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The Proposed Reforms The SEC was considering alternative proposals that would address these two structural issues in different ways: First, money market funds float the NAV and use mark-to-market valuation like every other mutual fund. This would underscore for investors that money market funds are investment products and that any expectation of a guarantee is unwarranted. In such a scenario, investment losses in money market fund portfolios could be both absorbed and reflected in the price—as would gains, for that matter. Similarly, while the incentive to run may not be reduced entirely, the “cliff” effect of redeeming at $1 or getting stuck with a loss and no immediate access to one's assets would no longer exist. Second, and alternatively, is a tailored capital buffer of less than 1% of fund assets, adjusted to reflect the risk characteristics of the money market fund. This capital buffer would be used to absorb the day-to-day variations in the value of a money market fund's holdings. To supplement that capital buffer in times of stress, it would be combined with a minimum balance at risk requirement. That requirement would enable investors to redeem up to 97% of their assets in the normal course as they do today. However, it would require a 30-day holdback of the final 3% of a shareholder's investment in a money market fund. That holdback would take a so-called "first-loss" position and could be used to provide extra capital to a money market fund that suffered losses greater than its capital buffer during that 30-day period. The result is that remaining investors would be unharmed by a redeeming investor's full withdrawal and the incentive to redeem fully and quickly at the first sign of trouble would be diminished. “I believe these proposals have merit, address the two structural issues identified and deserved to see the light of day so that we could receive public feedback,” Schapiro said.
The Proposed Reforms
The SEC was considering alternative proposals that would address these two structural issues in different ways: