SEC Serious About Money Market Safety

by Tom Taulli | April 17, 2013 12:05 pm

Until the financial crisis of 2008, money market funds were considered a pillar of stability. But with the collapse of Lehman, there were some funds that “broke the buck.” That is, they fell below their net asset value (NAV) of $1 (this is the price of all money market funds).

While these funds were supported by their large parent companies, the situation was definitely scary.

The financial crisis exposed some of the realities of money market funds. For example, some invest in extremely liquid government securities while other take positions in riskier assets. What’s more, bank-sponsored funds are the only ones covered by the FDIC deposit insurance. The rest may suffer big losses if a financial institution implodes.

In other words, money market funds are far from monolithic and, as a result, likely to provide a false sense of security for investors.

Because of this reality, the SEC has tried to bring about reform, such as by making the NAV float on a daily basis. This would help give a better sense of the overall risk levels for each money market fund. Quite simply: If it is plunging, there’s a good chance that there are problems.

However, as should be no surprise, the mutual fund industry has fought back hard. Let’s face it, they do not want to have their funds seen as being weak because could ultimately mean losing valuable assets.

Now, though, with a new chairwoman at the SEC — Mary Jo White — it looks like the industry is going to lose the battle. According to a piece from Dealbook[1],  one of her biggest priorities is to reform the money market fund industry. The article noted:

“Just days after Mary Jo White became its chairwoman, the agency’s spokesman, John Nester, said on Tuesday that ‘the staff expects to have something for the commission’s consideration in the near future.'”

To me, this sounds like a good move. Keep in mind that the mandate of the SEC is to help investors by providing more transparency. In other words, by taking a market approach, the agency is finding an efficient way to do this. If anything, it will probably give money market funds more incentive to be conservative with funds.

Thus, they will be about giving investors a safe place to store their money — not a way to take big risks to get an tiny bit of higher yield.

Tom Taulli runs the InvestorPlace blog IPO Playbook[2]. He is also the author of High-Profit IPO Strategies[3]All About Commodities[4], and All About Short Selling[5]. Follow him on Twitter at @ttaulli[6]. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. Dealbook:
  2. IPO Playbook:
  3. High-Profit IPO Strategies:
  4. All About Commodities:
  5. All About Short Selling:
  6. @ttaulli:

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