NEW YORK--Securities and Exchange Commission Chairman Mary Schapiro said Monday that the regulator had boiled down its plan to propose fundamental reform to the operation of the nation’s money market funds.

The two options: A capital buffer or letting the net value of assets float day to day.

The second option has long been anathema to the money market funds industry, which has assiduously maintained the principle of closing out the net asset value of a fund at $1 a share. This has been viewed as the fundamental factor that differentiates money market funds from other mutual funds – and reassures investors that the funds are as liquid and safe as checking accounts.

The idea that a money market account is the same as "a liquid cash account" works “very well almost all the time," Schapiro said.

But the exception was in September 2008, when the nation’s oldest money market operation, the Reserve Primary Fund, famously “broke the buck.” The fund declared the value of its assets to be less than $1 a share, due to its holdings in Lehman Brothers assets. Those assets plunged in value, when the investment bank was forced to file for bankruptcy.

When that happened, $310 billion was pulled from money market funds, mostly by larg institutions, in less than a week.

The commission instituted a variety of reforms in February 2010, but has been investigating potential long-term solutions to preventing runs on funds ever since.

One of the reforms that the SEC instituted was the publishing of the “shadow NAV” of funds, which shows the actual value of assets it holds. These are disclosed to the public with a 60-day delay.

The purpose, Schapiro said, is to make investors sensitive to the fact that the $1 net asset value is “brittle,’’ that there is no committed source of liquidity behind the value – and that sponsors may or may not be able or willing to prop up the fund at that value when conditions go bad.

“Investors want and have come to expect their dollar and nothing shy of that,’’ Schapiro told the Securities Industry and Financial Markets Association’s annual meeting here Monday.

But she said the SEC was giving “long and careful review” to letting the net asset value float – and not just mandating the industry create some sort of capital buffer.

The capital in the buffer would be used to prop up a fund, in the case of a potential run. But, she noted, it is a burden on market participants that is hard to calculate effectively.

Nonetheless, the capital buffer and the floating net asset value are the "options with greatest viability," she said -- even if the floating net asset value seems “draconian” and could be seen as the “end of money market funds, as we know them.” She said the SEC “will share the proposal very soon,’’ but gave no date.

Here’s text of Schapiro's speech on money market fund reform.

Here’s a Money Management Executive background piece.

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