Money market funds still face contagion risk: SEC's Plaze

What keeps Robert E. Plaze up at night? The deputy director of the Securities and Exchange Commission's Division of Investment Management no doubt loses sleep over the thought that mistakes made by one money market fund could spread throughout the industry and cause another run on money market funds. “There have been hundreds of money fund bailouts, where the funds would have broken the buck if the manager hadn't stepped in,” he said. “We continue to see risks and we're worried that another event could occur.” The rules that were enacted in 2010, which put greater restrictions on the credit quality and length of paper money market funds, still leave room for some money market funds to take on excessive risk, he said. “There's a lot of room for creative investment minds,” he said. “If one fund makes a mistake, it's going to spread to the other funds.” He's particularly concerned about “outliers” that are able to deliver a high yield in a low-yield world. The average yield on money market funds is just 0.02% today, down from 4.7% at money market funds' peak in June 2007. Publicly traded companies that offer money market funds also are under increased pressure to generate more fees from the funds to generate more profits. Last year, firms waived $5.7 billion of money market fees, while collecting only $4.7 billion, for example. “Those firms have to deal with the conflict between two sets of shareholders [the money market fund's and the company's],” Mr. Plaze said. “One way to resolve that is to take on more risk to generate more yield so they can charge fees again.” That's why Mr. Plaze believes that further regulation of money market funds is necessary, he told attendees at the Investment Company Institute's 2012 Mutual Fund and Investment Management Conference, although he wouldn't commit to which of the rumored proposals would be best. Mr. Plaze did defend the idea of a floating net asset value because it would make the funds more like mutual funds, and perhaps investors would treat them that way. “Investors should treat them like investments, not cash vehicles,” he said.