Money market funds have long seemed more like bank accounts than the mutual funds they actually are. However, that could soon change if the SEC's proposed reforms are implemented. JPMorgan Chase (NYSE:JPM), BlackRock (NYSE:BLK), Charles Schwab (NYSE:SCHW), State Street (NYSE:STT) and Federated Investors (NYSE:FII) are all concerned.

The SEC would change money market funds in two ways
The reforms would first require institutional funds to adopt a floating net asset value. Current rules allow funds to quote a stable per-share price. Second, the reforms would establish "gates," or redemption fees on institutional funds. The word "institutional," however, is not clearly defined in the proposed regulations.

A real quick history of money market funds
During the high-inflation and high-interest-rate environment of the 1970s and early 1980s, many banks promoted money market funds in response to customer demands for interest on deposits -- which, at the time, Regulation Q restricted.

The potential impact of reform
Financial companies operating money market funds, providing services to competing funds, or relying on money market funds to purchase their commercial paper could suffer if the proposed reforms take effect.

JPMorgan Chase, for example, provides services to 13 outside money market funds and operates the industry's largest, the JPMorgan Prime Money Market Fund. But from the standpoint of a money market fund service provider and operator, JPMorgan is probably all right. The size of these businesses is large, but not huge in the context of the overall JPMorgan Chase family of businesses.

The bank, however, is among the largest issuers of commercial paper, of which money market funds hold 40%. A smaller money market industry could thus force JPMorgan to issue less commercial paper and borrow more from commercial banks. This would dramatically increase the bank's cost of short-term liquidity.

During summer 2012, for example, the spread between commercial bank loans at the prime rate and the best commercial paper rates was about 3.01%.

Don't think that's a lot? Imagine if your credit card company were to suddenly raise your interest rate 1,354.17%. Because that's exactly what could happen to these banks -- and to, you too, eventually. (See the chart to the right.)

State Street could suffer much the same if reform were implemented. The company "provides various services for 425 money market funds," and 43% of its 2012 revenue was for money market-related services, according to Hoovers. More important, though, State Street, like JPMorgan Chase, was among the 50 largest issuers of short-term commercial paper last year. Thus, State Street and JPMorgan could suffer the same runaway short-term liquidity costs. (See the following chart.)

Source: David S. Scharfstein.

The impact of reform on Charles Schwab could be muted. Although the original discount broker is "one of the largest managers of money market fund assets in the United States, with 3 million money market fund accounts and $168 billion in assets under management," 88% of that amount is in sweep accounts for retail investors -- which would logically seem exempt from the proposed changes.

BlackRock, which manages $192.6 billion in money market fund assets is a different story. "At year-end 2012, 84% of cash AUM [assets under management] was managed for institutions and 16% for retail and HNW [high-net-worth] investors" -- a business mix that would suggest "institutional."

Federated Investors faces a potentially more difficult situation. As of last Dec. 31, "approximately 47% of Federated's total revenue was attributable to money market assets," making the company's business far more money market-centric than its competitors -- although, again, exactly how "institutional" gets defined remains an unknown.

The flip side
Money market funds haven't always been so profitable. For example, in September 2008, Bank of New York Mellon took "a $425 million third-quarter charge to bail out 10 funds affected by Lehman Bros.' bankruptcy, in a bid to help investors avoid losing money." Such an expense in the future could be far greater.

Immediately after the collapse of Lehman Brothers, the Reserve Primary Fund broke the buck, which began a run on money market funds. The U.S. Treasury stepped in and guaranteed the "share price of any publicly offered eligible money market mutual funds." Unfortunately, Treasury failed to first secure congressional approval, so Congress included a "never again" clause about this in its Emergency Economic Stabilization Act of 2008. Therefore, in a future run on money markets, the sponsors themselves would bear the financial brunt of keeping funds from breaking the buck, unless the rules were rewritten -- as the SEC has proposed.

Kells Hetherington owns share of Bank of New York Mellon. The Motley Fool recommends BlackRock and Federated Investors and owns shares of JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.