The  Derivative  Project   1  

Money  Market  Reform  on  Behalf  of  Retirement  Investors  

FILED  ELECTRONICALLY  
 
 
September 26, 2012
 
 
Honorable Chairman Mary Shapiro
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Members of SEC Investor Advisory Committee

RE: President’s Working Group Report on Money Market Fund Reform (File No.
4-619) and Request for Immediate Action

For Discussion at the Investor Advisory Committee September 28, 2012

Dear Chairwoman Shapiro and Investor Advisory Committee:

The Derivative Project, the only independent retirement investor advocacy

organization in the United States, appreciates the opportunity to submit these
comments to the Securities and Exchange Commission and the SEC Investor
Advisory Committee concerning the recent decision to delay a vote on requiring
money market funds to abandon the stable $1.00 net asset value (NAV) in favor of
a floating value or increasing capital requirements due to systemic risk posed by a
preponderance of assets held in money market funds that are part of the “Shadow
Banking System” as defined by our nation’s Federal Reserve System.

The Derivative Project agrees with Chairman Shapiro and the Federal Reserve
Bank of New York, that the evolving role of money market funds in our short-term
capital markets now poses significant systemic risk, due to the “Shadow Banking
System”. A controlled plan for moving these capital flows back into the
traditional commercial banking system must be analyzed by both the Securities and
Exchange Commission, the Financial Stability Oversight Council and the Federal
Reserve Bank.

Money market mutual funds are an obsolete product in the current interest
rate environment, now placing our nation’s retirement savings at risk. These
risks, to retirement investors, can easily be avoided and must be avoided,
immediately.

While the study on how best to control the systemic risk that is inherent in the non-
transparent money market mutual fund (MMF) industry is being conducted, it is
imperative that our nation’s retirement savings be removed immediately from all
money market mutual funds, carrying systemic risk and moved to FDIC-insured
sweep options. The yield will be greater and the risk will be less for the retirement
investor. The representation by the Fund industry that these MMF’s are “safe” and
“liquid” is a breach of existing securities’ laws, given that the Federal Reserve
Bank of New York has established they do pose significant systemic risk.

It is abundantly clear our nation’s capital markets have been manipulated to create
a product that delivers maximum return to the packagers of the “product”, while
returning no incremental gain to the retirement investor, with very high risk, that is
completely avoidable given currently available alternatives that offer a comparable
or higher return.

Money market mutual funds’ “liquidity” and “safety” parameters are being
misrepresented to retirement investors, in a preponderance of Prospectus and
advertising materials, a fundamental breach of the Investment Company Act of
1940 and the Investment Advisers Act of 1940. SEC registered investment
advisers are encouraging retirement investors to move money into these funds,
since it is solely in their interest, not that of the retirement saver. This also is a
fiduciary breach of the Investment Advisers Act of 1940.

1. The yield on money market mutual fund retirement accounts, such as

Charles Schwab’s Retirement Advantage, SWIXX, is less than placing the
retirement saver’s assets in a bank certificate deposit, if objective is longer
than 30 days.

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2. The systemic risk is far greater for the retirement investor in money market
mutual funds, than in a FDIC sweep account. Here is an example of a viable
Sweep account at a major retirement investor, Fidelity -- “Cash Balance in
the FDIC-Insured Deposit Sweep is swept to an FDIC-Insured interest-
bearing account at a Program Bank. The deposit at the Program Bank is not
covered by SIPC. The deposit is eligible for FDIC insurance subject to FDIC
insurance coverage limits. All assets of the account holder at the depository
institution will generally be counted toward the aggregate limit.”

In addition to sweep accounts, retirement savers at 401k’s and 403B’s should be

allowed the option to invest directly in an FDIC bank CD in the maturity of their
choice or in U.S. Treasury securities, at Treasury Direct. Employers may hire
retired commercial bankers, acting on a pro bono basis, to train employees how to
invest their money directly in U.S, government notes, bills and bonds and certain
agencies and FDIC insured CD’s. The Derivative Project would be pleased to lead
this initiative, in conjunction with the Plan Providers and Department of Labor and
SEC.

In sum, there is absolutely no reason why a retirement investor should be charged a

penny to invest in U.S. government Bills and Notes or FDIC insured CD’s when
online options are abundantly available. In this low interest rate environment,
which is anticipated to endure until 2015, according to the Federal Reserve’s latest
report, it is incomprehensible that the SEC and Department of Labor would
continue to allow mutual fund companies to take retirement investor’s savings,
while delivering no viable product or return. The SEC and Department of Labor
cannot stand by and allow retirement funds to be placed in products with systemic
risk, as acknowledged by the Federal Reserve Bank of New York, in its shadow
banking report of April 2012, when there are viable options for this savings, that
provide higher returns and no systemic risk.

Money Market Funds Are No Longer A Viable Short Term Saving

Alternative

Money market mutual funds were historically a viable safe, alternative for short-
term savings, but this product has been rendered obsolete by a low interest rate
environment that does not produce sufficient returns for mutual fund companies to
recoup their costs. Further, the money market mutual fund companies have

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stuffed these money market mutual funds with assets that do not belong there, such
as Charles’s Schwab’s investment in Whistle jacket, a Structured Investment
Vehicle that went bankrupt, while simultaneously representing to retirement
investors, their savings in this money market were only invested in high quality
Tier I and Tier II instruments.

The fund managers are no longer fiduciaries and are strictly placing their profit
model over the interests of the retirement saver, while increasing the retirement’s
saver’s risk and providing no incremental return on investment.

There are two principal reasons why retirement investors can no longer be allowed
to invest in money market mutual funds:

1. The Costs of Packaging the Product Exceed the Return to the

Retirement Investor – The Product is Obsolete and “Voluntary
Recapture” Programs must be Implemented for every Retirement
Investor to return fees taken while a firm breached its fiduciary duty
and misrepresented the risk in the money market mutual fund

Commercial paper, banker’s acceptances and other short-term liquid assets

provided sufficient returns historically for a money market mutual fund to
invest in such assets, on an institutional basis, with minimal costs and pass
on higher returns to money market mutual fund investors. Mutual funds
could recoup their costs and make a profit.

This is no longer the case. Returns on short-term assets are so low that
money market mutual funds can no longer make a profit on traditional short-
term money market assets, thus they have employed “voluntary recapture”
programs to take profits away from retirement investors as soon as money
market rates rise, a liability for every retirement savers’ future earnings
stream.

Mandatory recapture programs should be put in place for the benefit of

retirement investors for their lost income from breach of fiduciary duty, by
money market mutual fund companies, since the advent of any “voluntary
recapture program” and since the Federal Reserve stated excessive systemic
risk exists in money market mutual funds, but these Fund companies

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breached their fiduciary duty and continued to place retirement assets in

these funds, in their interest, despite other viable alternatives for the
retirement investor.

2. The Risks are No Longer Measurable and Cannot be Construed as

“Safe”

Since the traditional money market mutual fund has been rendered obsolete
by the current interest rate environment, the bulk of assets held by money
market mutual funds are variable interest entities, as described by the
Financial Times in plain English in a 2008 article:

“VIE is an accounting term that covers a multitude of activities in almost

any kind of special purpose vehicle - from conduits and structured
investment vehicles (SIVs) to individual CDOs themselves. The term VIE
refers to the way in which a bank's economic exposure to a vehicle can
change, which is key to whether it can be kept off-balance sheet.”

Federal Reserve Opinion on VIE’s

According to an April 2012 report on Shadow Banking Regulation By

Tobias Adrian and Adam B. Ashcraft, Federal Reserve Bank of New York
Staff Reports, no. 559

What is a Shadow Bank? Here is the definition by the Federal Reserve Bank of
New York in this report:

“The shadow banking system is a web of specialized financial institutions that

channel funding from savers to investors through a range of securitization and
secured funding techniques. While shadow banks conduct credit and maturity
transformation similar to traditional banks, shadow banks do so without the direct
and explicit public sources of liquidity and tail risk insurance via the Federal
Reserve’s discount window and the Federal Deposit Insurance Corporation (FDIC)
insurance. Shadow banks are therefore inherently fragile, not unlike the
commercial banking system prior to the creation of the public safety net.”

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Here is the conclusion of the Federal Reserve Bank of New York’s Staff report:

“The dilemma of the current regulatory reform efforts is that the motivation for
shadow banking has likely become even stronger as the gap between capital and
liquidity requirements on traditional institutions and non-regulated institutions has
increased. The objective of reform should be to reduce the risks associated with
shadow maturity transformation through more appropriate, properly priced and
transparent backstops—credible and robust credit and liquidity "puts." Regulation
has done some good, but more work needs to be done to prevent shadow credit
intermediation from continuing to be a source of systemic concern.”

Examination of Charles Schwab Retirement Savers Advantage Money

Market Mutual Fund (SWIXX) in the context of Risk and Return for the
Retirement Saver

SWIXX Objective

“The investment seeks the highest current income consistent with stability of
capital and liquidity. The fund invests in high-quality short-term money market
investments issued by U.S. and foreign issuers, such as: commercial paper,
including asset-backed commercial paper; promissory notes; certificates of deposit
and time deposits; variable- and floating-rate debt securities; bank notes and
bankers' acceptances; repurchase agreements; obligations that are issued by the
U.S. government, its agencies or instrumentalities, including obligations that are
not guaranteed by the U.S. Treasury.”

Misrepresentation Number One by Charles Schwab

Due to the systemic risk created by VIE’s, this money market mutual fund is
neither stable nor liquid. The borrower behind the VIE is not Tier 1, Tier 2 or Tier
3. They are high risk. Since the risks are off-balance sheet, non-consolidated, it is
next to impossible for the retirement investor to assess the potential systemic risk
of this product.

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Misrepresentation Number Two by Charles Schwab

The fund is not seeking the highest current income consistent with stability of
capital. The highest current income, that is the most stable, for the retirement
investor is currently FDIC sweep options, that invest exclusively in FDIC insured
CD’s, since the administrative costs for this product are far less than those
associated with packaging VIE’s and are far less risky. Further, funds such as
Charles Schwab’s have determined their profits are more important than a safe and
“highest return” to the retirement investor through their “voluntary recapture”
program. This is a fundamental breach of the Investment Advisers Act of 1940
and Investment Company Act of 1940.

Here is an excerpt from Schwab's SWIXX prospectus:

"Voluntary Expense Waiver/Reimbursement

In addition to the contractual expense limitation agreements noted above, Schwab

and the investment adviser also may waive and/or reimburse expenses to the extent
necessary to maintain a positive net yield for the fund. Schwab and the investment
adviser may recapture from the fund any of these expenses or fees they have
waived and/or reimbursed until the third anniversary of the end of the fiscal year in
which such waiver and/or reimbursement occurs, subject to certain limitations. The
reimbursement payments by the fund to Schwab and/or the investment adviser are
considered “non-routine expenses” and are not subject to any net operating
expense limitations in effect at the time of such payment. This recapture could
negatively affect the fund’s future yield. There were no prior year amounts
recaptured. As of June 30, 2012, the balance of recoupable expenses is as follows:

Expiration Date

December 31, 2012 - $26,653,803

December 31, 2013 - $47,297,540

December 31, 2014 - $59,017,389

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December 31, 2015 - $30,733,891

Total $163,702,623"

Who are the SEC Registered Investment Advisers that are Placing Retirement
Assets in a Fund that has greater risk and less return than other less risky
options available to retirement savers? Should they be investigated for breach
of fiduciary duty under the Investment Adviser’s Act of 1940?

As of its June 30, 2012 report to the SEC, this fund (SWIXX) held assets of
$12,930,125,813.20.

The seven-day gross yield is “ Item 17. 7-day gross yield 0.25%” and the seven
day net yield to investors is 7-day net yield, as calculated under Item 26(a)(1) of
Form N-1A 0.01%”

SWIXX assets are all predominantly variable rate demand notes, guaranteed by
banks, many are guaranteed by U.S. Bank.

At June 30, 2012, U.S. Bank stated in its SEC quarterly filing:

“While the Company believes potential losses from these investments are remote,
the Company’s maximum exposure to loss from these unconsolidated VIEs was
approximately $5.1 billion at June 30, 2012, compared with $4.8 billion at
December 31, 2011.”

U.S. Bank’s unconsolidated exposure and potential losses are in the billions and
increasing. However, this exposure pales in comparison to the non-traditional
commercial banks, as reported by the Financial Times in 2008:

“Of the major Wall Street brokerages, Goldman Sachs lists $62.1bn in total
exposure in unconsolidated VIEs, Morgan Stanley sits on $37.7bn, Bear Stearns
clocks in at $11.5bn, while Merrill Lynch has $6.5bn, says Credit Sights. The data
is drawn from the most recent company reports says Credit Sights.

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Disclosure by the banks of maximum exposure to loss from their VIEs is much
lower with Goldman around $26bn, $16bn at Morgan Stanley, $9bn at Merrill and
$100m at Bear, said Credit Sights.

However, the firm says “we continue to question whether maximum exposure
numbers accurately capture the entire risk associated with VIE assets.”

Based on recent filings, Credit Sights says Citigroup has roughly $84bn in total
CDOs in its unconsolidated VIEs, while Bank of America has disclosed $13.6bn in
VIE exposure.”

There is Significant Risk for Retirement Investors of which the money market
mutual funds, such as Charles Schwab’s, are not disclosing. Retirement
savings do not belong in these Funds, until the non-transparent entities are
removed and the systemic risk is eliminated.

Here is the summary from the New York Federal Reserve report on Shadow
Banking concerning the inability of money market mutual funds to adequately
understand the risks inherent in their investment:

“Investors in the shadow banking system---such as owners of money market

shares, asset backed commercial paper, or repo---shared a lack of understanding
about the creditworthiness of underlying collateral. The search for yield by
investors without proper regard or pricing for the risk inherent in the underlying
collateral is a common theme in shadow banking. The long intermediation chains
inherent in shadow banking lend themselves to this—they obscure information to
investors about the underlying creditworthiness of collateral. Like a game of
telephone where information is destroyed in every step, the transformation of loans
into securities, securities into repo contracts, and repo contracts into private money
makes it quite difficult for investors to understand the ultimate risk of their
exposure. As a clear example, the operating cash for a Florida local government
investment pool was invested in commercial paper that was sold by structured
investment vehicles, which in turn held securities backed by subprime mortgages,
such as collateralized debt obligations (CDOs). When the commercial paper
defaulted and the operating cash of local governments was frozen following a run
by investors in November 2007. Moreover, it is important to understand that access
to official liquidity (without compensating controls) would only worsen this

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problem by making investors even less risk-sensitive, in the same way that deposit
insurance without capital regulation creates well-known incentives for excessive
risk-taking and leverage in banking. The challenge for regulators is to create rules
that require that the provision of liquidity to shadow markets is adequately risk-
sensitive.”

Retirement investors are not “searching for yield” in their money market mutual
funds, nor do they seek to have their retirement savings at risk in non-transparent
entities. Retirement savers lost over $2 trillion dollars in their retirement savings
since mutual fund companies refused to protect them against the risk from non-
collateralized credit default swaps. They not only lost their life savings, but also
were forced to provide 100 percent on the dollar to make good AIG’s speculative
positions to counterparties that did not manage their counter party credit risk with
AIG. Retirement investors will never be put in that position again. Money market
mutual fund companies are clearly putting retirement investors in that position,
once again, and they demand the SEC, Department of Labor and Federal Reserve
provide the safe and liquid alternatives that are currently available through the
traditional commercial banking sector and Treasury Direct.

SEC registered investment advisers are placing retirement assets in these Funds
and mis-representing to the retirement investor that their assets are “liquid” and
providing the highest income.” Retirement investors are currently losing return
due to the high expense structure of these funds. They are only in these funds
because:

1. The SEC has allowed the mutual fund firms to misrepresent the amount of
risk and return in the objective of the fund to continue despite the
obsolescence of the product. This is a breach of securities laws.

2. The Department of Labor has allowed 401k’s, 403B’s and other “employee-
captive” programs to push money market mutual funds that offer little to no
return with significant systemic risk. Employees in many instances have no
other alternative, despite good readily available alternatives, with less risk
and higher return. This is a breach of ERISA fiduciary rules and the
Investment Adviser’s Act of 1940.

3. On March Charles Schwab met with Chairman Shapiro:

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To: File No. 4-619

MEMORANDUM

From: Jennifer B. McHugh Senior Advisor to the Chairman

Date: March 8, 2012 Re: Meeting with Representatives from Charles

Schwab

On March 8, 2012, representatives from Charles Schwab met with the

following SEC representatives: Mary L. Schapiro, Chairman; Ricardo R.
Delfin, Special Counsel to the Chairman; and Jennifer B. McHugh, Senior
Advisor to the Chairman.

The representatives from Charles Schwab discussed the impact on investors

of potential structural money market fund reform, particularly with respect
to money market funds offered as “sweep” vehicles.

Attending from Charles Schwab were:

• Marie Chandoha, President, Charles Schwab Investment Management

• Jeff Brown, Senior Vice President, Legislative and Regulatory Affairs,

Charles Schwab & Co., Inc.

• Michael Townsend, Vice President, Legislative and Regulatory Affairs,

Charles Schwab & Co., Inc. Misrepresentation form Investment Industry

Charles Schwab implied to the SEC there was no other alternative for investors for
a “sweep” vehicle. This is misrepresentation. There are other valid alternatives for
retirement investors, FDIC-insured sweep accounts. These can be used for
retirement investors until there is a return to a more normal historical yield curve
and VIE systemic risk is transparent and under control.

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Money Market Funds are Not Transparent

Charles Schwab stated in a May 31, 2012 comment to the SEC on money

market reform:

“There is one more important distinction between money market funds and
banks: money market funds are not guaranteed, while bank deposits are
federally insured up to $250,000. Money market funds are not guaranteed
because the risks are clearly disclosed to investors and because of the
regulatory structure in which they operate, which limits risk and ensures that
funds are highly resistant to market volatility.”

As an individual retirement investor I can attest that the risks are not clearly
disclosed, particularly with asset -backed paper, one cannot determine the
underlying assets. Most individual investors, may understand commercial
paper and bankers’ acceptances, but did not historically have to pay a fee to
have access to all the CUSIP’s of the securitized assets. Traditionally, the
individual investor could analyze the credit risk of the Tier I commercial banks’
Eurodollar time deposits or banker’s acceptances and were comfortable with the
rating services’ analysis and ratings of commercial paper. That is no longer the
case, as the bulk of assets are VIE’s in many of the retirement funds, with no
ratings are retirement investor can count on and no ability to personally do the
requisite due diligence to assess the credit and systemic risk.

As a former commercial banker, I can attest that the systemic risks are buried
and substantial from the unconsolidated VIE’s, certain repurchase agreements
and that as the Reserve Fund “breaking the buck” showed in 2008, the only way
money market mutual funds can withstand excessive market volatility and
liquidity crises is by the Federal Reserve intervening with U.S. taxpayer
support.

Here is a portion of Charles Schwab’s Letter to the SEC on Average

Maturity and Transparency

• “Weighted Average Life: In addition, the introduction of Weighted Average

Life (WAL) calculations, also a result of the 2010 SEC reform initiatives,
restrict the maximum weighted average life maturity of a fund’s portfolio to

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120 days. Previously there was no such limit. The effect of this restriction
limits the ability of a fund to invest in long-term floating rate securities “

The Derivative Project Comments:

• Most variable rate demand notes use short-term financing through money
market mutual funds, but hold long-term, highly leveraged financing needs.
In today’s low interest rate environment, once inflation and interest rates
move dramatically up, these borrowers may not have the revenues to support
the increased interest rate payments as below Tier II credits. It is hard to
assess the web or guarantees of these below Tier II credits.

• Charles Schwab is asking the taxpayer to absorb all systemic risk and to bail
them out, just as the commercial and investment banks were bailed out in
2008-2009. They have seen there were no prosecutions for mismanagement
of assets putting the entire financial system at risk.

Returns: Retail Investors Earned Billions in Additional Yield Through Money

Market Fund Investing (as stated by the money market industry)

“For retail investors, money market funds have paid almost one-quarter of $1
trillion more in returns than competing bank products since 1990 ($242 billion,
assuming reinvestment and compounding).”

The Derivative Project comments:

This statement by the Investment Company Institute may be correct,

however on July 17, 2012 it is misleading. Money market funds cannot
perform in a low interest rate environment and they now have created
systemic risk based on non-transparent assets held in most Funds. The
returns in these funds are now less and the risk is far greater.

The Investment Company Institute (ICI) on Page 198 of its Year-end Report
states:

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 “Money market funds offer investors a variety of features, including
liquidity, a market-based rate of return, and the goal of returning principal,
all at a reasonable cost. These funds are registered investment companies
that are regulated by the Securities and Exchange Commission (SEC) under
the U.S. federal securities laws, including Rule 2a-7 under the Investment
Company Act. That rule, which was substantially enhanced in 2010,
contains numerous risk-limiting conditions intended to help a fund achieve
the objective of maintaining a stable NAV using amortized cost accounting
or penny rounding or both.”

The Derivative Project comments

This is false and misleading. Money market mutual funds no longer provide a
market-based return, at a reasonable cost with limited risk.

• Money market funds now pose significant systemic risk, particularly if

interest rates were to rise suddenly, since many of the variable interest
entities (VIS) pose greater leverage for the entities than can be sustained
in a rising rate environment.

• Money market mutual funds, such as Charles Schwab Retirement

Advantage (SWIXX) have “voluntary recapture” plans that require once
interest rates begin to rise, the Fund will take an ever-increasing percent
of the interest rate spread, such that the retirement investor will never get
ahead. The proposition that the retirement investor is obligated to return
a guaranteed expense level and profit margin for an obsolete product is
not only a breach of fiduciary duty under existing securities’ laws, but a
clear admittance that the product is no longer a “going concern”, as it was
in the early 1980’s and 1990’s, when money market mutual funds could
pass on to retirement savers higher yields from banker’s acceptances and
commercial paper, while at the same time making a profit. Those days
are long gone.

Charles Schwab wrote further on the SEC on money market reform:

• “Transparency: We believe that one of the most important differences is the

transparency of money market funds as compared with banks. Money

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market funds are required to report their holdings, their net asset value and
other information on a monthly basis to the SEC, which makes that
information publicly available on a 60-day lag. In addition, funds are now
required to share their holdings with the public by posting that information
on the fund’s website within 5 business days of the end of each month.
Banks are not required to tell clients anything about their holdings. In fact,
those holdings tend to be so opaque that, as we saw in the financial crisis in
2008 and continue to see today, bank executives have difficulty sorting it out
themselves. “

• This comment misrepresents on how one can analyze a basic credit risk,
such as a commercial bank, compared to securitized assets, VIE’s and the
rating services. It is significantly different to analyze a commercial bank
over a securitized asset or guarantees and VIE’s and the traditional risks and
roles of the commercial banking sector, which are well established,
particularly their role in the short-term capital markets. The rating agencies
did not due proper due diligence on securitized assets which contributed to
the 2008-09 financial crisis. Retirement investors will no longer be
dependent on conflicted rating agencies and require the ability to do their
own due diligence to assess credit risk and systemic risk.

• It has been the money market Fund companies, such as Schwab and
Federated that have twisted and misused the trust of retirement investors by
taking their assets and misrepresenting how they are being used.

The Derivative Project Comments:

• As an individual investor in money market mutual funds, I have full

access to a commercial bank’s balance sheet, including the amount of
exposure to unconsolidated VIE’s. I also know that the FDIC, OCC,
and the Federal Reserve oversee the commercial bank. Commercial
banks have access to the discount window and overnight Federal
Reserve financing options. Money market funds do not have this
access. They are not commercial banks.

• As an individual investor, I typically do not pay for a service to locate

cusip numbers for all the securitized assets. Thus I must pay for an

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 extra service to research what is the actual status of a given security,
as opposed to being able to see the regular filings at the SEC’s Edgar
system.

• As an individual investor, I have no access to what assets are actually

held by asset-backed commercial paper. I have no idea what my risks
are. I know longer trust ratings agencies. If the money market mutual
fund strictly invests in A-1, P-1 commercial paper, I can easily look at
the balance sheet of the corporation and make my determination as to
credit and liquidity risk.

• Variable rate demand notes do not belong in retirement investors’

money market mutual funds, they are long-term financing vehicles
and it is impossible to determine how many guarantees and
interlocking agreements are out there to assess both credit and
systemic risk.

In sum, the individual retirement investor does not have access to transparency.
Asset backed commercial paper, securitized assets and other structured investment
vehicles (such as Whistle Jacket, that the Charles Schwab money market fund held
and went bankrupt) are not transparent and it is readily evident the management
will throw in anything into a money market mutual fund to “make a buck” even if
it “breaks the buck.”

Requested Action by the SEC, the Department of Labor and Financial

Stability Oversight Council and for Discussion by SEC Investor Advisory
Committee on September 28, 2012

We understand the Securities and Exchange Commission has requested that the
Financial Stability Oversight Council examine the systemic risk posed by
money market mutual funds. As William Dudley, head of the New York
Federal Reserve Bank stated on August 15, 2012:

“Runs in the wholesale funding markets, analyzed in the work of economists

such as Gary Gorton and Andrew Metrick, both finance professors at the Yale
School of Management, and Darrell Duffie, a finance professor at Stanford’s
Graduate School of Business, are the contemporary equivalent of the depositor

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runs that plagued the U.S. banking system 80 years ago. As with old-fashioned
depositor runs, wholesale funding runs can have devastating consequences for
the real economy.”

Until the process described above is accomplished by the FSOC, every retirement
investor must be given immediate access to a bank FDIC insured money market
sweep option, such as Fidelity’s.

Why is Immediate Action Necessary by the SEC and the Department of

Labor?

Certain retirement investor funds are being invested and the retirement
investor is suffering losses and no return is provided. For example, in a
certain TIAA-CREF 403B for a 501C3 non-profit, the money market fund is
providing .00% return, yet charging .42% gross and net annual operating
expenses. (As an aside, this particular 403B offered by TIAFF-CREF
expense structure is so high that the retirement investor is incurring losses
far greater than the indices. For example, the TIAFF-CREFF International
Equity Fund returns for 12/31/11 were -24.11% compared to MSCI EAFE
Index of -12.14%.)

Money market mutual funds financing role in non-consolidated VIE’s and

asset backed commercial paper must end. A purposeful, slow movement of
funds’ resources to traditional commercial banking sectors will be managed
by the Financial Stability Oversight Council with a strategic plan to prevent
a disruptive process in our capital markets. Commercial banks will resume
their role in intermediation. Commercial banks can and will resume their
role in commercial paper lines and lending. The FSOC must oversee a move
back to the traditional role of commercial banks, that will replace the non-
transparent securitizations and non-consolidated VIE’s that have solely been
created to produce income for mutual fund companies, such as Federated
and Charles Schwab.

• Once interest rates return to the level that a money market mutual fund
can pass on the increased yield from A-1, P-1 paper or Eurocurrency time
deposits or bankers’ acceptances, money market mutual funds may
resume their investment of retirement investors’ cash, provided it is only

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 invested in investments that can be looked at on a monthly basis with full
transparency. This would exclude:

1. Asset-backed commercial paper where the underlying assets are not

linked to, with full disclosure, online, updated weekly.

2. Any securitized assets, VIE’s, would be banned from any retirement

money market account. Money market retirement accounts will be
limited to the traditional commercial banking short-term money market
instruments, as clearly defined in the 1980’s. (See Marcia Stigum’s
Money Markets).

• All “voluntary recapture” programs, such as those of Charles Schwab’s,

described above, will be banned in any retirement money market
accounts, immediately.

In sum, the money market investment management industry has a fiduciary duty in
their investment decisions to retirement investors. They must put the interests of
retirement investors over their own profit model, if it is not in the best interest of
the retirement investor. They have breached their fiduciary duty. The SEC must
intervene immediately to protect the savings of our nations’ retirement investors.

As Sheila Barr said in a recent interview on her new book: Bull By The Horns:
Fighting to Save Main Street from Wall Street and Wall Street from Itself.

Reporter: “Well do you think that looking back, then, that we are going to look
back at the crisis and the government's response to the crisis, as a bunch of people
acting honorably and selflessly and in the interest of the country; or that we will
look back and see a rather pathetic picture of people acting in their own interest, or
in the interest of these Wall Street firms?

Bair: “I think we will look back and see a regulatory response and a Congressional
response that was unwilling to show independence to these large financial
institutions and that at the end of the day -- not withstanding the rhetoric --
implemented policies that were highly friendly to these institutions.”

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Ms. Barr went onto say:

“I am also, though, disappointed in Mr. Obama. I think his policies have been Wall
Street-friendly through his economic team. I think he's got the worst of both worlds
-- Wall Street doesn't like him because he's been publicly critical, yet his
administration has performed policies that are pretty friendly to them.

So at this point I have to say I'm probably going to write in Jon Huntsman. He was
talking about financial reform during the debates; good for him, he was really the
only one. I wish this issue would become more of an issue in this presidential race.
I'd like to hear both candidates talk about it more; show independence from these
financial interests. But I'm not really hearing that yet.”

The Derivative Project is asking those sitting on the Investor Advisory Committee
to take a vote at your September 28th meeting and have the vote disclosed by
participant.

Are you in favor of money market mutual funds (MMF) placing retirement savings
in MMF’s that yield less and carry far greater risk, than FDIC sweep accounts? If
yes, please explain why.

Are you in favor of allowing retirement investors the option to invest directly in
Treasuries and FDIC insured CD’s to eliminate unnecessary fees that can no longer
be sustained in a historically low-interest rate environment? If no, please explain.

Once we receive the answers from the Investor Advisory Committee, we will also
pose the question to Candidate Romney and President Obama. As Sheila Barr
stated “I wish this issue would become more of an issue in this presidential race.”

Chairman Shapiro and Investor Advisory Committee, thank you very much for
your assistance and time addressing this most crucial issue for retirement investors.

Susan Seltzer, President, The Derivative Project

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