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Investment Management

Bill Could Upend MMF Regulation

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March 08, 2016

It likely won’t pass but a bill creeping through Congress would allow prime funds to keep a fixed NAV but prohibit bail outs.

The fixed net asset value regime for prime funds apparently is still breathing life. A little publicized bill, the Consumer Financial Choice and Capital Markets Protection Act of 2015, and introduced in the Senate in July 2015, by Republican Senator Pat Toomey, and in the House on December 2015 by Representative Gwen Moore, a democrat, could allow the constant NAV to stay.

The bill “amends the Investment Company Act of 1940” and would allow MMF companies to keep their current fixed NAV regime if the company’s objective “is the generation of income and preservation of capital through investment in short-term, high-quality debt securities; the company elects to maintain a stable net asset value per share or stable price per share, by virtue of such methods, and the board of directors of the company has determined in good faith that it is in the best interests of the company and its shareholders to do so and that the money market fund will continue to use such method(s) only as long as the board believes that the resulting share price fairly reflects the market-based net asset value per share of the company…”

At the same time, the bill “prohibits covered federal assistance from being provided directly to any money market fund.” In other words, no bailouts if the MMF runs into trouble.

According to Pete Crane of Crane Data, which broke the story, if passed, the bill could possibly supersede the October 2016 SEC reforms calling for a floating NAV for prime and tax-exempt institutional money funds. Neither the House nor Senate version has made much progress but Mr. Crane says they bear watching.

The chances are slim of either version of the bill passing. However, Mr. Crane says, because it has something for both regulators and the industry it’s always a possibility. “It’s not out of the question because it throws a bone to both regulators and money market fund companies.” And if passed, the coming SEC regulations “would have to be rewritten.”

Mr. Crane adds that it would mean nothing in terms of the gates and fees, which would remain on the table. The SEC's rules, including making prime funds adopt a floating NAV along with gates and fees, going into effect in October of 2016. Government MMFs would be allowed to keep the fixed NAV.

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