Former Federal Reserve Chairman Paul Volcker has been a longtime critic of money market mutual funds, deriding them as part of the shadow banking system that siphons deposits away from more banks.

Monitored only by the Securities and Exchange Commission (SEC) and with few strictures on where and how they can invest, money market funds have offered higher yields than traditional savings accounts since their introduction in the early 1970s.

Volcker has long argued that higher yields and lighter regulation amount to unfair competition and called for greater oversight of money market funds. The events of the past few years have strengthened his case.

In September 2008 the Primary Reserve Fund–the original money market mutual fund–broke the buck after Lehman Brothers declared bankruptcy. The ill-starred investment bank and other financial outfits had long relied on short-term funding in the repurchase markets and the short-term commercial paper (CP) market. But investors refused to extend short-term financing through CP on any terms after Lehman Brothers failed, causing CP prices to collapse.

That, in turn, decimated the Primary Reserve Fund, forcing it into liquidation and engendering a raft of lawsuits from shareholders.

As confidence in money market funds plunged, the US Treasury Dept cobbled together an insurance program to prevent a run on the funds; a wave of withdrawals not only would have been detrimental for investors but would have placed additional pressures on an already overtaxed financial system.

Assets held by money market funds have plunged in the wake of Primary Reserve’s problems. But along with the insurance came a proposed regulatory overhaul of money market funds and new rules.

One major change comes in the way in which money market funds structure their portfolios.

Under the new rules, funds will be required to shorten the average maturities of their holdings from 90 days to 60 days. They will also have to maintain at least 10 percent of their assets in securities that mature in one day and 30 percent of their assets in securities that mature in one week.

Beginning in December, money market funds will also be required to disclose the value of portfolio holdings more frequently. Currently, funds are required to report the mark-to-market value of their assets only twice yearly with a 60-day delay; under the new rules they will be required to post their mark-to-market values monthly, though still with a 60-day delay.

The cumulative effect of the new regulations–particularly those that require shorter maturities–could shave as much as 0.5 percent from already low yields and further reduce the attractiveness of money market funds for parking cash balances. The rules will also spark further consolidation in money market funds, though 63 funds have shut their doors already or merged with other offerings over the past 15 months.

And fees on money market funds are likely to rise when short-term interest rates move upwards. In an effort to retain investors and shore up values, most managers in the industry have waived fees and are eating losses. And although these moves have propped up investors’ returns, those actions have turned running money market funds into a money-losing proposition for managers.

Another major change under consideration is the elimination of the current stable pricing structure of money market funds, the goal of which is to maintain a steady net asset value (NAV) of $1 per share. The SEC is testing the waters on a floating-rate NAV with an eye toward preventing runs when a fund appears to be at risk of breaking the buck.

The fund industry is vehemently against such a change, arguing that the current structure has served investors well for decades. Opponents also argue that without the goal of maintaining a NAV of $1 per share, investors will be left with short-term bond funds.

Many investors already consider short-term bond funds as an alternative to money market funds because of their higher yields and similar investment profiles. And some managers are actively encouraging that paradigm shift. Pacific Investment Management Company has introduced PIMCO Enhanced Short Maturity Strategy (NYSE: MINT), an exchange-traded fund (ETF) geared toward generating higher levels of income than money market funds. The ETF’s current SEC yield is 0.71 percent–far greater than the average 0.05 percent offered by money market funds. And with an expense ratio of just 0.35 percent, the fund is also cheaper than many money market offerings.

Going forward, funds such as PIMCO Enhanced Short Maturity Strategy could quite possibly become the only option for holding short-term cash balances, particularly if floating-rate NAVs become a reality.