implications of the SEC's proposal for local government 
investment pools, or LGIPs.
    The LGIP structure won't be familiar to everyone here, and 
I believe the effects of the SEC's alternative proposals 
certainly could pose a significant risk to participants in 
LGIPs, potentially harming the finances of those municipal 
entities. Could you tell us just briefly--I only have a few 
seconds left--if you see this as a potential harm and a concern 
we ought to have?
    Mr. McCoy. I think every State that manages an LGIP would 
look at this very seriously.
    I think that we will--as State treasurers, we would work 
with GASB to see if we could encourage GASB to change their 
rule to be more like the office of the OCC rule for bank stiff 
funds, which does describe--or require a stable NAV by using 
amortized cost accounting. So it would, we would be moving in 
that direction to see if we couldn't get some relief there.
    Mr. Hultgren. My time is about to run out. I am going to 
ask if I can follow up with some written questions and ask for 
your response. One in particular is NAST, concerned with the 
SEC's proposed elimination of the 25 percent basket, returning 
to a 10 percent limit, effectively could cap municipal debt 
held by a single MMF regardless of creditworthiness.
    So I have some questions about the impact, again, on 
taxpayers, on our constituents. My time has expired, and I 
yield back. Thank you all very much.
    Mr. Hurt. The gentleman's time has expired. And the Chair 
now recognizes Mr. Lynch for 5 minutes.
    Mr. Lynch. Thank you. Again, if I could go back to my 
question, Ms. Bair, it is sort of two dimensional. One is, 
would we be able to ensure the risk of breaking the buck to 
remove that inducement to run?
    And the other is, by creating an insurable situation there, 
you would allow the insurance company to actually look at the 
quality of the assets within the fund in setting the insurance 
rate. Is that something you had considered? And I do appreciate 
the courage of your position. You are not the most popular 
person in the room, but I do appreciate your candor, your 
honesty.
    Ms. Bair. So this would be using a private insurance or 
government insurance program?
    Mr. Lynch. Either way. The SEC is now talking about fees--
    Ms. Bair. Right.
    Mr. Lynch. Redemption fees--
    Ms. Bair. Right, right.
    Mr. Lynch. If you are going to charge them.
    Ms. Bair. Right. I think if policymakers decide that we 
need the fund industry as it is because of the payment 
processing services it provides, especially for large corporate 
users and governments, to do it up front with some type of 
insurance program that you pay for is the best way to do it.
    I am not advocating that, but I am saying if you want this 
industry to continue the way it has been, which now has an 
implicit government guarantee, frankly, a guarantee without any 
capital behind it, nothing behind it except kind of a wing and 
a prayer, that would be the way to go.
    I am not advocating that, but if you want this industry to 
continue the way it is with the stable NAV for a wide variety 
of large corporate users in particular, that would be a better 
approach than to leave things the way they are.
    Mr. Lynch. Thank you. And let me ask you, Ms. Chandoha has 
recommended--and again, this is for you, Ms. Bair--in her 
testimony that municipal MMFs, money market funds, be exempt 
from the floating NAV requirement.
    And there is a public purpose in terms of the municipals 
that is undeniable, and I worry. I have a letter here from the 
Massachusetts Municipal Association. I will ask unanimous 
consent to enter that into the record.
    And also, a letter from Governor Patrick--
    Mr. Hurt. Without objection, it is so ordered.
    Mr. Lynch. --arguing against the floating NAV. So, what are 
your thoughts on that in terms of exempting them?
    Ms. Bair. I don't like the government securities generally, 
so I would take it all out. I would say that the argument is 
stronger for a Treasury-only fund than it is for GSEs.
    And I am sorry you have credit risk with municipal debt, 
you do. You certainly have interest rate risk with all of them. 
So, no, I would just like to get rid of that exception for 
government funds. But I certainly wouldn't want to expand it.
    Mr. Lynch. Okay. And, lastly, again, this has been touched 
on several times. I just looked at the size of the 10 biggest 
banks back in 2008, for those that are still around and a lot 
of them are not. On average, they have increased 40 percent in 
size between 2008 and 2013.
    And I am just concerned about this too-big-to-fail problem. 
If we are going to create safeguards, that does induce folks to 
get out of money markets, and if they do run to banks, are we 
creating even a bigger problem on that end?
    Ms. Bair. I don't know where the money would go. I don't 
know that it would go to the largest banks. I think, typically, 
when I was at the FDIC, we saw a lot of volatility with 
community bank deposits depending on where the money fund 
rates--returns were.
    So, I think there is--definitely if you are worried about 
competitive issues, it is not clear to me at all that this is 
going to be benefiting the big banks. I would say, though, this 
is--
    Mr. Lynch. If I could, I think in the money market space, 
we have seen the size of sponsors--
    Ms. Bair. Certainly, on the retail level--
    Mr. Lynch. Influence.
    Ms. Bair. On the institutional level--
    Mr. Lynch. Yes.
    Ms. Bair. Yes, you would assume that very large accounts, I 
would assume, would go to the larger banks. For the retail 
level, I don't know if that is the case.
    So, look, this is not about--I think there is a 
perception--or those who want to keep the status quo want 
people to think this is bank-driven or bank regulator-driven.
    This is system stability-driven. I don't think the big 
banks are not supporting this. A couple have weighed in on the 
side of the fund industry because they have their own money 
funds. They have more deposits than they know what to do with 
already. So, I don't think they are driving this. I think what 
this is about is system stability. You have a banking system, 
albeit imperfect, and it needs changes, too.
    But, on the deposit side, it worked pretty well, and the 
reason is because you have a number of safeguards like deposit 
insurance, like Federal Reserve Board lending, like capital and 
unsecured debt that takes first loss before deposits would ever 
be hurt, which is why deposits mostly suck even the uninsured 
stuff.
    So, it is whether you want a shadow bank or not. You have a 
shadow bank that works in good times and it doesn't work in bad 
times. So, if you want to keep this, then you are right, go 
with some kind of government--
    Mr. Lynch. Thank you--
    Ms. Bair. --insurance program for that.
    Mr. Lynch. I yield back. Thank you for your courtesy.
    Mr. Hurt. Thank you, Ms. Bair.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    I fully admit that this is not something which is readily 
intuitive to most folks. I am not very familiar with it, so I 
appreciate all of you taking the time to help us get up to 
speed.
    When I deal with things that I don't readily understand, I 
like to go back to the very beginning of the issue.
    And it strikes me that we are here and the SEC is proposing 
these rules, if I get this right, in order to prevent future 
runs on money market accounts. That is a fair statement, right?
    But yet, I hear Mr. Stevens then turn around and tell me 
that there was no run in 2008 on these money market funds, 
there was no run when Orange County went under on these money 
market funds several years ago.
    Mr. Stevens, you are shaking your head no, but I thought 
you said that there was no run on these accounts several years 
ago.
    Is this a solution looking for a problem? Why are we even 
talking about these things?
    Mr. Stevens. No, I believe, Congressman, what I said was 
that the problems experienced in prime money market funds in 
2008 have been attributed to one fund breaking a dollar.
    Mr. Mulvaney. Right, just one.
    Mr. Stevens. Just one. The reality is that before the 
Reserve Primary Fund broke a dollar, 13 major financial 
institutions had collapsed or required a government bailout.
    Lehman Brothers went bankrupt, and the day the Reserve 
Primary Fund broke a buck, AIG was taken out. There was not a 
characteristic of money funds that was at issue. It was, in 
fact, a general flight to quality by all investors in the 
market. Remember, in those days, the banks wouldn't even lend 
to one another.
    So, what we saw is investors, very deliberately, leaving 
exposure to commercial paper and other assets that were opaque, 
including bank assets, bank-issued debt, and they were moving 
instead to the safety of Treasury and government agency 
securities, and one of the ways that they did so is by 
investing in Treasury and government agency money market funds.
    We interpret this to mean that it wasn't a structural issue 
with money market funds. It was, in fact, a basic problem in 
the commercial paper markets that all investors, including 
ours, were reacting to.
    So, we certainly had outflows, but the commercial paper 
markets were experiencing them across-the-board.
    Mr. Mulvaney. Thank you for that clarification.
    And to the extent that this is something which needs to be 
dealt with, tell me, Mr. Stevens--and I heard Mr. Gilligan say 
that a lot of funds have already offered--are starting to offer 
shadow NAVs.
    We have heard other folks testify today about funds 
offering voluntary--or talking about proposing voluntary gates 
and fees. Doesn't that voluntary system solve the problem just 
as well?
    If you had a shadow NAV with voluntary gates and fees, 
doesn't that accomplish the same thing?
    Mr. Stevens. We think disclosure can go a long way without 
having a requirement that we float the NAV to inform investors, 
since that is what many proponents of a floating NAV argue, to 
make them clear in their own minds that this is an investment 
product that can change in value.
    Some of our members have voluntarily started to do that. If 
the SEC were to require it across-the-board, that is something 
we could support.
    Mr. Mulvaney. So my understanding is that if you do the 
shadow NAV instead of actually mandating it, it does avoid some 
accounting and tax issues.
    Mr. Stevens. Yes, if you allow the transactional value to 
remain stable within the confines of the current rule, what you 
have is, you are sparing investors the need to keep track of 
infinitesimal capital gains and losses over time. Money market 
funds aren't like other mutual funds in the sense that you may 
buy a mutual fund, a stock or a bond or a hybrid fund today, 
and hold it for a long period of time.
    But, for a money market fund, you can be in and out of that 
constantly. Certainly, Schwab's customers are a great example 
of that, in Marie's testimony.
    And if you had a floating NAV, each one of those would have 
to keep track of minuscule gains and losses each time and 
report them to Uncle Sam. It would be a paper chase nightmare 
for tax compliance.
    And that is one of the reasons, I think, that money market 
funds are so popular because of the convenience that they 
provide through that stable $1.00 per share value base.
    Mr. Mulvaney. Thank you, Mr. Stevens.
    Mr. McCoy, I want to get back to you very briefly. I have 
45 seconds left. At the very end of your testimony, you were 
saying something very interesting to me which is the impact 
especially of these proposed rules on small and rural 
communities.
    Could you finish that testimony please because that--you 
just described most of my district?
    Mr. McCoy. Yes, sir. Thank you.
    Those will be the communities we think will be most 
impacted, that your large metropolitan communities gain great 
benefit from local government investment pools, but many of 
those could adapt more easily.
    They have larger financial institutions in their community 
that they have banking relationships with that would work with 
them to accept deposits. Also, they do have some trained 
investment staff, and with very good systems, they could move 
to develop to buy securities directly.
    The smaller ones will not have the staff or the resources 
to look for alternatives. They will end up taking more 
concentration risk in securities instead of having a 
diversified portfolio in a local government investment pool.
    And often not have banks that would have sufficient 
collateral to accept their deposits.
    Mr. Mulvaney. Thank you, Mr. McCoy.
    Thank you, Mr. Chairman.
    Mr. Hurt. The gentleman's time has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    I thank the witnesses for appearing here today. I can't 
remember if it was Mr. Gilligan or Mr. Stevens who indicated 
that were we to float the NAV, there would be a lot of 
institutional investors that would flee from the money market 
funds and would go to alternative products.
    So, you guys are going to have to remind me who said that.
    And I guess I would like to know, what that would be? We 
have heard a lot discussion here today that they wouldn't 
necessarily go to banks. Banks are overcapitalized, they have 
record deposits and don't really necessarily want the money.
    So, thank you for helping me recall who said that.
    Mr. Gilligan. Yes, ma'am. I think I spoke to that.
    I think the answer to your question is I don't really know 
where these deposits are going to flow to; no one really knows.
    Ms. Moore. Would they go off-shore perhaps?
    Mr. Gilligan. They definitely could go off-shore. I think 
they will go to a number of different places. I think funds 
will flow to banks, which has been stated already have a lot of 
deposits and have grown in size.
    I think there will be some off-shore movement into 
nonregulated funds. I think there will be some transition into 
muni funds, govi funds, but I don't even know that they are 
going--those funds are going to have the capacity or underlying 
financial instruments to take the prime institutional money 
that will free up--that will move out of there.
    So, it is a good question. No one knows.
    Ms. Moore. And then, I would ask Ms. Bair, are we pooling 
risk into--you said that they wouldn't necessarily go to the 
biggest banks, but you acknowledged that they probably would.
    Are we just moving risk into government-backed banking 
institutions? Wouldn't risk pool there, if it were to go to 
those banks?
    Ms. Bair. Again, the banking system is made, first and 
foremost, for a safe place to put ready cash; cash you need to 
move in and out on a quick basis, that maintains stable value--
that is what banks are supposed to do. Money funds are somewhat 
of a shadow bank in that regard.
    So, the fact that it would go to banks is not--that is what 
the banking system is supposed to do. I think Mr. Gilligan has 
some good arguments with the suggestion that money fund 
investors are going to go to some shadow hedge fund in the 
Cayman Islands, it just doesn't pass the lab test.
    Money market fund investors are somewhat risk-averse. They 
are going to be looking for safe places. And so, I can't 
believe that this is going to go into the shadow sector; we 
have already talked about Europe, which is proposing tougher 
standards. So, I do think he has some good, very good 
arguments, which he has articulated very well.
    This one, I don't see any shadow banks out there that are 
going to be attractive to the kind of investors who put money 
in money funds.
    Ms. Moore. Okay, thank you for that.
    I have a couple of other questions for whoever wants to 
answer--feels adequate to answer it, I would invite them to 
answer it. Do we have any clarity from the IRS on the 
accounting consequences of floating the NAV?
    Yes, sir, Mr. Stevens?
    Mr. Stevens. Congresswoman, we have had discussions on 
behalf of the industry with both Treasury and the IRS. They are 
certainly aware of the issues that we have focused our concerns 
on if we go to a floating NAV. And, they have tried, at least, 
to be forthcoming.
    One problem is something called the wash sale rule--if you 
are transacting and you are in and out, and you sustain a 
period of losses and then you reinvest, they have said that 
they would waive the wash sale requirements, but the taxpayer 
would still have to keep track of all of the transactions in 
order to determine whether they are within the exemption that 
is being discussed.
    So, the administrative burdens are going to remain. And 
while that is at least promising, it doesn't really resolve the 
heart of the problem.
    Ms. Moore. Right. We are obviously going to see the money 
market fund really shrink considerably. And if the only 
investors in there would be maybe municipal bonds, who are 
treated more like corporate bonds than they are Treasury bonds, 
what impact will this have on changing or maintaining the low-
risk profile of municipal bonds?
    Mr. McCoy. The question is whether the change on the 
municipal bonds--I am trying to make sure I understand the 
question--as to the impact on municipal bonds--
    Ms. Moore. If they are just a primary customer, as 
everybody else is gone--I am assuming that others would leave 
and go to big banks--does that change the risk profile?
    Mr. McCoy. It would not change the risk profile of the bond 
issuers, it would change the appetite of the investors. And--
    Ms. Moore. Okay.
    Mr. McCoy. So, it would remove the largest purchaser of 
tax-exempt bonds if the--if municipal money market--
    Mr. Hurt. Thank you, Mr. McCoy.
    Mr. McCoy. --demand there are a large purchaser.
    Mr. Hurt. Thank you, Mr. McCoy.
    Ms. Moore. And thank you, Mr. Chairman, for your 
indulgence.
    Mr. Hurt. The gentlelady's time has expired.
    The Chair now recognizes Mrs. Wagner for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman, and thank you to our 
witnesses.
    This is going to be directed to Mr. Stevens. If the logic 
behind the SEC's proposal for floating NAV was simply to 
provide more transparency or to remove the unique ability of 
money market funds to hold their NAV constant, then I think, 
perhaps, the SEC's proposal might have some level of merit. 
But, as we know, that is not the primary argument that the SEC 
made.
    As they noted in their rule proposal, the floating NAV is 
designed primarily to ``address the incentive of money market 
fund shareholders to redeem shares in times of fund and market 
stress.'' The SEC believes that this would, I guess, address 
any contagion or systemic risk issues surrounding money market 
funds.
    So, my question, Mr. Stevens, is does the solution fight 
the problem? If there are real concerns about investor 
redemptions and systemic risks during times of stress, is a 
floating NAV the appropriate response?
    Mr. Stevens. We have been on record on this subject 
continually since 2009, and it has been remarkable how many 
voices there are who say that all we need to do is float the 
net asset value per share. Certainly, some voices at the SEC, 
and the Federal Reserve Bank Presidents recently have said that 
is the prescription.
    We have always wondered whether that would stop a massive 
redemption out of a money market fund vehicle in the 
circumstances that we faced in 2008 when basically, people were 
trying to flee from a certain asset class and to find a safer 
haven for their investor dollars.
    Nonetheless, it remains one of the two core proposals that 
the SEC has put in place. And so, our members have been trying 
to figure out which is better, from the point of view of the 
investors we are serving--a floating NAV per share, or 
redemption gates and fees?
    Mrs. Wagner. If a floating NAV caused investors to pull 
money out of money market funds, is it reasonable to believe 
that a lot of the money would flow into FDIC-insured bank 
accounts?
    Mr. Stevens. We have been on the record about where the 
money would go to, and it is a complex analysis. For retail 
customers, they really will have no alternative, I think, 
except for deposits. So, they will go to banks.
    Institutions have lots of other alternatives, and while Ms. 
Bair kind of dispenses with the notion that there are offshore 
and other kinds of markets, those actually already exist for 
institutional investors, and they don't have the transparency, 
they don't have the regulations around them.
    But if they can provide a current money market rate of 
return and a stable net asset value for large investors, they 
will be a very attractive alternative to uninsured bank 
deposits, for example.
    Mrs. Wagner. So, if we are looking at money market reform 
from the standpoint of taxpayer protection, the SEC's proposal 
could actually create a scenario where funds flow from a 
product that currently does not enjoy a taxpayer guarantee to 
bank deposits, which have an explicit taxpayer backing. Is that 
correct?
    Mr. Stevens. We have expressed that concern, as well.
    Mrs. Wagner. Wouldn't this end up creating more risk for 
taxpayers and perhaps even exacerbate the too-big-to-fail 
problem?
    Mr. Stevens. It certainly--remember, we are talking about 
$2.6 trillion in--that is intermediated through money market 
mutual funds today. That is a big number.
    And so, if a substantial portion of that were to go back 
into the banking system, some substantial portion of that 
clearly would be going to our largest banks. I think, to the 
extent that raises the concern you are suggesting, it may 
create a risk elsewhere.
    Mrs. Wagner. Thank you.
    Mr. Gilligan, you have an important perspective in this 
debate in that you are here representing Main Street companies 
that both invest in money market funds but also issue 
commercial paper that is bought by money market funds and is 
essential to financing operations.
    You noted in your testimony that, ``Corporate treasurers 
and financial professionals understand the risk of investing in 
money market funds, and that investments in these funds is not 
guaranteed by the U.S. Government.'' Do you believe the SEC's 
proposal for floating NAV will somehow uncover hidden risks of 
money market funds that corporate treasurers and other 
institutional investors aren't already aware of?
    Mr. Gilligan. Absolutely not. And I argue a little bit with 
this notion that investors believe there is an implicit 
guarantee, anyway, of money market funds. I don't believe that, 
and I don't think the majority of investors believe that. Where 
that comes from, I don't know.
    By definition, institutional investors are sophisticated 
enough to understand the underlying risk and the shadow NAV 
takes that into account.
    Mr. Hurt. Thank you, Mr. Gilligan.
    Mrs. Wagner. Thank you--
    Mr. Hurt. The gentlelady's time has expired.
    The Chair now recognizes Mr. Perlmutter for 5 minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    Ms. Bair, I don't like being at odds with you. We went 
through all of this together 5 years ago today, I think, is 
when we began to see a run on money markets. And the reserve 
fund broke the buck today or tomorrow, 5 years ago.
    So, this net asset value floating--Mr. Hurt asked a 
question and I want to just follow up on that--Lehman Brothers 
is, say, at 10 o'clock on a Sunday night, is at 20 bucks per 
share, and reserve has it as an asset trading; by Monday 
morning, it is 2 bucks a share. Okay?
    So, in a time of crisis--because that week was Merrill 
Lynch, AIG, Lehman Brothers, Wachovia, Washington Mutual and 
then the money markets--in 5 days.
    The net asset value piece, I don't understand how it makes 
a difference. Because all of a sudden, they have gone from $1.2 
per value, down to 97 cents. And the net asset value is just 
going to tell you that.
    My feeling, and I guess I am very laissez-faire on this--
Colorado counties lost a ton of money in the reserve fund. They 
went into bankruptcy; they got 93 cents back, Okay?
    What different does this make at all when you really are in 
a financial crisis like that? I think the insurance that--and I 
want to thank you for that--was posted over those couple of 
days, that is what stopped the run. Not the fact that people 
could say, ``Oh geez, it is 97 cents, I want my money back.''
    So, please--
    Ms. Bair. So, a couple of things. We had an unstable system 
develop because of the stable NAV. We wouldn't have had such a 
large shadow banking sector; we wouldn't have had so much 
financial institutional reliance on money fund financing to 
begin with. So I think there is that.
    Plus, I would like to know, why is it that we had to bail 
out money funds, but not other mutual funds? This was just a 
matter of repricing--
    Mr. Perlmutter. Okay, and I get--this is where I disagree, 
because it is at $1.2 Sunday night, and at 97 the next morning; 
it would have have made any difference. That is what then 
created, in my opinion, the run--
    Ms. Bair. But there was always repricing, there was always 
withdrawal. There were withdrawals in lots of mutual funds. We 
didn't have to bail out those mutual funds. What was it that 
was unique about money funds that made taxpayers have to come 
in and take huge risks that they have--
    Mr. Perlmutter. What is unique is they were treated as 
checking accounts--
    Ms. Bair. Yes.
    Mr. Perlmutter. And so the real issue--
    Ms. Bair. They are like banking, or shadow bank--
    Mr. Perlmutter. As if they are treated as checking 
accounts, should there be insurance--not do you mark-to-market 
every day.
    Ms. Bair. That would be another alternative. That is 
something Congress would have to do.
    If you want this alternative to traditional banks, if you 
want them to have some kind of new kind of bank called the 
money fund that is going to have insurance, you will need to 
charge for that, and you probably want to have some first-loss 
protection like capital, the way we do at banks. Then do that, 
if that is what you want, I am not--
    Mr. Perlmutter. Or it is buyer beware, and so I guess that 
is where I am sort of laissez-faire, because--
    Ms. Bair. --if they--
    Mr. Perlmutter. Colorado counties took a clobbering.
    Ms. Bair. Right.
    Mr. Perlmutter. Okay? And if Colorado counties want to 
continue to do this, buyer beware.
    Ms. Bair. They are--can be--would be--were a lot better if 
they see the value of the fund fluctuating every day. It would 
be a daily reminder that they are not guaranteed. The stable 
NAV--
    Mr. Perlmutter. Let me speak to Mr. McCoy. You are watching 
these things all the time, are you not as a treasurer? You are 
watching the value of your investments?
    Mr. McCoy. Absolutely.
    Mr. Perlmutter. Every day, so it is more the retail people 
I am worried about, and that is why an insurance fund of some 
type might be beneficial because it would be like an FDIC fund, 
but I just don't think the marking-to-market every day, which 
is what the net asset value thing is all about, changes the 
equation.
    Ms. Bair. But they have to, if they have to sell assets for 
redemptions. They have to sell at the market, so that is a much 
more accurate reflection of what the value of this fund is 
worth. I would just--a lot of people have asked me, and you did 
just again.
    What would have made the difference if we had a floating 
NAV? I think the better question is, what would have happened 
if we hadn't had a taxpayer bailout? This idea that there is 
only one fund that has ever broken the buck. How many funds 
would have broken the buck if taxpayers hadn't stepped in? And 
I'm sorry, Mr. Stevens, but your industry was in a bit of a 
panic. I was around, and you wanted that bailout, and you 
bought into it.
    Mr. Perlmutter. You and I are in complete agreement.
    Ms. Bair. And I would just like to suggest--
    Mr. Perlmutter. Had you and the Administration, and this 
was the Bush Administration, not stepped in, it would have 
crashed terribly.
    Ms. Bair. Yes. And a lot of people would have lost money.
    Mr. Perlmutter. I don't think this rule changes that. That 
is my point.
    Ms. Bair. Okay.
    Mr. Perlmutter. No, I am done. Thank you. I yield back.
    Mr. Hurt. Thank you, Mr. Perlmutter.
    The gentleman's time has expired.
    The Chair now recognizes Mr. Scott for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman. I must say, this has 
been a very fascinating hearing, because my eyes have been 
opened up to something of which I have only been dimly, dimly 
aware. Now, from what I have been hearing, is it a fact now 
that what we are saying is if this SEC proposed rule requiring 
the floating NAV asset value to take the place of the dollar, 
that this would kill the prime money market, is that an 
accurate statement? Does everybody agree with that?
    Ms. Bair. No, I don't--
    Mr. Scott. Mr. McCoy?
    Mr. McCoy. We figured it would have a significant impact. I 
would not use the word ``kill.'' This is something that is new 
ground. It is untested, and so we believed it would have a 
significant negative impact that would be harmful, but this is 
untested.
    Mr. Scott. Tell me, what would you do if you could not 
invest your money in a market fund at that stable $1 per share, 
or you could only invest in government funds? If you had that 
choice, where would you put your money?
    Mr. McCoy. Yes, for us, the State of Georgia, we are buying 
securities directly in the marketplace. We have lots of 
alternatives other than money market funds. Your mid and 
smaller-sized municipal governments have fewer alternatives and 
so a money market fund, for those who can legally buy private 
funds, is a very good alternative for them.
    Most will--of the local governments would turn to the State 
and local government investment pools which are run as stable 
value by law, and so that's our issue is that if this has an 
unintended consequence that would cause an impact for a local 
government investment pool no longer to be able to provide that 
service, those local governments, the smaller ones will have 
difficult time finding comfortable investments that would not 
increase their risk and reduce their liquidity.
    Ms. Chandoha. And I would argue that individual investors 
have fewer choices, so if they are not going to invest in prime 
funds, they could invest in government funds, but the reality 
is at this point in time, there is not enough capacity in 
government funds to absorb that. We have the largest Treasury 
money market fund, and almost 2 years ago we closed that to new 
investors because there wasn't enough capacity in that. So we 
do think individual investors would migrate probably to bank 
products.
    Mr. Scott. So what you are saying, then, is it might not 
kill the prime money market, but it could put it on life 
support. Now, let me ask you, Treasurer McCoy, to explain so 
the audience will know why, if it is important operationally 
and legally for State and local governments to be able to 
transact with money market funds at the $1 level, and what 
would be the result, for your failure to do so, how damaging 
would that be?
    Mr. McCoy. That is a very good question. State and local 
governments, and this is separate from our pension funds, 
dealing with operating funds, bond proceeds and trust funds, we 
have to preserve the public funds, and that's our primary 
responsibility, to protect the public funds, and invest them 
where they are available as they are needed, State bond 
proceeds as they are needed to, or bond reinvestments, to make 
payments to bondholders on time, the exact amount that's 
needed.
    We have to protect funds, operating funds, teachers, 
others--employees' payroll. Deposits were made, we have to 
safeguard those funds, invest those funds. They need to be 
liquid when they are needed for payment.
    If anything that would inhibit that would run afoul of the 
whole purpose of protecting the public's funds, we do have to 
protect the principal and provide liquidity, and that's where 
this would run afoul with a lot of State statutes, I know the 
SEC just referenced in their comments that States may need to 
change their statutes.
    That would be a long and healthy debate for States to 
determine whether it would be prudent to then put local 
governments' money and State government money at risk because 
the SEC had changed their money market fund reform, or 
regulations, so there--we will have a lot of issues that would 
come up, that would impact State and local governments, and 
again, these are untested waters.
    Mr. Hurt. Thank you. Thank you, Mr. McCoy. The gentleman's 
time has expired. Thank you, Mr. Scott.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Foster, for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman. Do any of you know the 
answer to this: Has there ever been an estimate of what the 
losses would have been economy-wide had the government not 
backstopped the money market industry in 2008?
    Ms. Bair. No. No. I don't think they have, but my guess is 
it would have been a lot.
    Mr. Foster. Or more than $1 trillion, or is there any way 
to--
    Ms. Bair. That I don't know, but I think a lot of funds 
would have broken the buck. I think a lot of retail and 
institutional investors would have had to wait a long time to 
get their money back, and when they did get their money back 
they would have gotten a lot less. Again, as we just said 
earlier, some reserve fund investors still haven't been paid, 
so I think the results would have been quite cataclysmic, and 
hurt a lot of institutional--
    Mr. Foster. Those will be the direct losses from investors 
who didn't get their money back. There would be a separate 
class of losses when the markets froze up, and business as 
usual would be--
    Ms. Bair. Ironically, the bailout helped the investors, but 
money funds still pulled back. They didn't want to lend any 
more, and that was why we had problems in the wholesale funding 
market. The source of credit that supported other financial 
institutions dried up, so while the bailouts protected the 
investors, the money funds still pulled back, and that's why we 
had, one of the big reasons why we had disruptions in wholesale 
funding markets.
    Mr. Stevens. Congressman, could I get a word in here, if 
you wouldn't mind, because I think you are asking perhaps the 
wrong question?
    The issue is what would have happened to the economy if the 
government hadn't stepped in to try to restore order to the 
commercial paper markets? We were an investor in those markets. 
We weren't the only investor, and we weren't the only investor 
that pulled back. In fact, we re-entered those markets before 
most. So the issue is not, as I have said before--
    Mr. Foster. You re-entered them after the government 
backstopped you.
    Mr. Stevens. The guarantee program was in place. That is 
correct, and so from a psychological point of view, that was a 
very dramatic moment, true. But what ensued thereafter were a 
series of programs that the Federal Reserve maintained in order 
to get the commercial paper markets starting again.
    That wasn't just for our purposes; it was for all 
commercial paper, investors' and issuers' purposes, and that is 
what got the situation resolved. I think it is important, and I 
would like to respond to a statement, if I can do so now, about 
the guarantee program.
    The guarantee program is not something our industry asked 
for. We were told it was going to be put into place. When we 
were told it was going to be put into place, we insisted that 
it be limited in time. We also insisted that it be limited in 
nature. In fact, the guarantee program was designed so that if 
a fund broke a buck, the government might pay the difference 
between the 99 cents and the dollar, so the exposure was 
intentionally limited, and in fact, we paid $1.2 billion in 
guarantee fees and the taxpayer never paid a penny on that 
guarantee.
    Mr. Foster. Does anyone have a comment on your comment 
here?
    Ms. Bair. We all have our revisionist history. You know, 
gee yes, that's right, the government just, for the fun of it, 
threw money at money funds when they didn't really need to. I 
don't see that the money funds pulling back with its--
disruption wholesale funding markets. There were certainly 
other factors, but my own agency ended up having to take huge 
exposure guaranteeing the debt of large financial holding 
companies who couldn't roll their paper without some kind of 
government backstop, so there was quite a lot of government 
support thrown at this. And money funds were a significantly 
exacerbating factor, and I think anything besides that is 
revisionist history.
    So, I am sorry we have to have a different perspective on 
this, but I was there, and I don't recall anybody objecting in 
the fund industry when the government decided to bail them out.
    Mr. Foster. Okay.
    If I could change the subject for a moment, Ms. Chandoha, 
you mentioned that retail investors don't run, which I thought 
was interesting. This is, to my thinking, that it was the 
sophisticated investors who were the ones who actually monitor 
the asset values who actually are the ones who are going to get 
their money before the gates slammed shut, or the fund gets 
liquidated. Is that really the situation we want to be in, and 
one that you think is good for your customers?
    Ms. Chandoha. Large institutional investors can lose their 
money more quickly. They also hold larger portions of funds.
    Mr. Foster. And they monitor--
    Ms. Chandoha. So, they can have a much bigger impact very 
quickly. Retail investors have very small portions for the 
funds. And even if they do move, it has a much smaller impact.
    So, there were some redemptions in retail funds, but much 
more muted than institutional funds.
    Mr. Foster. Yes. And has there ever been research by 
independent parties as to what fraction of money market 
investors actually understand the risks, and the fact that it 
is not just like a checking account?
    Ms. Chandoha. We certainly do a lot of education for our 
clients. There is a lot of disclosure about the nature of money 
market funds. It is a tremendous amount of detail. As I 
mentioned earlier, we have been voluntarily disclosing the 
shadow NAV's of our money funds since earlier this year. So, we 
do--
    Mr. Foster. My question is, what fraction of the investors 
actually look at those--
    Mr. Hurt. The gentleman's time has expired.
    Mr. Foster. I yield back.
    Mr. Hurt. But I do think that we might have an opportunity, 
Mr. Foster, to get back to you if you would like to stick 
around.
    The Chair now recognizes Mr. Carney for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman, and thank you to all 
the panelists. This is a fascinating discussion--question and 
answer back and forth. And I have heard a lot of things this 
morning that have raised maybe more questions than they have 
answered.
    For me, I think--Ms. Bair, at one point, you talked--you 
posed a question hypothetically--if we want to see a strong 
money market fund industry, then you might want to do that. I 
get the sense from some of the things that you have said, 
directly and maybe implied indirectly, that you think the way 
the money--that the money market fund industry is too large. 
And you refer to it in a pejorative way as a shadow banking 
system.
    And I think I understand that, but why do you think it is 
too large, or is playing an inappropriate role currently?
    I am a former secretary of finance at the State level. So, 
I was part of the cash management policy board at the State of 
Delaware. I understand the value for State and local 
governments on finance committees for nonprofit organizations. 
We used money market funds as cash management tools of very 
valuable, efficient, convenient way to do those kinds of 
transactions.
    The implications of what you are saying is that--or this 
change, I think, is that people would not see that convenience. 
Obviously, there are tradeoffs there, and so they would migrate 
to the banks, I think, clearly. And maybe that is a good thing, 
maybe that's a bad thing.
    I would like to know your view of that. I respect your 
opinion considerably, and I would like to know your view on 
that point there in terms of going from this way of doing cash 
management to--back to the regular banks, if you will.
    Ms. Bair. So, what is the core function of a banking 
system, any banking system in a developed country? It is a 
place where people can put their ready cash. They can access it 
at any time, and know it will keep stable value. To provide 
that peace of mind, we have regulations, we have capital 
requirements, we have deposit insurance, we have access to the 
Fed's discount window to make sure that payment processing 
system works, and is liquid. And that is part of it, of the 
banking system. That is a core piece. That is--unlike these 
crazy derivatives and some of the other things that large banks 
do that give a lot of us heartburn, this is a core function of 
what they should be doing, so the fact that this--
    Mr. Carney. If I may--I have limited time, so--but over the 
last 20 to 25 years, all these institutions that I just talked 
about have been migrating away from that into what they 
consider--
    Ms. Bair. Well--
    Mr. Carney. --more convenient--
    Ms. Bair. --this was facilitated by a regulatory change 
made by the SEC in the mid-1980s that allowed a mutual fund to 
basically act like a bank. And, it worked until it didn't. 
There have been numerous experiences where the bank has been 
broken, but through sponsor support, you don't see that. We 
would have had massive problems in 2008 if it hadn't been for 
government intervention.
    Mr. Carney. But ``it worked until it didn't''--we have 
talked about why it didn't. I was not here in the Congress at 
that period of time when the prime fund broke the buck. But we 
saw much bigger problems in the banking system. We have much 
larger concerns--I do--
    Ms. Bair. In the wholesale funding markets, yes. You didn't 
have systemic--you didn't have deposit funds. We had a seize-up 
in the wholesale funding markets.
    AIG, Lehman Brothers, Merrill Lynch, Bear Stearns--we had a 
few banks that had some problems. I don't want to suggest 
otherwise, but those are not depository-taking institutions.
    Mr. Carney. But your response to, if you want a strong 
sector--which I conclude that you don't think is the best 
thing--you ought to do it through some kind of capital reserve 
or some kind of insurance, not through--
    Ms. Bair. I think they should act like other mutual funds. 
I--with the floating NAV, all the other mutual funds flow 
through NAV. I think money funds--they are mutual funds. They 
should flow through NAV.
    It is the structure, not the funds themselves. You have 
lots of good corporate citizens who are offering these funds. 
But the inherent regulator structure is an unstable one. This 
is the classic reform of undoing a bad regulation, which 
would--is what we got in the mid-1980s, which developed--was 
the foundation for developing a very, very large shadow banking 
sector in the sense that--
    Mr. Carney. So, what does the floating NAV address in your 
view? That--
    Ms. Bair. It tells people that your money is not protected 
at a dollar. It is not a cash equivalent. There are assets 
underneath it that float in value. And if you want to redeem, 
they are going to have to sell those assets for you to get your 
money back.
    So, it is honesty in accounting. And it is also, at the 
end, you eliminate the first mover advantage, if you have a 
stable NAV, when the underlying assets are not worth that 
dollar, the more sophisticated investors--in this case, 
institutional investors in 2008--they will run. They will have 
an affirmative obligation to run, because they can still get 
out for a dollar, even though that fund is now worth only 97 
cents. They lock in the losses. And less sophisticated people 
are left behind. They are the ones ending up holding the bag.
    It is a structural weakness that needs to be addressed.
    Mr. Carney. I wish I had more time for a fuller discussion. 
Thank you, Mr. Chairman.
    Mr. Hurt. And, Mr. Carney, I think you will have that 
opportunity.
    This has been an excellent hearing. And we certainly 
appreciate the indulgence of the panel. And if it suits your 
schedule, we would love to have you stick around just for a few 
more minutes. I think there are Members who would like to ask 
additional questions, and we will limit those to 2 minutes, if 
you all can--if you could bear with us.
    And so, with that in mind, I will kick it to Mr. Stivers 
for a period of 2 minutes.
    Mr. Stivers. Thank you.
    I really appreciate the indulgence of a quick second round.
    I have two questions. One is for Mr. Stevens.
    A lot of the panelists here seem to ignore the 2010 rule 
changes that changed the investment criteria for money market 
mutual funds, thus making them more stable.
    Can you just spend maybe 30 seconds talking about why that 
is important when you limit what they can invest in, and how 
that keeps the stable net asset value a viable way to go?
    Mr. Stevens. Thank you, Congressman.
    What the rules did is impose a whole set of heightened 
risk-limiting conditions on money market funds. And they were 
almost immediately tested in 2011 during the crisis in the Euro 
zone, and at the time of the debt ceiling controversy and the 
downgrade by one of the ratings agencies of U.S. Government 
securities.
    We came through that fine in part because of the 2010 
amendments.
    Mr. Stivers. Thank you. I only have a little bit of time. I 
also want to give Ms. Chandoha a chance.
    I am kind of scratching my head with your position, because 
it appears to me, your position is that a floating net asset 
value is great, except where it affects you. You want--you like 
the exemption on government funds, and you happen to have the 
biggest government fund in the country. And you want a retail 
exemption, and 99 percent of your customers are retail.
    So, help me understand how you sort of put that together, 
that you like a floating NAV, but not where it affects you. You 
want the exemption.
    Ms. Chandoha. Certainly, our clients are retail investors. 
And, what we appreciate with the SEC's review is that they 
focused in on where the potential risks lie in the money fund 
industry.
    We do believe that regulations should focus in on where the 
risks lie, and not necessarily be a one-size-fits-all approach.
    So, that does benefit us. But we do think that retail 
investors did not run--they are very stable investors--and that 
retail investors should be segregated from institutional 
investors who do have the ability to run and move assets more 
quickly.
    Mr. Hurt. Thank you, Ms. Chandoha. Thank you--
    Mr. Stivers. Thank you. And thank you, Mr. Chairman. I 
yield back.
    Mr. Hurt. Thank you.
    The Chair now recognizes the ranking member of this 
subcommittee, Mrs. Maloney, for 2 minutes.
    Mrs. Maloney. Thank you.
    I would like to ask Ms. Bair and Mr. Stevens--a lot of 
cities, including mine, New York City, believe that they need 
the money market funds in order to finance their day-to-day 
operations. They depend on them. Do you believe a floating rate 
would have hurt a city's ability to finance their local 
projects and their local concerns?
    And in the debate on the floating NAV, is that the only way 
to eliminate the accounting or the cliff effect that you keep 
talking about, Ms. Bair, or are there other ways to eliminate 
it that wouldn't result in such a radical restructuring of the 
money market industry?
    Mr. Stevens and Ms. Bair?
    Ms. Bair. So, as I said before, guarantees without capital 
behind them make it cheaper for everybody to do business, but--
and especially with implicit government support, which I think 
has been a factor in the money fund industry--that model works 
until it doesn't. It doesn't work in times of distress.
    If you don't want to go to a floating NAV, the next best 
alternative, I think, is to require capital behind a guarantee. 
If funds want to guarantee a dollar, even when the assets are 
less than a dollar, then force them to have some capital behind 
that. That is the approach being used in Europe.
    I think the simpler, cleaner approach is a floating NAV. 
And I think that you will still have funds that retain a high 
degree of liquidity, that invest in short-term securities. They 
will float slightly, but they will still float, reminding 
people they are not guaranteed.
    So, I don't think they are going to completely go away. But 
if you don't want to do floating NAV, I think the best next 
best option is capital, which is what the Europeans are doing, 
basically--proposing.
    Mr. Stevens. Very quickly, tax-exempt money market funds 
provide about 70 percent of all short-term municipal finance in 
the United States. If you create the characteristics in those 
funds that investors are not interested in, that source of 
finance will disappear. And it will have a significant effect 
on State and local governments throughout the country.
    Witness my colleague here from Georgia today, and the 
thousands of others--State and local government officials--
whose point of view about this is very much in the SEC's 
records.
    Mr. Hurt. Thank you, Mr. Stevens.
    The gentlelady's time has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch, for 2 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    And, again, thank you for all your help today. It has been 
a very good hearing.
    Hypothetically, if we did go to the floating NAV, it 
requires a daily evaluation of the underlying assets. And while 
we have a 10 percent requirement for--excuse me--we have a 24-
hour requirement that 10 percent be redeemable within 24 hours, 
and then there is a--I think is a 30 percent over 7 days. You 
still have a very large body of assets that are less liquid.
    And I am just wondering, in the past, we have had very 
difficult time marking-to-market some of these less liquid 
assets. Does anybody have a suggestion that might allow us to 
avoid using internal models that, in some cases, in the past--
especially during a crisis moment, we come up with these, let's 
call them, generous valuations on the part of the asset holder 
that we ran into back in 2008. Is there any way we can, sort 
of, manage this within the floating NAV scenario?
    Mr. Stevens. Congressman, I don't think we have problems 
valuing these portfolios. The weighted average maturity of the 
instruments in the portfolio is 60 days or less. You are 
talking--
    Mr. Lynch. That is the average, though.
    Mr. Stevens. The--
    Mr. Lynch. I am saying--
    Mr. Stevens. --dollar-weighted average.
    Mr. Lynch. --you are going to have. I am just asking how 
confident can investors be that these assets have been valued 
properly?
    Mr. Stevens. I think, very highly confident. Our members 
are putting out information, filing with the SEC, about what 
the mark-to-market value of these portfolios is.
    Mr. Lynch. But they are using their internal models. If 
there is no turnover, or if there is not an active market in 
that asset, we don't have a--we don't have a market valuation 
available. So somebody has to approximate that.
    And so, in the past, during a crisis period, we have had 
some very wacky valuations that have not held up over time.
    Mr. Stevens. Right.
    Mr. Lynch. And I am just trying to anticipate how we would 
avoid that.
    Mr. Stevens. These are instruments that are valued 
according to amortized cost. And as I said at the beginning of 
the hearing, it's a valuation method the Chairman of FASB 
talked about how it applies in the context of money market 
funds. I think it produces a very reliable mark-to-market price 
that deviates very, very little on a--
    Mr. Lynch. Thank you, Mr. Stevens.
    Mr. Stevens. --between the dollar value.
    Mr. Hurt. Thank you.
    Ms. Chandoha. I would just comment that we have been 
producing shadow NAVs on our money funds. And we used outside 
pricing services to price those.
    Mr. Hurt. Thank you.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 2 minutes.
    Mr. Scott. Yes, very quickly. One point we are missing in 
the first round was on retail funds. And I would like to get a 
response from Ms. Bair, Ms. Chandoha, and Mr. Stevens quickly. 
The proposed rule defined a retail fund as one that allows 
share holders to withdraw less than $1 million a day. And the 
retail funds would be exempt from the floating net asset value 
requirement in the rule.
    Now, Charles Schwab has proposed that limit be raised to $5 
million. And there have been others who have suggested that the 
retail funds be limited to investors with a Social Security 
number or a particular retirement plan. Can each of you just 
very briefly give me a comment on that, on your definition of a 
refund fund and what changes you might propose in that 
definition and why?
    Ms. Bair. I think, as I think they should all float. I 
think is very--one of the problems with trying to describe 
about retail, is very difficult to come up with a definition 
that can't be gamed.
    And I do worry, even with a $1 million redemption daily 
limit, that is still a pretty big size redemption. And people 
like my mother in Illinois who are not going to be checking 
their balances everyday are going to be stuck where the people 
who are more sophisticated are going to be able to get out 
first with this first-mover advantage, which you have at the 
Savynap.
    So I think they should all float. But if you are going to 
keep it to retail, make sure it is retail. And don't let a lot 
of sophisticated money into this fund.
    Mr. Scott. Ms. Chandoha, you are Charles Schwab, and you 
recommended it, so?
    Ms. Chandoha. Yes, we do think it makes sense to segregate 
retail and institutional investors because institutional 
investors can move more quickly. And your mother might be 
impacted.
    We do think that there are various ways of delineating 
between retail and institutional investors. We made a 
recommendation around the $5 million redemption limit. Social 
Security numbers could be another method for doing that.
    Mr. Scott. And, Mr. Stevens, you agree?
    Mr. Stevens. You and I both, as individual investors, have 
a Social Security number on every account. That's an easy, 
administrable, and very clear line between investors like you 
and me and a hedge fund.
    Mr. Scott. Thank you, Mr. Stevens.
    Mr. Stevens. Thanks.
    Mr. Hurt. I thank the gentleman from Georgia.
    I want to thank everybody on this panel for their 
participation. I do think this was a very good hearing. And I 
thank you, especially, for indulging us in a second round of 
questions.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    Thank you. This hearing is now adjourned.
    [Whereupon, at 12:28 p.m., the hearing was adjourned.]
                            A P P E N D I X



                           September 18, 2013
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