Rule changes that federal regulators are considering in an effort to strengthen money market funds during periods of economic turmoil could actually kill the $2.7 trillion industry, according to Willia, McNabb III, chairman of
The Vanguard Group Inc.
The Securities and Exchange Commission is considering ways to reduce the chances of a run on the funds similar to the one that occurred in September 2008 when Lehman Brothers Holdings Inc. collapsed and the Reserve Primary Fund — a money market fund that had loaned money to the investment bank — “broke the buck,” or fell below $1 a share.
"If the structure of these funds is significantly changed, by mandating excessive capital requirements or floating the $1 share price, money market funds as we know will disappear," Mr. McNabb told fund industry professionals gathered in Washington for a day-long Investment Company Institute meeting on money market funds.
Such funds already face razor-thin yields that are driving investors away. Money fund assets are down $1.2 trillion from the January 2009 high of $3.9 trillion, according to Crane Data LLC, which compiles money fund data. About two-thirds of the holders in the cash management tool are institutional investors and the rest are retail investors.
The SEC enhanced money fund regulations in January 2010, but SEC Chairman Mary Schapiro said last May 20 that even more regulations are necessary because too many investors consider money funds risk-free investments.
Investors who move away from money funds because of structural changes could steer their money to riskier, ultra-short bond funds, Mr. McNabb said. “And they are going to need to hire a very diligent tax accountant” because every transaction will become a taxable event, he said.
Many money fund investors also would likely move to bank checking and savings accounts, which would provide lower rates and less stability, Mr. McNabb said. He pointed out that money funds have “broken the buck” only twice in their 40-year history, while 2,800 bank have failed since 1971.
Changes under consideration include a controversial proposal to require funds to maintain a floating-rate net asset value, a plan to require an industry-sponsored emergency pool of money to act as a backstop in event of a run, a move to banking regulations, and other steps.
The SEC hasn't outlined a timetable for changes, but fund industry experts said new regulations are not likely before next year.
