Capital market regulations often have un-
The Securities and Exchange Commission’s
recent rule regarding money market redemptions is no exception. The rule is intended to
ensure orderly liquidations of money market
funds during financial panics. However, the
rule may reduce investment liquidity and
flexibility during periods when these advantages are critical. A thoughtful evaluation of
accounting controls over treasury functions
is required to manage this risk.
Money market funds have long been considered highly liquid, stable instruments for
securing reasonable short-term yields with
flexibility for managing corporate cash. Companies often came to view these funds, albeit
incorrectly, as a substitute for lower-yielding
bank deposits or treasury paper.
During the financial vortex in the fall of
2008, the unthinkable occurred — two noted
money market funds “broke the buck.” In
other words, their net asset value declined
below a dollar per share. Many other money
market funds faced issues during this period. In fact, major sponsors such as Morgan Stanley, Wachovia and Credit Suisse felt
compelled to take a variety of steps to ensure
that their funds didn’t ultimately suffer the
In response to the 2008 events, the SEC ad-
opted Rule 22e- 3, effective May 5, 2010. The
rule permits a fund to suspend redemptions
and payments of redemption proceeds if:
The money market fund’s board, includ-
ing a majority of disinterested directors,
determines that the deviation between the
fund’s amortized cost price per share and the
market-based net asset value per share may
result in material dilution or other unfair re-
sults to shareholders;
The board, including a majority of the
disinterested directors, irrevocably has ap-
proved the liquidation of the fund; and,
This rule may also apply under certain
conditions to conduit funds (i.e., funds that
invest in other money market funds) and unit
investment trusts — a structure that many
insurance companies use.
In a 2009 release, the SEC stated that the
rule is intended to reduce the vulnerability
of investors to the harmful effects of a run
Money market machinations
New SEC rule may imperil money market redemptions
BY MICHAEL BURGESS
DTT REPORTS GROWTH,
MAJOR HIRING PLANS
on the fund, and minimize the potential for
disruption to the securities markets.
The commission recognized that the rule
may cause liquidity problems for investors,
and specified that the rule may be applied
only when the fund’s board has irrevocably
approved liquidation of the fund. In other
words, the commission sought to prevent
funds from suspending redemptions merely
for the fund sponsor’s convenience. The commission may rescind or modify a fund’s application of the rule if a proper liquidation
plan has not been devised.
Michael Burgess is a CPA affiliated with
Lehan Partners LLC, a consulting firm in
Atlanta. Reach him at (270) 519-5639.
Nominally, the commission’s intent behind
the new rule was properly motivated, but
the best-laid plans often have unusual consequences.
Markets can turn very bad, very quickly.
Many recent studies of market behavior
confirm that the frequency of extreme stock
price moves far exceeds the nearly 0 percent
chance the lognormal distribution would
predict. Some studies have indicated that a
four-sigma move is as much as 20 times more
likely than would be expected if prices were
normally distributed. Many other financial
assets also exhibit this.
Furthermore, abrupt price moves in many
markets often induce a virulent contagion
in other markets. Fixed-income securities
are not immune to this behavior. If markets
tank again, fixed-income securities and the
packages in which many of them are marketed could experience substantial volatility
In order to predict when this rule will be
applied, we only need to know the underlying market behavior that would likely cause
a fund to resort to its application. The answer
is compelling and simple — panic.
After 40 years of experience with stable
dollar-per-unit values, punctuated with the
problems in 2008, no other market profile
would make sense.
Why apply the rule if matters are not dire?
Dire circumstances are the very times when
companies require maximum liquidity. Unfortunately, this is also the time when fund
managers are most likely to resort to this rule.
If a financial panic has begun, and redemptions have been suspended, it is too late to get
out intact. A company should not rely on SEC
rules to protect them. History is littered with
reliance on financial regulations that failed
Remember portfolio insurance in
1987? The ease and liquidity of shorting fu-
tures was supposed to protect mutual funds’
investments in stocks. It worsened the speed
NEW YORK — Deloitte Touche Tohmatsu
said that it plans to hire a quarter of a
million new employees around the world
over the next five years, after the firm
saw its revenue grow in the past year.
The firm reported that its current revenues grew 1. 8 percent to $26.6 billion
in fiscal year 2010. Revenues in China
and India have doubled and tripled, respectively, in fiscal 2010, with significant
headcount increases in both regions.
Deloitte’s current headcount worldwide is
approximately 170,000 professionals.
Deloitte experienced a 15 percent
increase in consulting revenues over last
year, led by 19 percent growth in the
strategy and operations service line and
33 percent growth in technology integration. Those increases helped to offset
small declines in other businesses whose
results were primarily affected by modest
reductions in the firm’s rate per hour.
Audit revenue declined 1 percent,
while market share of the Fortune Global
500 grew by 1 percentage point. Financial advisory revenue declined 2 percent.
Tax revenue declined 5 percent.
The Deloitte U.S. member firm’s
recent integration of BearingPoint’s
North American public sector practice
contributed meaningfully to the consulting group’s performance. The firm saw a
38 percent increase in revenues from the
public sector compared to the prior year.
Revenues from the financial services and
manufacturing industries were essentially
flat, but that represented a significant
rebound from last year’s double-digit
GRANT COO JOINS SEC
WASHINGTON, D.C. — The Securities and
Exchange Commission has appointed
J. W. “Mike” Starr as deputy chief accountant for policy support and market
monitoring in the agency’s Office of the
Chief Accountant. He will serve as the
chief accountant’s liaison on projects
and activities to improve the quality of
accounting and auditing policy decisions
and to identify and address potential
financial reporting weaknesses and risks.
Starr also will advise the chief accountant
and his office on highly complex topics.
Starr, 63, previously served as the chief
operating officer for Grant Thornton
International, and was a member of the
senior leadership of Grant Thornton LLP.