Will regulators kill money-market funds in order to save them?
The Securities and Exchange Commission is poised to propose new rules that are supposed to make money-market funds safer in the wake of the failure of the nation's oldest fund during the 2008 financial crisis.
But mutual funds and other critics say the rules are so radical they would make money funds unattractive to many investors.
The stakes are high not only for the money-market fund industry, but for millions of Americans and corporations that use the funds as a place to safely store money they can quickly access.
At the heart of the debate is whether the funds face significant risks not addressed by current rules, which were tightened in 2010.
"I do feel a sense of urgency about the structural weaknesses that exist in money-market funds ... that makes them prone to runs," SEC Chairman Mary Schapiro told reporters last week.
Critics of the looming changes say that worry is overblown.
"My view is that the current disclosure regime for money-market mutual funds is fairly clear and does the job," said Mike Krasner, managing editor of iMoneyNet, which tracks money-market funds.
The changes will likely require money-market funds' assets to float daily, like a mutual fund, instead of holding the assets steady and having the yield fluctuate. Other expected changes would prevent shareholders from draining their accounts all at once and make fund sponsors pony up if a fund fails.
The industry thinks the changes would take away two characteristics of money-market funds that make them popular with both individuals and institutional investors: stability and the ability to get money out quickly. It would force that money into banks, the critics say.
Money-market funds play a crucial financing role. They invest in short-term corporate debt, called commercial paper, along with other short-term and highly liquid interest-bearing assets, including government securities and certificates of deposit.
Individual investors and savers along with corporations and other institutions park money in them that can be easily moved to bank accounts or other investments. Municipal and state governments rely on them to roll over short-term debt. They're not government insured like a bank account, but they have always been regarded as safe.
What Schapiro says keeps her awake at night is the memory of the September 2008 collapse of the Reserve Primary Fund. The $64.8 billion fund held $785 million in Lehman Bros. IOUs that became worthless the day the investment bank failed.