Late last week, Andrew "Buddy" Donohue Director of the Division of Investment Management of the U.S. Securities and Exchange Commission, the main regulator of money market funds, gave the Keynote Address at the Practising Law Institute's Investment Management Institute 2009. Donohue said, "[M]oney market funds have been one of the most important innovations within the mutual fund industry. In the 1970s, money market funds served as the vehicle that essentially introduced many investors to the mutual fund industry."

He continued, "Currently, with almost $4 trillion in assets, money market funds are of fundamental importance to the financial system as they serve to meet the liquidity and capital preservation needs of all types of investors -- both individual and institutional by maintaining a stable net asset value of $1.00. While money market funds are an innovative product that provided a great benefit to the fund investors, events of the past eighteen months have presented a challenge to the traditional money market fund model."

He describes the problems with SIVs and the protection put forth by advisors. "However, in September of 2008 during a period of extreme tightening of the credit markets we saw the first 'breaking of the buck' by a widely-held money market fund. It is gratifying to note that in the wake of adverse market conditions of September 2008, many intervened in the money market arena swiftly, dealing with such adversity for the greater good of investors and the market. Specifically, many money market fund sponsors or their parent firms were willing to voluntarily step in and assist money market funds facing credit or liquidity challenges by entering into asset purchase or credit support arrangements benefiting fund investors."

Donohue continues, "Furthermore, money market funds have also had to address the challenges posed by low or non-existent yields in treasury securities -- in fact, we have been seeing the lowest yields on Treasuries in 50 years.... As a result we have seen a number of treasury money market funds close to new investors and we understand funds have waived fees and expenses in order to avoid negative yields. As a result of these events, the Commission staff and the primary industry trade association for money market funds, the Investment Company Institute, have stated the need to review the current money market fund model in light of investor protection concerns that have emerged."

He says, "Many assert that the stable $1.00 NAV has been important to the development and popularity of money market funds. While the popularity of the stable $1.00 NAV is understandable, it does present certain potential drawbacks to investors.... These problems could be addressed by the adoption of a $10.00 NAV or a floating NAV. I believe these important issues must be considered when approaching money market fund reform."

Finally, he says, "As the review of the money market fund model and its regulatory regime is one of our top priorities in the Division of Investment Management this year, the staff is exploring these issues and we look forward to pursuing this area of reform in cooperation with the fund industry and fund investors.... The Division will recommend that the Commission update those regulatory requirements where and as necessary.... I appreciate the work the mutual fund industry has performed in this area through the Investment Company Institute's Money Market Working Group .... I view this as a good first step towards real reform in this area. I look forward to quickly developing recommendations for changes to protect money market investors."

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