The odds of floating NAVs for money market mutual funds are growing steadily longer. This month both Vanguard and Fidelity -- two of the largest providers of money market funds -- have strongly denounced an SEC proposal that would allow floating NAVs. Both fund firms also are opposed to the disclosure of "shadow" NAVs to shareholders, warning that the non-price price would be confusing to shareholders.

The opposition from two of the leading sponsors of money market funds -- of the total money fund AUM base of $3.6 trillion, Fidelity claims $500 billion and Vanguard's largest money fund holds nearly $120 billion of assets.

Both fund firms made their arguments against the proposed change to rule 2a-7 in public comment letters [see Fidelity's letter here and Vanguard's here, links to all comments are located here].

Fidelity executives warn in the comment letter that a floating NAV will "cause significant shareholder outflows, destabilizing money market mutual funds and the overall money markets."

Its letter points to research that found that 69 percent of institutional investors would cease to use money market funds to hold cash if floating NAVs were adopted. It also claims that one-third of retail shareholders would stop using money funds if the rule change goes through.

Vanguard executives employ even stronger language in warning regulators from adopting the rule: "A Floating NAV Would Eviscerate a Successful and Important Product for Investors" is the subtitle for their section of the letter addressing the issue.

Yet, even if Fidelity and Vanguard succeed in lobbying the SEC the battle against the changes may not be finished.

The President's Working Group on Financial Markets is expected to release its recommendations on potential rule changes for money market funds on September 15. Those recommendations could result in legislation or pressure from the executive branch on the SEC to enact the rules.

An example of the forces aligned against money fund advisors was provided on Tuesday when former Fed chair Paul Volcker said in an interview with Bloomberg that money market funds undermine the banking system and should be brought under a banking regulatory regime. While Volcker is not a part of the President's Working Group, he does say that he remains an advisor to President Obama.

"In my vision of the new financial system, you obviously want to protect banks and have strong banks, and I don't think they should be put at a competitive disadvantage vis-a-vis money-market funds," Volcker told Bloomberg.

Fund insiders are not taking kindly to Volcker's position.

"Paul Volcker has a 30-year hatred of money funds and he is woefully behind the times," Eugene F. Maloney, an executive vice president with Federated Investors Inc. told Bloomberg. Federated is the third largest advisor to money market funds. It had not filed a public comment with the SEC at the time this article was published.


Shaking the faith of shareholders with a fluctuating is not the only reason Vanguard is resisting the fluctuating NAV. It warns of administrative and recordkeeping nightmares that would be induced by such a change.

Fidelity echoes those warnings and points out that a floating NAV would also create certain administrative, tax, and cash management conveniences for fund investors. Changing NAVs would create issues for investors in tracking the cost basis of their holdings for tax purposes, especially for those shareholders who frequently write checks against the funds.  

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