William A. Birdthistle of the Chicago-Kent College of Law recently published a paper looking at the rules for money market funds adopted by the SEC in 2010. In his paper, Breaking Bucks in Money Market Funds, Birdthistle takes the position that the SEC's reforms may have the unintended effect of increasing, rather than decreasing the likelihood that money funds may "break the buck:"
This Article argues that the Securities and Exchange Commission's first and most significant response to the economic crisis increases rather than decreases the likelihood of future failures in money market funds and the broader capital markets. In newly promulgated regulations addressing the "breaking of the buck" in the $3 trillion money market - a debacle at the fulcrum of the 2008 financial meltdown - the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds, potentially riskier portfolio requirements, and the continued use of discredited ratings agencies. These policies, premised implicitly upon doubt in the ability of markets to process information effectively, obscure the true perils of money market funds. Rather than swaddling investment risks in misleading regulatory padding, the SEC should illuminate the possible menace of these funds.
As an alternative to the SEC's approach, Birdthistle "offers transparent solutions to alleviate moral hazard and systemic risk in the broader market and to end the regulatory subsidy of these specific investments." In short, Professor Birdthistle offers:
The SEC could quickly remediate the perils of moral hazard and systemic risk in money market funds and credit markets simply by reducing the level of obfuscation in its current approach. By adopting the lessons of neoclassical, [footnote omitted] behavioral,[footnote omitted] or prudential regulation, the agency could quickly encode a new set of rules to bring greater transparency to this vital and once-ignored sector of the economy. Two simple but fundamental changes could accomplish a great deal of this work: either return to the floating NAV or establish an insurance facility to guarantee deposits in money market funds.
Professor Birdthistle's paper is an interesting look at alternatives for money market fund regulation, taking a position counter to that of the President's Working Group and the SEC.
The full paper is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1728929