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For Vanguard Money Fund, The Love Isn’t Mutual

Keith Rothfus
Rep. Keith Rothfus, R-Pa. Photo by Carol E. Davis, courtesy the U.S. Army Corps of Engineers.

In the more than 30 years in which I have owned mutual fund shares from the Vanguard group, the company has always positioned itself as investor-friendly, and usually with good reason.

So it comes as a pretty big surprise that Vanguard has lined up against many of its biggest institutional customers, and its “suppliers” of the investments that it purchases on their behalf as well, to protect its own position and investment in the money market fund business.

The Securities and Exchange Commission set out to reform money market funds a few years ago. Though the changes the SEC imposed could have been worse, they were still pointless and counterproductive. Prime money market funds sold to institutional investors were forced to adopt floating net asset values, rather than maintaining a stable $1.00 NAV as in the past. Government money market funds were exempt, with the predictable result of a substantial growth in such funds’ assets as institutional investors tried to avoid the headache of newly unstable prime options.

Incidentally, at the time, Vanguard was not shy about speaking against floating NAVs. Like many other financial institutions and industry groups, it vocally opposed the SEC’s commitment to fixing a product that wasn’t broken. The U.S. Chamber of Commerce even bought a highly targeted segment of advertising in a subway stop used by many SEC employees. This pushback saved individual investors from the aggravation of floating NAV funds, but institutional and corporate investors weren’t so lucky – and neither were the financial firms that had to spend time and money to comply with the new rules.

Lawmakers may now be ready to correct the SEC’s mistake. The Wall Street Journal recently reported that Rep. Keith Rothfus, R-Pa., has introduced a bill to roll back the 2014 rule. The House Financial Services Committee is set to debate the proposed legislation, which some 60 lawmakers have already signed onto – an unusually high number, the Journal reported.

It is less popular, however, with Vanguard and some other big asset-management firms. The offered reasoning: a reluctance to revisit the long fight over money market fund rules and the sunk cost of compliance with the SEC’s requirements. As arguments go, it is not especially compelling.

BlackRock, like Vanguard, is a big player in the pooled-investment market, both in mutual funds and in their cousins, exchange-traded funds. Like Vanguard, it got where it is by generally offering good value to its investor customers. And like Vanguard, it is trying to submarine the reversal of the SEC’s pointless, overreaching mutual fund rule to protect its own position.

The motives of companies like Vanguard and BlackRock may be mixed, and they are certainly opaque. It’s hard to believe that they think the floating share price is a net benefit to investors. Before it was imposed, these companies – like the rest of the industry – publicly took the position that it was unnecessary and detrimental, and statistics cited by Investment Company Institute analysts demonstrate that they was correct.

But they made big investments to comply. Those investments might need to be written down or written off if the rules mandating them are reversed, which would hurt the companies’ reported financial performance. That may explain the sotto-voice reversal.

Or maybe it’s just a crass way of protecting their large positions in the U.S. money fund market (which they share with traditional powerhouse Fidelity and the emerging leader JPMorgan Chase) because the costs of compliance – notably the mechanisms to constantly calculate prices on the many small positions money market funds must constantly hold and replace as they mature – represent a barrier to entry and growth by competitors. If I had to bet, I’d say both motivations are in play here to some degree.

But the motivation doesn’t actually matter. Once it gets over the surprise of seeing familiar players like Vanguard lining up against their customers, Congress should get on with the business of reversing the floating-price rule that never made sense in the first place. As predicted, the rule has steered investments toward Treasury debt, indirectly subsidizing the federal government at investor expense, while driving up interest rates in the municipal and corporate debt markets, which have also become less liquid as a result. Except for the Federal Reserve and the government it represents, this has always been a lose-lose scenario.

I am not going to pull any business from Vanguard right now. But I’m certainly going to reconsider who my friends are.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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