Why a Floating NAV for Money Market Funds - Financial Services

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					 Broker-Dealer Newsletter: Why a Floating NAV for Money Market Funds is a Bad Idea
                                    July 16, 2012

 Broker-Dealer Newsletter: Why a Floating NAV for Money Market Funds is a Bad Idea

                                           July, 2012

By FSI President & CEO Dale Brown

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 and investors 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. Such a rule shift could have drastic consequences for our economy.

At FSI, we are acutely aware of the importance of money market mutual funds to Main Street
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, increasing tax and record-
keeping burdens and reducing the benefits of these funds to investors and businesses alike.

Money market funds also play a crucial role in meeting businesses’ short-term financing needs,
holding more than one-third of the commercial paper issued by businesses. If individual
investors were to shy away from money market funds, the flow of capital to businesses would be
significantly disrupted. Few immediate substitutes are available to fill the financing gap that
would be created by a rapid shrinkage of these funds.

Money market funds form a vital link in providing financing for state and local governments, as
well, since as mutual funds they are able to pass the benefits of tax-exempt income along to
investors. Tax-exempt money market funds currently hold more than half of the short-term
securities issued by state and local governments. By making money market funds less attractive

 Broker-Dealer Newsletter: Why a Floating NAV for Money Market Funds is a Bad Idea
                                    July 16, 2012

to investors, then, the SEC could create another barrier for municipal governments seeking to
raise money for basic operations in a difficult environment.

FSI understands the SEC’s desire to protect investors and strengthen America’s regulatory
framework. Imposing a floating NAV on money market funds, however, is simply not in the best
interests of American investors or businesses; rather, this measure could unnecessarily
undermine one of the key instruments that Main Street investors count on for stability and
liquidity, while depriving businesses and governments of a crucial source of financing.


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