Addressing a large and unresolved issue that had pended since 2008, the Securities and Exchange Commission yesterday imposed new restrictions on money-market mutual funds. The rules will perform a sort of balancing act, reducing the risk of the $2.6 trillion industry, but keeping intact the prime utility of the product. Asset management companies, as well as the five-member SEC committee, have given the move mixed reviews, with two members of the latter voting against the new ruling.
The SEC Commission has approved rules that require institutional money market funds to implement floating share values and other restrictions, such as restricting withdrawals and imposing redemption fees of up to 2% if fund assets drop below prescribed levels. The shares would float based on changes to NAV (changes to the underlying market value of the fund’s assets). Currently, these funds have a fixed price of $1 per share.
The New Rules
According to Mary Jo White, SEC chairwoman, these rules “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.” She went on: “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investors.”
Wall Street Positively Affected
Wall Street seemed on the whole satisfied with the final results – which are a significant shift from the 2012 proposal. Then, former SEC Chairwoman Mary L. Schapiro wanted all funds to adopt the floating NAV practice or hold capital to absorb losses of any kind.
The rules were crafted in response to the 2008 financial crisis, when corporate lending markets seized up in response to a lack of liquidity. The new restrictions will hopefully help maintain capital levels and keep markets operating smoothly during times of stress.
Individual Money Market Funds Not Affected
While the new floating share rules apply to institutional funds (both prime and tax exempt), they will not impact government and retail funds that are sold to individual investors. (Note that they will apply to institutional municipal money markets.) However, provisions for liquidity fees and redemption gates do apply to all funds, both institutional and retail.
For a definition of government and retail money market funds, the SEC provides this detail via a press release on their website:
Government and Retail Money Market Funds – Government and retail money market funds would be allowed to continue using the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price. A government money market fund would be defined as any money market fund that invests 99.5 percent (formerly 80 percent) or more of its total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash. A retail money market fund would be defined as a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the money market fund to natural persons. A municipal (or tax-exempt) fund would be required to transact at a floating NAV unless the fund meets the definition of a retail money market fund, in which case it would be allowed to use the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price.
One way this might affect individuals, is if they invest in institutional money market funds through their 401K. It is likely that most retirement plans will choose retail money market funds as a plan option for this reason. This will affect small and large businesses that use these accounts as short term funding for their day to day and week to week operations.
The new rules will not go into effect immediately. Fund companies have two years to comply with the new restrictions.