The SEC Money Market Fund Reforms

Remember those terrifying days of the Fall 2008, when even savings tucked away in money market funds seemed suddenly imperiled?  I recall with horror sitting in my faculty office and listening to the President announce that such funds would be federally protected (for a time).  Depositors and investors alike thus learned - indirectly - that fund managers may have dabbled with the exotic vehicles that had felled Wall Street's titans.  

The SEC recently announced reforms to the regulatory requirements of money market funds, and those reforms are encouraging on many levels.  Among other things, the reforms require money market funds to 1) maintain a minimum percentage of assets in "highly liquid securities," 2) observe percentage limits on investment in illiquid securities, 3) "maintain a stable net asset value per share in the event of shocks," and 4) observe a detailed disclosure protocol centering on both monthly reports to the SEC and web postings of portfolio holdings.  See http://www.sec.gov/news/press/2010/2010-14.htm.        

The rules must still sojourn through the rule adoption process and undergo a period of phase-in.  But the impact of the measures is dramatic.  To the market, the reforms represent a commitment to the isolation and eradication of a specific industry ill manifested between 2008 and the present.  In a debate on regulatory reform that has seen discussion of meltdown culprits range far and wide, it's refreshing to see one collateral consequence so vividly remembered and expressly addressed.

To fans of regulation, the reforms constitute a re-commitment to the notion of net capital limitations, a curb on excessive speculation that had been subordinated in the past decade as cries of warning/reform gave way to fears of stifled entrepreneurial creativity.

To those who study the SEC, the reforms represent the resurgence of an agency that has often taken a backseat to the Federal Reserve and Congress in proposing remedies to the economic crisis.

Last but certainly not least, to investors the reforms signal true concern for the nest eggs of so many.  It goes without saying that money markets remain the most conservative option available for those fearing reinvestment; to state it bluntly, to watch the vehicle fall prey to trendy speculation is akin to telling all casino patrons that they can't leave the table nor exit the casino with their chips.    

The one (perhaps unavoidable) drawback to the money market reforms appears to be their link to the credit rating agencies.  More on the continued reliance upon those agencies tomorrow...

---JSC, 2/15/10