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Eliminating Money Funds' $1 NAV Causes Concern

While the financial services industry largely embraced most of the Obama administration's financial services overhaul, the idea of removing money funds' $1 net asset value is causing widespread concern in the mutual fund industry.

"If you float the value of a money fund, you've essentially destroyed the product," said Investment Company Institute President Paul Schott Stevens. "We're going to explain clearly why we believe a fluctuating [NAV] is a very bad idea."

The Securities and Exchange Commission is expected to propose new money fund rules this week, including a floating NAV for money funds. Another idea is disclosing the $1 NAV to the third decimal, which the ICI also opposes, saying it would be as much of a deterrent to investors who scrutinize their funds.

But the Obama administration believes a floating value for money funds, along with imposed limits on risk, capital requirements and access to emergency liquidity facilities from private sources, will prevent a run on money funds that would endanger the entire capital markets, as what occurred last September when the Primary Fund broke the buck. In addition, the administration is calling on the President's Working Group on Financial Markets "to assess whether more fundamental changes are necessary and to address systemic risk more directly." The administration is asking for the Working Group to prepare its report by Sept. 15.

At the same time, it warns that additional regulations on money funds, which are vital to the capital markets system, could drive investors into unregulated vehicles.

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