SEC’s Money-Market Overhaul Faces Uncertain Future

What many investors don't know, and what commentators like Sallie Krawcheck, the controversial former head of wealth management at Bank of America and Citigroup, point out is that that as recently as last summer, the largest money funds averaged 45% of their investments in European bank paper, with one major player at just under 70%. "They don't know that, were the investments to falter, half of the top 10 money-fund providers are not large and presumably well-capitalized banks but instead asset managers that don't have anything like banks' capital resources," Krawcheck (left) noted in the Journal in February.

Nor, she continued, do money-fund investors know that the largest money-fund managers have been gaining share in the industry over time, therefore concentrating and potentially heightening the risk of a failure.

"And they don't know that, while these firms will likely go to extreme lengths to avoid 'breaking the buck,' the $1 net asset value represents an implicit, rather than explicit, guarantee. Even then, there is no certainty that firms will be successful in raising capital in a downturn since, by definition, they will be trying to do so during a market dislocation."

In a comment letter to the SEC in May, Scott Goebel, senior vice president and general counsel for the mutual fund behemoth Fidelity Investments, recognized the need for greater oversight, but urged regulators to go slow in instituting new rules.

"We believe that some minimum international standard must exist for consistent treatment and management of money-market funds under a global regulatory framework," Goebel wrote. "However, we realize that money market fund regulation has developed in different markets based on differences in relative size and maturity of national economies. It is important for regulators to recognize these differences within their jurisdictions, which may necessitate varying regulation."