Money Fund Vote Withdrawn

Bloomberg published a story late last week that Mary Shapiro is withdrawing the proposal for money market funds to have floating NAVs or have money fund managers support the funds with some capital subordinate to investors'.  Three of the commissioners opposed the proposal, suggesting that fund managers be allowed to refuse redemptions in times of market stress.  One commissioner also suggested that more study is needed before any reforms be adopted.

The call for additional study is a canard, as the issue has been before the commission and the industry for two years.  Allowing fund companies to refuse redemption requests is essentially the situation that we have now, but a little worse.  As the experience with the Primary Fund shows, the first action taken when the buck is broken is to halt redemptions.  The Primary Fund had to get SEC approval, which was immediately forthcoming.  Giving fund managers the authority to close the redemption window will only accelerate the run, with large institutions leading the way at any sign of weakness.

Money market funds with a stable NAV are a product of arcane accounting rules that allow the funds to smooth the effects of short term market movements on short term debt instruments.  Absent these accounting rules the NAV of the fund would fluctuate with market conditions, perhaps a penny in a week, maybe three cents in a year.  Management could limit even that small amount of volatility through risk control techniques.  Could also provide capital to absorb the first dollar loss.

The float or support proposal has backers out side of the SEC.  (See my posts of April 13 and July 16.)  With he support of the Fed and the new Financial Stability Oversight Board  (a creation of the Dood-Frank financial reform bill), the proposal seems assured of adoption, despite the objections of the SEC commissioners and the money fund managers.  It just remains to be seen when it will happen and what the final rules will look like.