Money Market Industry's Resistance May Hurt Companies Money market funds are what investors use to earn a few tenths of a percentage point of interest. Yet in such a quiet, if not boring, corner of the financial products universe, a ferocious battle is being fought between the industry and regulators over how these funds operate. The twist is that the money market fund industry's resistance may hurt corporate America. Money market funds hold about $2.6 trillion, a sizable sum but down sharply from the days before the financial crisis, when these funds held about $4.3 trillion. The decline came after the Reserve Primary Fund, the nation's oldest and largest money market fund with $64 billion, "broke the buck" - in which the value of its shares fell below $1 - in 2008 in the wake of Lehman Brothers" bankruptcy. The fund had been left holding $785 million of Lehman's debt. The events of that week are the impetus behind current efforts by the Securities and Exchange Commission to overhaul the market and put controls in place. The commission took a first step, supported by the money market fund industry, in 2010, when the S.E.C. adopted rules for greater transparency and required money market funds to invest in more liquid assets with shorter maturities and higher quality. But the S.E.C. chairwoman, Mary L. Schapiro, does not think this is enough. In testimony before the Senate last week, she said that the funds should be fundamentally transformed to prevent future runs. The S.E.C. is considering at least two proposals. The first would be to price funds by their net asset value and not a dollar per share. Investors would always get back the value of the fund, giving them an incentive not to withdraw their funds at the first hint of a loss. The second idea is to have a capital buffer that can absorb a small loss. These proposals are intended to address a fundamental flaw in money market funds. These funds are meant to mimic bank accounts, with investors buying shares set at a fixed $1 value. The intent is for the shares to be held constant at that value and redeemable at any time. In order to keep a stable value, the funds can never lose money. But in the case of the Reserve Primary Fund, its loss on Lehman debt meant that its assets were suddenly worth less than a dollar. Investors panicked and withdrew $300 billion from money market funds in a week. The Federal Reserve stepped in to provide a guarantee of these funds up to $50 billion and provide short-term lending under which money market funds, including nine of the 10 largest, borrowed about $150 billion in the 10 days after the Reserve Primary Fund broke the buck. The Federal Reserve acted forcefully because money market funds are at the heart of corporate finance, pumping money into corporate America. The funds invest in commercial paper issued for working capital by American corporations, financing vehicles for banks and municipal debt. Ms. Schapiro testified that the S.E.C. had found more than 300 instances when money market fund advisers were required to shore up their funds. She contends that the agency's proposals are needed to prevent the next run. The industry has pushed back. The Investment Company Institute, an industry trade association, argued at the same Senate hearing that pricing funds in units other than a dollar would scare off customers and destroy the industry. The United States Chamber of Commerce is also opposed to the change and submitted to the Senate a research paper by James J. Angel of Georgetown University. The paper, which was financed by the industry, contends that pricing in net asset values would require complex accounting and tax record-keeping by investors, forcing them to flee. But the core issue is whether another run is likely. Any kind of loss by a fund can set off a run. Even if it is rare, a run is likely to happen at the worst possible time, like during a financial crisis. While the probability of such a disaster may be small, the harm would be enormous. Against this possible danger must be weighed the issue of whether investors will no longer use these funds. Do they really care whether money market funds are priced at a dollar or have to pay for capital buffers? If so, financing will disappear for corporate America payrolls and government, as well as for financial institutions, now the biggest issuer of debt to money market funds. But the industry argument that customers care deeply whether these shares are priced at a dollar or at their net asset value, appears to be made of fear. The industry also ignores possible compromises. Jeffrey N. Gordon of Columbia Law School said in a submission to the Senate that it would be possible to have two classes of shares, one fixed at a dollar and the other floating, which would allow investors to choose. The industry's logic appears to work only if investors don't understand the product and want dollar pricing because it implies a guarantee that isn't there. These days, about two-thirds of money market users are sophisticated finance investors who should easily comprehend the difference, and can adjust their investing accordingly. The industry also ignores the costs that an absence of reform will impose on corporate America. The industry argues that new regulation is unnecessary because previous overhauls were sufficient and because the funds have been prudent, investing only in supersafe and ultra-liquid investments. Yet as a result of these limitations, corporate America can no longer get the wide array of financing it previously received from money market funds. According to David S. Scharfstein of Harvard Business School, who also testified last week, of the 50 largest issuers of debt to money market funds today, only two are nonfinancial firms; the rest are banks and other financial companies, many of them foreign. One reason is that many of these corporate entities are now shut out of the market and funds are not willing to purchase their paper. Another is that corporate America is less likely to rely on money market financing these days because of its inherent instability. This is the real issue with money market reform: Will the S.E.C. proposals help financing by making money market funds more stable for issuers and investors? The S.E.C. will be considering the two proposals in the next month or two, according to reports, and they are likely to prompt a more public confrontation. Three S.E.C. commissioners have already issued a statement heralding caution, and more than one senator called this issue a nonproblem last week, noting that only two funds have ever broken the buck. But when you look at the facts, it may very well be that the industry is the one crying wolf. Leaving things as they are may only keep people skittish about money market funds, hurting the funds and the companies that rely on them for financing. Perhaps the industry may want to more fully consider the benefits of Ms. Schapiro's reform.