SEC Chairman Mary Schapiro's recent testimony before the Senate Banking Committee about scrapping the $1 per share stable net asset value (NAV) for money market funds made me wonder: if every American had to declare a taxable event every time we withdrew money from an ATM, wrote a check or swiped a debit card, would we still feel comfortable leaving our money on deposit at a bank?
The answer, of course, is no. The paperwork alone would make the thought of going to an ATM more painful than a trip to the dentist. Many would feel that keeping their money on deposit at a bank was no longer worth the hassle—and the consequences for businesses, investors and the economy overall would be severe.
This scenario may sound far-fetched, but Chairman Schapiro's recent suggestion that the value of money market mutual funds should be required to float according to the fluctuations of the market could force American investors to ask similar questions about a critical component of their investment strategies. And just as in my earlier analogy, the consequences for both individuals and businesses could be severe.
At FSI, we are acutely aware of the importance of money market mutual funds to Main Street American investors, since these are the clients our financial advisor members serve every day. These investors look to money market funds for liquidity, diversification and convenience, along with a market-based yield. These individuals, as well as businesses and institutions, make broad use of money market funds to hold excess cash for short periods of time and to maximize liquidity.
The stable NAV is central to these benefits. Investors purchase and redeem millions of dollars in money market fund shares every day. With a stable NAV, those investors are relieved of the burden of tracking gains or losses for tax or financial accounting purposes.
With a floating NAV, however, every money-market sale would be a tax-reportable event, substantially increasing tax and record-keeping burdens and significantly reducing the benefits of money market funds to Main Street investors.
