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The Securities and Exchange Commission (SEC) has proposed wide-ranging reforms to the regulation of money market funds (MMFs). But do they go far enough and will they revive investor confidence? Jay G Baris, Partner and Chair of the Investment Management practice at Morrison Foerster, New York, considers the implications for the industry.
A number of proposals have been put forward by the SEC for reforming the structure of MMFs. Regulators have been looking at methods to limit the risk posed by the $2.9 trillion money fund industry, since an avalanche of withdrawals helped to freeze bank and corporate funding markets during the financial crisis almost five years ago.
In summary, what changes are proposed?
The SEC has put forward numerous reforms of the regulation of money market funds, but essentially there are two main stand-alone proposals, which mean the SEC could adopt either one individually, or in tandem with each other:
Under this proposal an institutional prime MMF would no longer be able to round up an NAV to the nearest dollar. Rather, the investors in a fund would have to purchase and sell their shares at whatever the value of the NAV is at the point of sale; it wouldn’t be fixed at $1. The proposals do not apply to government or retail funds. This means that they define a retail fund as one that restricts redemptions by any one shareholder to no more than $1 million a day.
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