In response to the lessons of the Reserve Primary Fund experience, the SEC enacted sweeping changes to MMF governance and reserve requirements in 2010. These included, but were not limited to, requiring 10 percent overnight and 30 percent weekly liquidity standards. The reforms to MMFs have already helped the industry maintain investor confidence and weather two significant market disruptions: the downgrade of U.S. debt and the Greek/Euro Zone debit crisis. This is why the latest calls for reform are perplexing, since Congress passed Dodd-Frank six months after the SEC amended Rule 2a-7 related to MMFs governance and Congress chose not to modify the fixed NAV at that time.
Nonetheless, there have been proposals for additional regulations of MMFs based on the logic that investors in MMFs may mistakenly believe they are federally backed or insured and that MMFs remain susceptible to bank-style runs because they are not insured or backed. The name Money Market Fund does speak for itself. They are funds invested in markets. But if that is not enough, MMFs already must explicitly and clearly disclose that they are not federally backed. Therefore, this knowledge is either already known or readily available to MMF investors. MMFs investors seek short-term liquidity vehicles that protect principle while paying modest interest. Individuals, investors, and state and local governments use MMFs to maintain assets liquid to pay debt obligations or salaries, purchase consumer goods, settle securities trades, or to transfer funds as liquidity is needed. Both SEC proposals would frustrate those aims by either ending cash equivalency by floating the NAV or imposing a pseudo margin requirement on investments in MMFs by not permitting full withdrawal.
The SEC is to be commended for the 2010 MMFs reforms, but the most recent proposals to change Rule 2a-7 must be reexamined. The fixed $1.00 NAV of MMFs has been an important feature in finance for 40 years and has provided safe, “cash equivalent” short-term liquidity to businesses and local governments everywhere. Congress must work with regulators on ways to build on the principles of Dodd-Frank and promote prosperity going forward, but we must also be careful to not needlessly disrupt markets, which surely the new potential SEC regulations will do.
Rep. Moore (D-Wis.) is a member of the House Financial Services Committee.