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By Christine Benz and Miriam Sjoblom, CFA | 06-27-2012 02:00 PM

What Would Reform Mean for Your Money Market Fund?

Morningstar's Christine Benz and Miriam Sjoblom debrief investors on the floating NAV, capital buffer, and redemption restriction proposals for money market funds.

Christine Benz: Hi, I'm Christine Benz for Morningstar.

The Securities and Exchange Commission is considering a proposal that would change the way money market funds are regulated.

Joining me to discuss these proposals is Miriam Sjoblom. She is associate director of fund analysis for Morningstar.

Miriam, thank you so much for being here.

Miriam Sjoblom: Thanks for having me, Christine.

Benz: So, let's start with a little bit of stage-setting. Why is the SEC considering reforming the money market fund industry?

Sjoblom: Well, SEC Chairman Mary Schapiro has come out and said that the money market funds as they are structured today continue to pose systemic risk to the financial system, to the economy. And there were reforms enacted in 2010 that she says really haven't solved the problem of a crisis causing a run on money funds.

If you look back to 2008, that's what happened, when the Reserve Fund broke the buck following Lehman Monday. You saw people pulling money out of money market funds in droves.

Benz: So, ... money market funds are supposed to have this stable $1 net asset value. In the case of this Reserve Primary Fund that broke the buck, its net asset value actually dropped below $1, and that spurred a run-on-the-bank type of situation?

Sjoblom: That's correct.

Benz: So what is the SEC considering ,and how do they think that it would address some of these risk factors that are there for money market funds?

Sjoblom: Well, there are two main reforms on the table, it seems. The first is to eliminate that fixed $1 share price and switch to floating net asset value system where the net asset value of the funds would reflect the actual market value of the securities in them.

Benz: I think that that is something that investors watching this should be clear on: Even though [money market] funds typically do maintain that $1 per share NAV, the underlying securities can bob around a little bit more underneath that surface, and so the idea is to actually show investors to what extent that's happening. Sometimes they might actually jump above that $1 mark as well.

Sjoblom: Certainly. It can work both ways.

Benz: So they would float the NAV, and shareholders would be able to see on a daily basis ,or whatever it might be, what the real, actual NAV would be?

Sjoblom: Right. And some reports say if they were to show the actual NAV, it might be that you would have to go out several decimal points to even see the difference, yet still it could be another signal to investors of how good is my money market fund manager at managing risk.

Benz: Okay. So, the floating NAV is one part of their proposal. What else is on the table?

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