(August 2012) At some point over the coming weeks, Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission, was expected to bring up for a vote new proposed regulations for money market mutual funds. That will no longer happen due to insufficient votes to approve the proposed changes.
According to a Reuters article on the subject, “Luis Aguilar, one of the SEC’s five commissioners and seen as the swing vote, said there remained too many unknowns in the broader cash-management industry to feel confident new rules would not spook investors away from money funds, which play a central role in financial markets.” He’s right. If money market mutual funds were changed to a floating net asset value (NAV), as opposed to the current assumed stability of the $1 NAV, it would potentially create an accounting nightmare and increase uncertainty for investors at a time when the financial markets are already gripped by excessive uncertainty.
Can you imagine having to keep track of the cost basis of every dividend, every interest payment, and every other transaction in and out of your money market mutual fund acting as your brokerage’s sweep account? With a floating NAV on that sweep account, you’d have to keep track of it all for tax purposes. I’m not sure the word “nightmare” adequately describes what that would be like for many investors. Furthermore, how would investors be certain that funds needed to cover trades or to cover cash secured put positions would be there in the amount needed on settlement dates if the NAV of the money market mutual funds holding those funds were to float?
In my article, “Money Market Funds – A Bad Deal is About to Get Worse,” I noted the following three reasons why money market mutual funds were already losing their luster:
- Lower yields than many checking and savings accounts
- No FDIC insurance
- As of January 27, 2010, the SEC adopted new rules for money markets, one of which permitted the board of directors of a money market fund to suspend redemptions if the fund is about to break the buck and will be liquidating
If the SEC were to add floating NAVs to the mix, I can imagine many investors would struggle to figure out a reason why they should park money in such investment vehicles, especially during times of economic difficulties. On top of that, if the proposed change of holding back a portion of a withdrawal request for a period of time were to come to fruition, it would throw one of the current benefits of money markets, liquidity, out the window.
Perhaps it would make sense for the SEC to first work with the mutual fund and brokerage industries to develop a widespread alternative to money market mutual funds as sweep accounts before voting in the future on a floating NAV structure for the funds. With regard to changing the liquidity profile of money market mutual funds, it would make sense to think through whether this will actually increase the likelihood of a run on the funds during times of economic woes before voting on such a change in the future. That is, if there’s anyone left using the funds should the proposed changes ever be voted through.
To read the “Statement of SEC Chairman Mary L. Schapiro on Money Market Fund Reform,” released yesterday, click here.
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