The SEC's new "Money Market Fund Reform" Proposals, in addition to laying out likely new quality, maturity, and liquidity restrictions for money funds, invite interested participants to comment on possible future changes to money fund regulations. It says, "The Commission requests comment on the rules and amendments proposed in this release. Commenters are requested to provide empirical data to support their views. The Commission also requests suggestions for additional changes to existing rules or forms, and comments on other matters that might have an effect on the proposals contained in this release."
Following the main body of proposals, the SEC writes, "We recognize that the events of the last two years raise the question of whether further and perhaps more fundamental changes to the regulatory structure governing money market funds may be warranted. Therefore we are exploring other ways in which we could improve the ability of money market funds to weather liquidity crises and other shocks to the short-term financial markets. We invite interested persons to submit comments on the advisability of pursuing any or all of the following possible reforms, as well as to provide other approaches that we might consider to achieve our goals. We expect to benefit from the comments we receive before deciding whether to propose these changes."
In particular, the Commission seeks comments on the possibility of a "Floating Net Asset Value," which is not among the current proposals recommended by the SEC. They say, "When the Commission adopted rule 2a-7 in 1983, it facilitated money market funds' maintenance of a stable net asset value by permitting them to use the amortized cost method of valuing their portfolio securities.... [U]sing the amortized cost method of valuation is an exception to the general requirement ... that investors in investment companies should pay and receive market value or fair value for their shares. The Commission did not take lightly its decision to permit money market funds to use the amortized cost method of valuation.... [I]n exchange for permitting this valuation method, [the SEC] would impose certain conditions on money-market funds designed to ensure that these funds invested only in instruments that would tend to promote a stable net asset value per share."
The SEC adds, "The $1.00 stable net asset value per share has been one of the trademark features of money market funds. It facilitates the funds' role as a cash management vehicle, provides tax and administrative convenience to both money market funds and their shareholders, and promotes money market funds' role as a low-risk investment option. Many investors may hold shares in money market funds in large part because of these features. We are mindful that if we were to require a floating net asset value, a substantial number of investors might move their investments from money market funds to other investment vehicles."
But they add, "However, a stable $1.00 net asset value per share also creates certain risks for a money market fund and its investors. These risks are a consequence of the amortized cost method of valuation and the resulting insensitivity of the $1.00 net asset value per share to market valuation changes. It may create an incentive for investors to redeem their shares when a fund's market-based net asset value per share falls between $0.995 and $1.00 because they will obtain $1.00 in exchange for their right to fund assets worth less than $1.00 per share. Regardless of the motivation underlying the redemptions, the unrealized losses attributable to redeeming shareholders are now borne by the remaining money market fund shareholders."
The SEC also requests comment on "requiring money market funds to satisfy redemption requests in excess of a certain size through in-kind redemptions." Comments should be received by Sept. 8, 2009 and sent to rule-comments@sec.gov (include File Number S7-11-09). Finally, note that we will be adding a panel on "The SEC's Money Market Fund Reforms" to the agenda for our upcoming Crane's Money Fund Symposium on Sunday afternoon, August 23, in Providence, R.I.
