Business Management Dynamics

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ISSN: 2047-7031

bmd Business and Management Dynamics bmd
ISSN: 2047-7031  
Volume  4   Issue 1  2014  
Article Abstract
The Effects of the 2010 Sec Reforms of Money Market Mutual Funds on Investment Performance
Keywords:  SEC reforms, money market, investment, credit risk, performance
Zakri Bello, Ph.D
I investigated the effects of the 2010 SEC regulatory reforms on portfolio characteristics and investment performance of the three major categories of money market mutual funds (MMFs) from April 1993 to March 2013. MMFs are regulated under the Investment Company Act (1940) and the SEC Rule 2a-7 which mandate specified credit quality and maturity standards, and which permit perpetual $1 net assets value (NAV) per share. MMFs faced significant problems during the financial crisis of 2007 to 2008. The SEC adopted significant reforms of Rule 2a-7 in January 2010, designed to reduce credit risk, liquidity risk, and interest rate risk, and to make MMFs more resilient to runs that might affect the financial system. As a result of the reforms, the liquidity of MMFs increased substantially. My results indicate that the investment performance of each of the three categories of funds was not statistically different from zero during the study period. Substantial tracking errors and small portfolio betas indicate a lack of fit between MMF portfolios and benchmark indices. I find that the sub-period during which the SEC reforms were implemented had markedly worse performance than the 2007 to January 2010 period of the most severe financial crisis since the Great Depression. I attribute part of this poor performance to the opportunity costs of a much higher liquidity requirement imposed on MMFs after January 2010. I also find that SEC reforms did stabilize MMF portfolios.
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