The SEC’s proposal includes two principal alternative reforms that could be adopted alone or in combination. One would require a floating net asset value (NAV) for prime institutional money market funds. The other would allow the use of liquidity fees and redemption gates in times of stress. Additional diversification and disclosure measures would apply under either alternative. The commission attempted to propose reforms last summer but was unable to reach a consensus to support the changes. (See “SEC Backs Down On Proposal—For Now.”)
The proposal does not directly affect registered investment advisers (RIAs)—it has more of an economic impact on the fund industry and institutional shareholders of money market funds, according to Duane Thompson, senior policy analyst at fi360. “However, if adopted as proposed, it can affect some RIAs whose clients hold both institutional and/or retail class shares of money market funds,” Thompson told PLANADVISER. “As such, if institutional shares go to a floating daily value, then RIAs with access to both share classes will have to track share values differently, and assess the benefits and risks of each for their clients.”
After the Crisis, Reform
The SEC began evaluating the need for money market fund reform after the Reserve Primary Fund broke the buck at the height of the financial crisis in September 2008. “Our goal is to implement effective reform that decreases the susceptibility of money market funds to runs and prevents events like what occurred in 2008 from repeating themselves,” said Mary Jo White, chair of the SEC.
Any final SEC action changing the requirements for money market funds should be reviewed by RIAs from a fiduciary standpoint, since their duty is to assess the suitability of a product and match it appropriately to a client’s risk tolerance, Thompson said, and consider whether other fixed-income instruments are preferable.
“Since the federal government is no longer able to guarantee money market funds as it did after the Prime Reserve episode in 2008, advisers will have to judge for themselves whether the SEC’s reform efforts are adequate in protecting client assets from a future run on money funds. Even if the SEC fails to take further action, its efforts are nonetheless a reminder that, while experts may disagree on the amount of risk posed by money market funds, most investors do not understand the potential risk involved.”
We applaud the SEC for listening to concerns about unintended consequences for small investors who rely on money market funds, based on our initial readings of the proposals, said Chris Paulitz, a spokesman with the Financial Services Institute. “Both alternatives would preserve a stable NAV for investors, which is critical,” Paulitz told PLANADVISER. “We are studying and will provide detailed comments to the SEC, and encourage our members to provide input as well.”
A link to the SEC release is here, with a fact sheet on money market funds, their history and how they were affected during the financial crisis.