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Featured Advisor

Srbo Radisavljevic
Managing Principal/Investment Advisor

Edge Portfolio Management


State: IL

At Edge, a low client to advisor ratio allows for personal and customized service for each individual.  Our goal is to work as a team for each client to provide not only portfolio management but wealth coordination and financial planning.  We make every effort to have frequent communication with our clients and to provide timely response to calls and emails.  I also enjoy spending time with my wife and three kids, following Chicago sports, enjoying ethnic cooking, and serving as a school board member for Norridge School District 80.

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Money Funds: Unfinished Business for the SEC

The SEC is championing additional reforms to make money funds safer for investors. What are the possible new rules?

| BY Adriana Reyneri

Mary L. Schapiro, chairman of the U.S. Securities and Exchange Commission, says her agency has some unfinished business – making the $2.6 trillion money funds industry even safer for investors.

In comments to Congress this week, Schapiro announced that SEC staff is preparing recommendations to further reduce the likelihood of runs on money funds, such as those that took place in 2008. The reforms would supplement restrictions placed on money market funds in 2010.

Schapiro earlier championed the reforms at a November meeting of the Securities Industry and Financial Markets Association, or SIMFA, referring to the stability of money funds as an “issue that has not been fully resolved following the financial crisis of 2008.”

Money market funds are highly liquid financial products widely used by both retail and institutional investors to manage their cash. The “delineating feature” of the money funds is that they seek to maintain a $1 net asset value, which allows investors to use money market funds as a liquid cash account, according to Schapiro, who told SIMFA, “The general success long allowed money market funds to be regarded as a sleepy, low-risk part of the financial world, growing to nearly $4 trillion in assets at their height.”

All changed in the financial meltdown of 2008 when the Reserve Primary Fund could no longer support a $1 share value, triggering a wide-scale run on prime money market funds. During the week of Sept. 15, 2008, investors drew $310 billion – 15 percent of assets – from the money funds. The Treasury Department stepped in with a Temporary Money Market Fund Guarantee Program to halt the panic selling.

The SEC followed this crisis with a round of reforms that tightened credit quality standards, shortened weighted average maturities and imposed first-ever liquidity requirements on the money funds. The reforms also included new reporting requirements designed to increase transparency of the funds and allow regulators to better monitor the funds’ risk profiles. The agency also began providing investors with access to a “shadow NAV” designed to sensitize investors to fluctuations in the value of the funds’ pooled investments.

Despite this critical first step – and an industry consensus that the SEC has done enough – Schapiro is calling for additional safeguards. The agency is considering two options, a floating net asset value and a capital buffer. A floating NAV would “reinforce what money market funds are – an investment – and what they are not – a guaranteed product,” said Schapiro, but the option poses regulatory challenges.

A meaningful capital buffer, combined with redemption restrictions, could provide a cushion to “mitigate the incentive for investors to run,” said Schapiro. “A sudden market of interest rate fluctuation would not have the potential dramatic ‘break the buck’ effect that it could have today.”

The cushion could come from the fund sponsor or shareholders, or the market, itself, and the agency is trying to determine what the appropriate size of the buffer would be, Schapiro said, adding, “The issues we face are not easy. If they were, further structural money market reforms would be implemented by now.”

The SEC, charged with ensuring orderly and efficient financial markets, is working in concert with other federal agencies, including the U.S. Treasury Financial Stability Oversight Council, on the structural reforms to money funds.