Letting the net value of assets in a money market fund would "change the shape and form" of such funds -- and could create system risk.

That's the assessment of Maria F. Dwyer, the chief regulatory officer of MFS Investment Management, speaking on the "State of the Investment Industry" Monday morning at the National Investment Company Service Organization 29th Annual Conference and Expo.

"No one would be willing to buy these funds,'' she asserted. "So this would require restructuring" of an industry that has long been predicated on the idea that the net asset value would be set at $1, after the close of every business day.

Failure to maintain that buck-per-share value led in the last two years to the demise of the Reserve Primary Fund, the nation's first money market fund, and a $10 million fine against TD Ameritrade recently, for the manner in which it marketed the Reserve Primary Fund as a safe investment.

Money market funds became investment favorites in the '70s, at a time of high inflation, note MFS chairman emeritus Robert Pozen and NICSA chairman Theresa Hamacher in their newly released book, "The Fund Industry" because they offered higher returns than savings accounts and flexibility akin to bank accounts.

But, when Lehman Brothers went bust in September and October of 2008, so in effect did the Reserve Primary Fund, which held a large portion of its assets in Lehman securities. Investors who knew that, fled for the exits. The Reserve Primary Fund paid them out in non-Lehman securities. Which concentrated its holding more into Lehman assets.

And, at that point, the Reserve Fund "broke the buck,'' registering its value at 97 cents a share, instead of the promised buck.

A floating NAV is seen in some corners of the investment industry as a solution. But Charles Muller, Deputy Director General of the
Association of the Luxembourg Fund Industry, noted that a floating NAV did not do much in Europe to improve funds' condition there, after the credit crisis arrived.

The creation of a "private liquidity facility" to back up money market funds appears to have a fair amount of "viable support,'' said Dwyer.

This would be an industry-funded bank that would back up money market funds that get in trouble. The concept was proposed in 2010 by the Investment Company Institute and detailed further last month by the ICI in comments to the Securities and Exchange Commission.

The liquidity" backstop" would invest in high-quality, short-term money market instruments, including commercial paper; and money market fund companies would be legally required to participate in the fund, which would be structured as a state-chartered bank or trust company regulated by state banking authorities and the Federal Reserve.

Initial capital would come from sponsors of prime money market funds, based on the assets under management of those funds, with an aggregated target initial equity of $350 million.

During times of unusual market stress the LF would buy high-quality, short-term securities from prime money market funds, which would enable funds to meet redemptions while maintaining a stable $1.00 net asset value (NAV), even when markets are frozen.

But such a facility with that kind of funding may not be enough to backstop the industry, if more than one fund gets in trouble. "We need some kind of backstop that is reliable and we're not there yet,'' said Elizabeth Krentzman, Principal, Deloitte & Touche.

It's dancing on the head of a pin to try and figure out what the right solution would be,'' said Dwyer.

But a solution must be found, said Krentzman. "If we were to have another Reserve Fund incident, then I think it's lights out,'' she said. "Because at that point, I think Congress takes the wheel."

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