The Securities and Exchange Commission ("SEC") recently approved new regulations that will greatly affect money market funds and those who invest in them. The new regulations require money market funds to have a floating net asset value ("NAV") instead of the traditional $1 fixed NAV. The SEC believes that this will alert investors that money market investments do have risk and will prevent runs on funds, such as those that occurred during the 2008 financial crisis. The SEC also passed new regulation regarding redemption of assets. "The rules will allow money market fund boards to erect limitations, in the forms of fees and temporary redemption gates, on the ability of investors to pull out money of the funds at a time of market distress."1 While the SEC is trying to make the money market more transparent for investors, large institutional funds claim that a floating NAV and the new redemption fees will cause some investors to put their assets elsewhere and cause lower returns for those investors that remain in money market funds.
While many opponents of the regulations claim that the changes will negatively affect investors and money market funds, some also claim that the regulations will not even meet the goals that the SEC sets outs to accomplish. A Columbia Law School paper by Jeffrey Gordon and Christopher Gandia argued that whether or not the NAV was fixed or floating for money market funds did not affect the likelihood of a run on fund.2 Because circumstances that may induce a run on a fixed NAV fund would also create concern that money market fund assets will decrease in value, they argue that floating NAV funds will be just as susceptible to runs in such circumstances. Others argue that the new regulations will increase the complexity of accounting and taxation with regard to money market funds, that investors may turn to riskier and less regulated funds, or that investors may instead put assets into banks, making larger the institutions responsible for the 2008 financial crisis.3 Fund managers are joined in their opposition by some large investors who previously used money market funds for cash management but feel it may be difficult to do so now that they would have to monitor the floating NAV.
Proponents of the new SEC regulations argue that money market funds need further regulatory enforcement because the actions taken in 2008 to save them from completely falling apart are no longer available options for the government due to the Dodd-Frank Act. Ben Bernanke notes that investors need to be made aware of the risk inherent (even though it's perhaps a smaller risk than other investments) with money market funds.4 Supporters argue that these funds are not bank deposits that are federally insured, and should hence be treated like securities. Others argue that the "tradition" of a $1 fixed NAV resulted from an accounting trick that exploited a 1983 SEC rule that "allows funds to claim that each share is worth $1, even if that's not exactly true based on market prices of the underlying assets."5
Many institutional funds are worried about what these new regulations may mean for their investors and for the health of their funds. However, many are confident that fund managers and investors will successfully adapt to the new regulations, and the SEC is sure that these new rules will bolster the money market funds and make their true value better known to investors.
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