Views on improving the integrity of global capital markets
12 June 2013

Money Market Funds Redefined: the SEC Issues a Reform Proposal at Last

When former SEC Chairman Mary Schapiro was unable to muster the votes needed for a money market fund reform proposal, the Financial Stability Oversight Council (FSOC) stepped in to address what it considers the funds’ potential systemic risk.  Whether the SEC’s recent proposal will be enough for the FSOC to now defer to the securities regulator for a final resolution remains to be seen.

Under the guidance of new Chairman Mary Jo White, SEC commissioners last week voted unanimously to propose for public consideration and comment reforms to the current money market fund regulatory scheme that are aimed at reducing the risks that a fund’s “breaking the buck” would cause a run on money funds industrywide (the so-called contagion effect). Under the proposal, the public is asked to consider two approaches that could be implemented alone or in tandem:

  • Floating NAV: Prime institutional money market funds would be required to use a floating net asset value, rather than a stable $1.00/share value. Government and retail money market funds would still be allowed to use a stable NAV approach.
  • Liquidity Fees and Redemption Gates: All money market funds would be allowed to continue using a stable NAV approach, but could impose a 2% liquidity fee on redemptions if the fund’s “weekly liquid assets” fall below 15% of its total assets, unless the board of directors determines such action is not in the best interests of the fund or to use a lesser fee. The board could also decide to temporarily suspend redemptions for up to 30 days.

Early reactions to the proposal range from support for a well-reasoned approach that preserves many current uses of money market funds to views that the proposal does not go far enough to address potential systemic risk.

Meanwhile, the FSOC has not yet publicly abandoned its intentions to undertake further money market reform measures. In late May, Treasury Secretary Jacob Lew told the Senate Banking Committee that it was planning to act if the SEC failed to adopt “meaningful structural reforms” focused on systemic risk. 

Whether the SEC’s latest attempts will be found to meet this mandate is a question left hanging. The proposal gives the public 90 days to say what it thinks.

Photo credit: Associated Press

About the Author(s)
Linda Rittenhouse, JD

Linda Rittenhouse, JD, was a director of capital markets policy at CFA Institute. She focused primarily on issues related to investment products and investment regulation. Rittenhouse holds a JD degree.

1 thought on “Money Market Funds Redefined: the SEC Issues a Reform Proposal at Last”

  1. Lance Speck says:

    The easiest solution to money market reform is to float the NAV. If everyone in the system were required to do this there would be few problems. Those who treat money market funds like guaranteed bank deposits can go back to the banking system where they are protected by the FDIC.

    There are unintended consequences with this solution but alternatively imposing a force majeure clause would also go a long way to solving the contagion problem. If the funds were with the oversight of the SEC allowed to suspend redemptions of impose limits this also would be a viable solution.

    At the end of the day the current system is flawed. Money market funds are not guaranteed bank deposits and pretending they were for the last 50 years was an accident waiting to happen.

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