MMF Reforms: For Better, or Worse?
Main Street, a personal finance publication owned by The Street, posted an article on "Money Market Fund Reforms: Parking Cash is Not a Risk-Free Proposition." It says, "For money market funds, a dollar in has by and large translated to a dollar out, perhaps with a bit of interest earned along the way. This $1 net asset value has been the cornerstone of cash held in investment accounts. And for retail investors, that worked fine -- until 2008 when one fund wrote off its bad Lehman Brothers debt and priced its fund at 97 cents on the dollar. Institutional investors immediately ran for the doors, liquidating their holdings in the fund and, in doing so, nearly left unsuspecting retail investors with less than one dollar out. Jay Sommariva was managing $50 billion of fixed income assets for BNY Mellon the day the Reserve Primary Fund "broke the buck." "We had skin in the game at that point -- it was the worst," remembers Sommariva, now with Fort Pitt Capital Group in Pittsburgh. "Just like everybody else, we had to put gates up on our portfolios because there was a mass exodus of the institutional money -- what they call the 'smart money' -- that knew what was going on." While institutions with hundreds of millions were redeeming their shares, retail investors with mere thousands of dollars were mostly clueless. "They had no idea -- until four or five days later, and then they started to get a whiff of what was going on. And obviously by that point it was too late," Sommariva says. "The funds were in disarray. If the government didn't step in, I think I heard there would have been 30 money market funds that would have broken the buck the next day. It would have been a total disaster."" The piece adds, "In an effort to prevent a similar future run on money market funds, regulators have issued rules set to go into effect in October 2016. But large investment firms such as Fidelity, BlackRock and JPMorgan are already beginning the process of adjusting their money fund offerings." It continues, "Sommariva thinks that, in the long run, the new regulations may even make things worse, particularly for the typical U.S. investor. He contends that by maintaining a fixed-share price, investors will still feel a false sense of security -- mistakenly believing that a dollar in means you are assured of a dollar out. "So I don't know if they've actually fixed the problem," he adds." Also, SEC Commissioner Daniel Gallagher discussed money market funds in his speech, "Bank Regulators at the Gates: The Misguided Quest for Prudential Regulation of Asset Managers" at the Virginia Law and Business Review Symposium on April 10.
