Thoughts from CFP Director Professor Russ Wermers:
Yesterday, by a 3-2 vote, the SEC Commissioners approved a rule to require money market mutual funds in the “prime institutional” category to mark their share price to market each day, rather than holding a fixed $1 per share (as they have for decades). This change is meant to remind large institutional investors that these cash accounts have some risk, albeit very small during normal times, so that they will hopefully not be overly surprised when an event happens (such as the Lehman default) that impairs the value of their fixed-income assets. Other, lesser-binding components of the rule include the ability of funds to shut down redemptions or charge a fee for redeeming money fund shares during a crisis.
There are two interesting issues to watch: First, will institutional investors accept this change, or will they move their money to other cash accounts (such as unregistered vehicles or banks)? Second, will the floating share price really work to inhibit mass redemptions during a big market event, or will it serve to speed up the revelation of which funds are holding impaired assets (i.e., reveal the “good banks” vs. “bad banks”)? Fund management companies have two years to comply. This will be an interesting experiment to watch.
Professor Wermers Research: “Runs on Money Market Funds”