In deciding what further rules should apply to money-market funds, the SEC and other regulators would do well to heed the old Latin maxim primum non nocere- first, do no harm.
Money-market funds typically invest in very low-risk securities, maintain a net asset value of $1 a share and have long been a widely used cash management tool for retail investors. They are also of critical importance to the nation's credit markets, providing liquidity to financial intermediaries.
In 2008, as the credit markets froze, the nation's oldest money-market fund - the Reserve Primary Fund - broke the buck. In response, the SEC in 2010established stricter quality and liquidity requirements, and shortened average maturities for money-market funds. These steps significantly improved the operation and safety of money-market funds.
In the past several months, however, SEC Chairwoman Mary Schapiro has made it clear that the commission is considering substantial reforms, including floating NAVs and capital buffer requirements, and that she anticipates the commission issuing a reform proposal "in very short order." These potential reforms appear to stem from concerns about the existence of investment risk in money-market funds - a risk inherent in the very concept of investing.
However, as the 2010 report by the President's Working Group on Financial Markets made clear, radical reform options may have serious collateral consequences. A floating NAV may decrease the attractiveness of money-market funds to investors, undermining the ability of these funds to provide the short-term credit and liquidity crucial to the operation of the financial markets.
New capital buffers also could have negative consequences. As SEC Commissioner Daniel Gallagher has noted, "The level of capital that would be required to legitimately backstop the funds would effectively end the industry ... and I have doubts that a smaller cap that accrues over time would be sufficient to protect investors in funds in an actual crisis."
Ultimately, however, approaching the regulation of money-market funds with the goal of eliminating (or virtually eliminating) risk is not fruitful. However frustrating it might be for regulators who want to ensure positive outcomes for all investors, the recent changes to money-market funds may well have done all that is reasonably possible to limit risk while still preserving the benefits of money-market funds. In the words of Gallagher, "If the commission moves forward with a proposal, the option of doing nothing until we have seriously analyzed the impact of last year's reforms must be given serious consideration."
Susan Ferris Wyderko is president and CEO of the Mutual Fund Directors Forum, an independent membership organization of fund directors. She also held several top positions at the SEC during a 20-year tenure at the agency.
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