“(MoneyWatch) COMMENTARY A long-simmering debate about the future of money market funds is heating up, as the SEC signals it wants changes that a fund industry executive on Monday said were “outrageous.” The question, debated in Washington for nearly four years, is whether or not money market share prices should remain fixed at $1 per share, as they have since the first money market fund was created in the 1970s, or whether the share price should be required to “float” to reflect the value of the underlying securities it owns.
Arguing in favor of the fixed share price are fund managers and their trade group, the Investment Company Institute. They contend that a floating share price would scare investors away from money market funds, which would disrupt the financial markets and deprive corporate America of an important source of short-term capital.
Arguing in favor of a floating share price is, well, let’s put it this way: When the Wall Street Journal’s editors, the SEC chair, Paul Volcker, and a blue ribbon commission chartered by President Obama all come out in favor of a floating share price, it’s safe to say that the idea has a broad base of support.
Why is this issue important? Because a fixed share price connotes safety and stability — an investment that’s free from volatility. But while those might be appropriate ways to describe money market funds most of the time, they don’t apply all of the time. While it’s not common, it is possible for the holdings of money market funds to decline enough that the fund is in danger of “breaking the buck” — losing so much on its investments that it can’t return $1 per share to its investors.
When this happens — as it did with one of the nation’s largest money market funds in 2008 — it can create a “run on the bank” mentality as investors scramble to pull their money out before an artificially high $1 share price is lowered. This puts even more downward pressure on prices as fund managers try to sell their holdings to meet these redemptions….”
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