Are Regulators Attempting to Kill Off the Money Market Mutual Fund Industry?

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Both the SEC
and the President’s Working Group on Financial Markets (the
Plunge Protection Team) are considering whether Money Market Funds
should be forced away from their stable $1.00 value method of maintaining
money market share prices. A move by regulators forcing money market
funds away from the maintenance of the $1.00 price would cause huge
hiccups in the industry and perhaps result in the end of the industry.
At a minimum, it would cause huge withdrawals.

That regulators
are suddenly focusing on these funds and at the core element of
their appeal is curious. Are the insider banks behind the idea in
the hope that the money will flow to them? Does the government expect
more of the money to flow into Treasury Bills (then already does)?
Whatever is behind this focus, there is no legitimate reason behind
an attempt at such a regulation.

At Crane’s
Money Fund Symposium, Paul Schott Stevens, President and CEO of
the Investment Company Institute spoke
about the problems that a move away from $1.00 pricing would mean:

…money
market funds remain firmly opposed to proposals that would force
them to abandon their stable per-share value. And we are not alone
in that stance. America’s businesses, along with state and
local governments, are rallying in opposition to any suggestion
that regulators would force money market funds off their stable
$1.00 net asset value.

The idea
of floating these funds’ value is likely to be discussed
in the President’s Working Group report, whenever it may
be issued. And it’s still in the air at the SEC, which is
contemplating a “round two” rulemaking to address any
lingering issues in money market funds and Rule 2a-7.

Proponents
of the floating NAV see this idea as a home run – a way to
solve any problems of systemic risk that might somehow arise from
money market funds with one swing of the bat.

We think
it’s more of a foul ball.

Forcing
money market funds to float their NAV will not eliminate the chances
of investor runs. Nor will it reduce risks to the financial system
in a severe liquidity crisis. What it will do is destroy money
market funds as we know them – imposing severe dislocations
on America’s households, businesses, and governments, and
disrupting the American economy.

At ICI,
we have been making this case to anyone who will listen, and urging
users of money market funds and issuers in the money markets to
speak out. And I’m pleased to report that they are responding.

In the last
several weeks, groups representing state and local governments
have come out squarely in opposition to forcing money market funds
to float. The National Association of State Treasurers; the Government
Finance Officers Association; and the National Association of
State Auditors, Comptrollers, and Treasurers – all have voiced
their support for the ability of funds to operate with a stable
NAV.

The SEC’s
own Investor Advisory Committee has before it a resolution, strongly
backed by one of its subcommittees, that calls upon the Commission
to preserve the stable NAV as a core feature of money market funds.

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the rest of the article

July
28, 2010

2010
Economic Policy Journal

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