September 4, 2009
In general, I'm opposed to allowing money market mutual funds (MM) to have an intentionally floating Net Asset Value. While it may be "marketing" problem for retail funds, it is, more importantly a "confidence" issue.
If, after implementing the Commission's proposed rules on portfolio holdings, it were to remain likely that NAVs could decline under foreseeable future market conditions, this will create worry in the minds of retail customers. Because money market mutual funds are so widely held, this could harm future economic conditions in the same way that the recent Reserve Fund problem did. That is, the currently existing disclosure regarding possible loss of principal was widely dismissed, until it happened.
The Commission does have at least one source of real data to consider. I don't know that these data point one way or the other. But it might be instructive to investigate public and private responses to past year declines in the NAV of the CREF Money Market Fund. This variable annuity retirement product (SEC CIK#: 0000777535) has had a variable accumulation unit value since inception, around 1989.
One reason it was set up that way was to provide "total return" unit values, rather than periodic distributions. I believe that it also has slightly different rules for portfolio holdings than current retail money market funds. But this fund value declined 1.23% on May 1, 2009. I see that as a problem for owners, not just a "marketing problem." In fairness, the unit value also went up by almost 1% in one of the last twelve months, an improbable result for today's retail MM funds.
Required policies for paying accumulated but unpaid interest upon withdrawals should also be considered by the commission. If a withdrawal is made before (say...) the end of the month, the customer should be assured of receiving all income through the actual date of withdrawal. If you look at the prospectus for the TIAA-CREF Money Market Fund-Retirement Class (which does have a "constant" NAV, unlike the annuity product mentioned above) ticker symbol TIEXX , SEC CIK#: 0001084380 ), you will find that this cannot currently be taken as an assumption, despite the large number of MM funds that chose to honor it. This is, however fully disclosed, unfair, and should not be permitted. The current rulemaking initiative provides the opportunity to add this requirement.