The SEC seeks comment on options offered up by the President’s Working Group on Financial Markets, which conducted a study of possible money market fund reforms.  Comments are requested by 1/10/11.  The President's Working Group - it began in 2009 - studied possible reforms that might mitigate money market funds' susceptibility to runs.  The PWG's Report includes the following:

• Supports the SEC's new rules regulating money market funds ("MMF's"), approved last February, that are intended to better protect MMF investors in times of financial market turmoil and to lessen the possibility that MMF's will not be able to withstand stresses similar to those experienced in 2007 and 2008.
• Identifies features that make money market funds susceptible to runs as well as the systemic implications of the run on prime money market funds that occurred in September 2008. 
• States the SEC's new rules alone could not be expected to prevent a run of the type experienced in September 2008.
• Outlines possible reforms to supplement the new SEC rules and, individually or in combination, further reduce the susceptibility of MMF's to runs and the related systemic risk.

    Policy Options.  Some of the measures discussed in the Report could be implemented by the SEC under its existing statutory authority;  others would require new legislation, coordination by multiple government agencies, or the creation of new private entities. 

a.  Floating net asset values, though such a change may have several unintended consequences, including: (i) reductions in MMFs’ capacity to provide short-term credit due to lower investor demand;  (ii) a shift of assets to less regulated or unregulated MMF substitutes - e.g., offshore MMF's, enhanced cash funds, and other stable value vehicles; and, (iii) unpredictable investor responses as MMF NAVs begin to fluctuate more frequently.

b.  Private emergency liquidity facilities for MMF's, to serve as an external liquidity backstop that augments the SEC's new liquidity requirements for MMF's.

c. Mandatory redemptions in kind, to address such things as large redemptions that could force MMF's to sell assets in an untimely manner. 

d.  Insurance for MMF's, to mitigate the risk of runs in MMF's. 

e.  Two-tier system of MMF's with enhanced protection for stable NAV funds, thereby permitting investors to select the types of MMF's that best balance their appetite for risk and their preference for yield.  

f.  Two-tier system of MMF's with stable NAV MMF's reserved for retail investors.

g.  Regulating stable NAV MMFs as special purpose banks, perhaps reorganizing them as special purpose banks, of SPB's.  Functional similarities between MMF shares and bank deposits, as well as the risk of runs on both, provide the rationale for this option.

h.  Enhanced constraints on unregulated MMF substitutes, although such new measures, intended to mitigate MMF risks, may also reduce the appeal of MMF's to many investors.

For further details, click onto:   [ SEC Release IC-29497 (Other Releases), 11/3 ]