SEC Asks for Comments on Floating NAV For Money Market Funds.(401(k)s)

Byline: John Morgan

Regulators are searching for ways to make money market funds stronger without inadvertently crippling the $3.7 trillion mutual industry, but reaching that delicate balance will require compromises from both sides.

"We are seeking to strike a proper balance and find changes that make sense in times of stormy weather and calm waters," said Andrew "Buddy" Donohue, director of the Securities and Exchange Commission's division of investment management. "A ship incased in armor might survive a collision, but it could sink under its own weight."

At an open meeting last Wednesday, the SEC proposed several amendments to Rule 2a-7 governing money market funds, the most controversial of which would eliminate the stable $1 net asset value (NAV), something the industry says is the funds' most attractive feature.

"The stable NAV is a crucial feature of money market funds, and a fluctuating NAV could destroy the value of the product," said Paul Schott Stevens, president and CEO of the Investment Company Institute. "Such a change would be so unpopular with investors that it would likely push them into riskier, less-regulated products."

Money market mutual funds contain nearly 40% of the total $9.7 trillion in mutual fund assets, according to the ICI, and eliminating the stable NAV feature could trigger a major and devastating dislocation of assets from mutual funds to other areas like banks and certificates of deposit. Such a sudden and massive transfer of assets could also have unseen consequences on global market stability.

"If money funds had a floating NAV, would investors turn to other investments?" asked Commissioner Troy Paredes. "What are the incentives for investors when they see a market-based NAV start to creep down?"