The Securities and Exchange Commission believes there is not enough diversification among money funds, adding onto the money market reform rhetoric and potentially putting more ammunition behind ultra-short-duration bond exchange traded funds.

According to the SEC, money funds rely on a small number of issuers, reports Peter Ortiz for Ignites. [Money Market Debate Puts Focus on Short-Duration ETFs]

Money funds can invest in securities linked to their parent issuers and parent affiliates but treats them as one entity when calculating the funds’ total exposure. However, parents and their affiliates are treated as separate entities under diversification requirements. [PIMCO Short-Duration ETF Tapped as Money-Fund Substitute]

“Half of the money market fund assets come from the top 25 parents, while the next 25 parents only add another ten percent,” according to an analysis by the SEC’s Division of Economic and Risk Analysis.

The SEC proposes limiting securities of any issuer to no greater than 5% of a fund’s assets and “treat certain entities that are affiliated with each other as single issuers when applying Rule 2a-7’s 5% issuer diversification requirement.” Industry observers, though, argue that tightening diversification requirements would crate a burden on funds.

“It means funds might have to trim some holdings and that it might be difficult for a fund to build a diversified portfolio because it will have to find something to replace the holdings that they trim,” Joan Ohlbaum Swirsky, of counsel at Stradley Ronon, said in the article.