To be sure, big financial service firms like Fidelity Investments and Federated Investors Inc. are aggressively battling the proposed reforms. J. Christopher Donahue, chief executive of Pittsburgh-based Federated, has called the proposed regulations "Draconian," and threatens to sue the SEC if they're approved. He worries that more regulations "will destroy the very essence" of money market funds.
For its part, Fidelity, the largest money market fund manager, has said that passing these additional reforms ultimately would destroy the money market fund industry. And Fidelity isn't alone. "There seems to be so little reason or support for more reforms," says Daniel Wildermuth, author of "Wise Money" and CEO of Kalos Financial in Alpharetta, Ga. "And, it could kill the whole area."
Given this push-back, the SEC's final vote on these new proposals is stalled, says Mike Krasner, managing editor at iMoney.net, a firm that analyzes market fund data. Originally, the vote was expected in early April. Now, a final vote by the SEC's five-member commission could be months away, says Krasner. "I'm guessing they're having an active debate," he says.
What these proposals mean
Both proposals are equally controversial. The SEC's first proposal aims to change money market fund pricing by having the share price float like a mutual fund price rather than being a constant $1 price per share at which shares now are bought and sold. Below $1, investors would lose principal. "This proposal destabilizes money market funds," Wildermuth says.
The second proposal gives investors a tighter money fund withdrawal window. From 95 percent to 97 percent can be withdrawn right away and the rest after 30 days. "But the idea of owning money funds is liquidity," Krasner says. "So, you're altering the concept."
Widermuth agrees. "We already have a product that's very strong and robust," he says. "More changes could drive investors into investments that are less stable."
Wildermuth and Krasner don't expect the SEC's proposals to be approved. Still, some advisers are suggesting other products for worried investors. Zacks Investment Research is recommending money market exchange-traded funds, or ETFs. They're a low risk and highly liquid alternative to money market funds, says Zacks analyst Eric Dutram in a research note.
Ultrashort bond funds or international bond funds also are worth considering, Wildermuth says. "And bank checking and savings accounts offer complete stability for investors not willing to face uncertainty," he says.
Fewer fund choices ahead?
Money market funds are steadily losing traction with investors anyway. From 2008 to 2011, money market fund assets have fallen about $1 trillion, along with the number of funds offered. Low yields are the culprit, Krasner says.
These days, 90 percent of all money market fund assets are held by only 20 large financial services companies, Krasner says. If new proposals are approved, fund choices could decline even more, as rising costs and fewer investors force other firms to leave, he says.
The regulations passed in 2010 already have brought lots of extra costs because more trading and research are required to meet SEC guidelines, Krasner says. Eventually, these costs could ding fund returns as they're passed on to investors. "For now, yields aren't affected because they're already pretty low," Krasner says.