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SEC Proposes New Money Market Reforms

Fairholme manager defends portfolio, personnel moves, and more.

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The SEC is set to propose a new round of regulations for the $2.7 trillion money market fund business, and the mutual fund industry isn't taking the news lying down. The Wall Street Journal reported the regulations could include a floating net asset value stipulation as well as new capital requirements and redemption restrictions. Any new regulations would first need to be approved by the agency's commissioners and then submitted to a public comment period.  

If enacted, the changes would continue to alter an investment option that had already been overhauled by new rules during the past several years. (Here's Morningstar's take from 2010 on the previous regulations.) For example, money market funds traditionally keep their NAVs at a stable value, or $1 a share. Funds are said to "break the buck" if they drop below that threshold. That policy has historically made money market funds a perceived safe haven, at least until the Lehman Brothers collapse pushed the Reserve Primary fund, a large money market offering, under the $1 level and triggered a run on money market funds in general that was only calmed by government intervention. A floating NAV would, in effect, erase the stigma attached to breaking the buck. As with traditional open-end mutual funds, a floating NAV for money market offerings would also be a clear signal as to which ones are taking the most risk, depending on how far and frequently the NAV fluctuated away from the $1 level.

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Morningstar Fund Analysts does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.