In this climate of ongoing uncertainty, Main Street American investors are searching for a few constants to count on when making financial decisions. One of the crucial tools they have come to depend on over the last 40 years is the money market mutual fund. Investors look to these vehicles for stability and liquidity and have widely adopted them as a crucial part of their retirement planning strategies.
Unfortunately, a pair of proposals under consideration by the chairman and staff at the Securities and Exchange Commission threatens to undermine all of that.
Under the first proposal, the SEC would require every money market fund to freeze 3 to 5 percent of an investor’s account every time the account holder takes cash out of the fund. If a client sells $5,000 in stock today and parks the cash in a money market fund expecting to have access to those funds for other investment decisions or to make ends meet in the near term, too bad: she’ll only be able to access $4,750 next week. The remaining $250 will be locked up, by government order, for 30 days.
This change would make money market funds the only mainstream financial product to face a government-imposed asset freeze that routinely denies investors use of their full account balances. Under this proposal, every money market fund investor would have a new joint account holder: the federal government.
The second proposal is to replace the stable dollar-in, dollar-out principle that money market funds have successfully used for 40 years with a “floating” value. That means that instead of being offered at a stable $1.00 per share, an investor’s money market fund shares might be sold at $1.00012 today and $0.99991 next month (these funds are so stable that “floating” their values means counting hundredths or even thousandths of a penny).
The result: every time an investor puts cash into a money market fund or writes a check on the account, he would need to track tiny changes in the shares’ value, and report all these changes on his tax return. For many hard-working Main Street investors, who might transact every week as they save, pay bills and make other financial decisions, these new bookkeeping requirements would present significant new costs, both in time and money.
Either of these crippling changes would make money market funds effectively unusable for approximately 56 million individual investors.
Money market funds have a long and established track record of stability, convenience and liquidity, providing superior flexibility and historically higher yields for investors than comparable bank products. Many investors count on these funds for basic services such as check writing, ATM access and sweep accounts. The current SEC proposals would take many of those options off the table. And dozens of groups representing individual and institutional investors have told the agency and other regulators that they would abandon money market funds under either option.
While we understand and applaud the SEC’s efforts to re-examine its regulatory structure in light of the financial crisis, the fact is that money market mutual funds today aren’t broken.
In 2010, the SEC passed comprehensive rule changes to make these funds more stable and resilient. Those reforms were tested last summer by the European debt crisis, the showdown over the U.S. debt ceiling and the first-ever downgrade of the U.S. debt rating—and money market funds sailed right through.
The proposals currently under consideration by the SEC would only impose new costs and complications on investors, while exacerbating one of the key problems identified by the SEC’s own recent study under Dodd-Frank: investor confusion.
We urge the agency to realize that these proposals won’t address Americans’ financial concerns; they’ll simply make them worse.