For investors in money market funds, regulatory uncertainty is becoming the new normal.
Ever since 2008, when the Reserve Primary Fund "broke the buck" and created a panic that threatened to upend the financial markets, regulators have been discussing ways to reduce risk in the money market industry. But with the exception of some cosmetic changes in 2010, there has been a lot of talk but little action. And if comments last week from SEC Chairman Mary Jo White are any indication, the regulatory standstill is likely to continue.
[Read more about the Reserve Primary Fund in The Decade's 10 Worst Fund Disasters.]
White, who took office last month, said her goal is to ensure that the products are stable and safe for retail investors. But she steered clear of providing any details on how she intends to achieve that goal.
"As the SEC works to develop and propose meaningful money-market fund reform, our goal is to preserve the economic benefits of the product while addressing potential redemption pressures and the susceptibility of these funds to runs — runs in which retail investors are especially likely to suffer losses," she said at a membership meeting of the Investment Company Institute. "While I'm sure that you would like me to say more about this today, I'll stop there as the staff and commissioners are actively engaged in discussions designed to yield an appropriate and balanced proposal in the near future."
So-called "runs" happen when investors in funds they believe to be in trouble withdraw their money en masse. Retail investors can be vulnerable during such redemptions because by the time they realize what's going on, institutional investors will have already fled, leaving their retail counterparts holding the proverbial bag.
Retail investors typically use money market funds in ways similar to their bank accounts: as places to store their money when they are not investing it elsewhere. For such investors, perhaps the most recognizable feature of these funds is their steady $1-per-share net asset value. What many don't realize is that the $1 NAV is somewhat of an accounting fiction and that at any given point in time, the actual value of a particular share can vary from the $1 target by fractions of a penny.
Although these fluctuations are normal, they are, at least in certain senses, largely invisible to investors. Certain regulators, most notably Mary Schapiro, White's predecessor at the SEC, argue that requiring funds to "float" their net asset values would increase transparency and minimize the risk that a debacle such as the Reserve Primary Fund fiasco will reoccur. A floating NAV merely means that instead of always being told their funds are worth $1 per share, investors would be kept abreast of actual fluctuations. In other words, the share price of money market funds would change every day, just like it already does with all other types of mutual funds.
Schapiro, however, was unable to get enough support within the commission for either a floating NAV or an alternate proposal that would have required funds to take certain steps to prepare for the possibility of a redemption crisis.
Although some view White's lack of specificity as an indication that she will take a more hands-off approach than Schapiro, it remains to be seen to what extent White will align herself with her predecessor's positions. Indeed, as commentators have been quick to note, the only thing that is clear at this point is that the regulatory logjam will likely continue into the coming months.
"[White] really didn't say much. She didn't say anything about the options, and she didn't say anything about the timetable," says Peter Crane, the president and chief executive of the money market tracking firm Crane Data. "Though everyone keeps saying [new proposals] are coming, I think this means, 'Don't expect to see anything anytime soon.' ... I would think at this point, the end of June is the absolute earliest you can see a proposal [from the SEC]."