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.

The Dollar Meltdown: S... Charles Goyette Best Price: $0.10 Buy New $3.14 (as of 06:45 EDT - Details)

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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July 28, 2010

2010 Economic Policy Journal