Mistaken Ideas about Money-Market Funds

Proposed regulations by the SEC are bad for investors, threaten the ability of money-market mutual funds to provide capital, and would pose serious economic risks.

For more than 40 years, money-market mutual funds have helped businesses, states, and municipalities meet their financial needs by purchasing their short-term debt.
But now, Washington bureaucrats threaten to impose major changes to the structure of these funds, supposedly to decrease risk in the financial system. Remarkably, the current discussion comes just two years after the Securities and Exchange Commission tightened credit standards, shortened maturities, and increased disclosure requirements for money-market mutual fund assets.
The suggested changes are bad for investors, threaten the ability of money-market mutual funds to provide capital, and pose serious economic risks.

One change would require funds to publish the value of the funds’ shares at more specific prices, rather than rounding their net asset value (NAV) to the nearest penny as they do currently. The intent of the proposed change is to highlight the technicality that the funds’ NAV actually “floats” within a very narrow range around a dollar. However, because these historical variances are so immaterial and temporary (usually from 1/5 to 1/10 of a penny or less) money-market mutual funds report their prices just as every other mutual fund does—rounding to the nearest penny. Reporting prices to a tenth of a penny just for floating’s sake would force costly new accounting and tax reporting for all investors and would prevent many institutions and government entities from investing in the funds. Is that worth showing a change of $0.001 per day in share prices?

Another change would require funds to hold aside some of investors’ cash as “capital,” rather than investing it. This is an odd idea, because capital reserves are typically used to alleviate risk associated with lending or investing with leveraged equity, and money-market mutual funds are not leveraged. Moreover, if funds are required to hold excess capital, companies and governments will have to pay more to obtain financing from these funds because the funds will raise their yield requirements to offset income lost on an idle capital reserve.

Read more: http://www.american.com/archive/2012/july/mistaken-ideas-about-money-market-funds