Next run on money market funds could kill industry, SEC official says

If money market funds experience another run similar to the one that happened in September 2008, the money fund industry is unlikely to survive in its current form, according to an SEC official who has done extensive work on money fund regulation.

To avert such a disaster, the Securities and Exchange Commission could finalize a proposal by the end of the year aimed at reducing money market fund risk and improving disclosures about the funds, Robert Plaze, associate director of the SEC’s Division of Investment Management, said at a panel discussion sponsored by the District of Columbia Bar Association.

Mr. Plaze also is co-chairman of the money market fund subgroup of the President’s Working Group on Financial Markets, which is to issue a report by Dec. 1 making recommendations on whether changes are necessary to reduce money fund’s susceptibility to runs.

Even if the SEC institutes new regulations, “the larger context is whether money market funds as a model will survive. And I suspect if there’s another event similar to last September they may not,” Mr. Plaze said.

The SEC is likely to change money market fund regulation in two stages, he said.

The first set of regulations will be based on the proposal issued by the SEC in June, which would require the $3.4 trillion money market industry to improve the credit quality of its holdings and ensure that the holdings are more liquid, among other things.

More sweeping rules, dealing with controversial issues like whether money market funds should have a floating net asset value instead of a fixed $1 per share value, could come next year, Mr. Plaze said.

The President’s Working Group is looking at the systemic risk that money market funds pose to the economy as a whole since they are widely used in business and municipal finance, he said, adding: “The crisis is in everybody’s mind.”