Requiring money market fund advisers to hold capital to support their money market funds would fundamentally change the nature of these funds, according to a new study by the Investment Company Institute released today.

Depending on the size of the capital buffer and the assets covered, the study revealed that a capital buffer could result in advisers shifting to less regulated products or exiting the cash management business altogether. These changes would not benefit investors and could lead to greater systemic risk in the economy.

The study also finds that imposing capital requirements on a fund adviser would shift the investment risks from fund shareholders to advisers, requiring advisers to absorb possible losses in the funds that they manage. As a practical matter, the study concludes, advisers have no ability to pass along cost increases to investors in the current very low interest rate environment. But even with more normal interest rates and fund revenues, the fee increases needed to provide a market rate of return on adviser-provided capital could be prohibitive, the study finds.

“This study confirms the problems with the capital buffer concept that we have noted for some time,” stated ICI president and chief executive Paul Schott Stevens. “Our analysis shows that this approach, like the other money market fund changes being weighed by the SEC, could undermine the money market fund as a product."

More broadly, Stevends added that financing for key sectors of the economy could be disrupted and systemic risk potentially increased, as cash balances of institutional investors migrate to less-regulated, more-opaque financial instruments.