The Securities and Exchange Commission is exploring structural changes to money market mutual funds, including raising the net asset value standard to $10, from $1.
Several problems with money market funds could be addressed by the adoption of a $10 or floating NAV, Andrew “Buddy” Donohue, director of the SEC’s Division of Investment Management, said in a speech delivered this month to the Practising Law Institute, a New York-based non-profit legal continuing-education organization.
“The choice of a $1 instead of a $10 per-share NAV has made the NAV quite insensitive to losses and gains in the funds’ portfolios until, once they reach 0.5%, the share price rises or falls a full 1%,” he said in his remarks.
“That means that while price changes can be expected to be infrequent, when they do occur, they will be fairly dramatic.”
The volatility can have an impact on shareholder redemptions, Mr. Donohue said. “The $1 price may not provide investors with adequate information regarding their investment,” he added.
But raising the floating NAV might not be very helpful.
“I think it would do more harm than good,” said Pete Crane, president of Crane Data LLC, a Westborough, Mass., research firm focused on the $3.8 trillion money market fund industry.
“What would investors do when the NAV drops to $9.99? Investors don’t like it when the NAV goes down. I don’t see what starting the run on the funds earlier actually solves.”
Changes to the NAV standard would also cause problems for accounting and other processes.
“It would present a Y2K-type challenge,” Mr. Crane said.
“It’s hard to say what it might do to money market fund industry. By tinkering with the formula, you might end up with a disaster.”
Other industry experts agree.
The move to a floating NAV would be detrimental to the industry, said Domenick Pugliese, partner in the New York-based Paul Hastings Janofsky & Walker LLP.
Investors use money market funds as alternatives to bank accounts, and keeping the NAV stable is important to them, he said.
“Once that NAV starts to move, the fund looks a lot like a bond fund, and that investment involves a whole different type of investor who wants to take investment risk,” Mr. Pugliese said.
“The floating nature of the NAV could really hurt money market funds. This would be a dramatic structural change.”
In recent weeks, the Washington-based Investment Company Institute has released a series of industry standards that many fund firms are adopting voluntarily.
Mr. Donohue said in his remarks that the review of the money market fund model and its regulations is a top priority with the SEC.
“The staff is exploring these issues, and we look forward to pursuing this area of reform in cooperation with the fund industry and fund investors.”
In testimony March 26 before the Senate Banking committee, SEC Chairman Mary Schapiro told Congress to expect the agency to make its recommendations about money market funds sometime this spring.