According to an Investment News article, the SEC is heading a a review of the regulations governing money market funds. The immediate objective is to stem any run on the fund that breaking the buck might cause. A couple of proposals adopt a kind of "loss reserve pool" mechanism to allow for defaults and provide liquidity when markets dry up. The most disruptive is a proposal to have money market fund NAVs float on a daily basis.
On the surface, these proposals seem reasonable. The sanctity of the $1 NAV is one feature that has made money market funds so popular. Investor confidence in the security of the funds invested. However, the new regulations would be costly. And in an era of 0.1% yields, it is not clear that the new costs could be born by the funds and still offer investor an attractive yield.
Perhaps the experience with The Reserve Fund is an indication that we are asking too much of a mutual fund. After all, most money finds rely on an arcane accounting methodology (called income equalization) to maintain that $1 NAV as it is. Most brokerage firms now offer an FDIC insured cash management option, often with comparable services and higher yields than their money market funds. Even the plain cash balance accounts at brokerage firms are insured by the SPIC, even if they don't pay interest. Money funds could be merged into short-term bond funds, which is what they would become under floating NAV proposals.
Update: FDIC Corp. Chair calls money market fund stable NAV a "fiction," and is not overstating the case.
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