The Securities and Exchange Commission voted 3-2 this week to tighten rules on the $2.6 trillion money market industry.
In a nutshell, money market funds are open-ended mutual funds that invest in low-risk securities, according to the SEC. Often regarded as being a safe place for investors to park their cash, money market funds aim to earn a little interest, while maintaining a net asset value of $1 per share.
The SEC’s long-awaited reforms are an effort to prevent another mass investor exodus from money market funds, which contributed to the 2008 financial crisis. SEC chair Mary Jo White said in a statement:
[Wednesday’s] reforms will fundamentally change the way that most money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system in a crisis.
According to The Wall Street Journal, the new rules will have minimal impact on asset managers like Charles Schwab that cater to individual investors.
But they have big implications for prime institutional funds, which make up about 35 percent of money market funds, USA Today said.
The new rules are essentially twofold:
- Share prices. Some money market funds will be required to have floating share prices like other mutual funds, instead of artificially maintaining a stable $1 share price. If the shares fall below $1, investors would then see potential losses in the funds, USA Today said.
However, The New York Times adds:
But not all funds will be covered by that rule. Only funds whose investors are institutions and that purchase corporate debt or municipal securities are covered. Funds whose investors are individuals are not subject to the change.
- Redemption suspension. This amendment will allow a money market fund’s board to temporarily stop investors from redeeming shares or charge a fee on redemptions “if the level of liquid assets falls below 30 percent,” says USA Today.
Both measures will take effect in two years.
The rules are getting mixed reviews. The WSJ said:
The prospect of losing immediate access to their cash, or risk to principal, already has caused some corporate treasurers to shift money away from the industry. Verett Mims, assistant treasurer at Boeing Co., said in a conference call Tuesday that the aircraft maker’s pension unit has already moved cash into separately managed accounts in anticipation of the new rules.
Meanwhile, some people think the new rules don’t go far enough. According to USA Today, former Federal Deposit Insurance Corp. chair Sheila Bair said:
“I remain concerned, however, that this approach may be too limited to address the systemic risks posed by money market funds, and that the new gates and fees could exacerbate it,” Bair said in an e-mailed statement. “A better, and simpler, approach would be to apply a floating [net asset value] to all money funds just like other mutual funds which have operated well without systemic risk, or implicit support, since 1940.”
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