SEC Tightens Rules for Money-Market Funds

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The Securities and Exchange Commission made substantial changes in liquidity and disclosure requirements of money-market funds.   The new rules require money-market mutual funds hold some assets that could be easily converted to cash and to disclose new information on fund values.   The goal is to strengthen protection for investors in money-market funds, which hold about $3.2 trillion in assets.

Money-market funds are open ended mutual funds that invest in short term debt securities, holding themselves out as safe and easily accessible investments that offer returns above conventional savings accounts.   Money market funds seek to limit exposure to losses due to credit, market and liquidity risks.   They generally invest in the safest types of debt such as Treasury bonds, while so-called prime money-market funds seek slightly higher yields but accept marginal risk by venturing into short-term corporate bonds.

In September 2008, the Primary Reserve Fund undermined safety of the trillions held in the money funds by “breaking of the buck.”   Within few days, the value of the Reserve Primary Fund’s assets fell to 97 cents per investor dollar — below the dollar-for-dollar level needed for full repayment.   Investors pulled out around $300 billion from prime money funds, representing 14 percent of the assets in those funds.    The SEC’s current decision came in response to this event that exposed investors to enormous losses.

The SEC new rules make substantial changes in liquidity and disclosure requirements.    The new liquidity rules require all money market funds to hold at least 10 percent of their assets in cash, Treasury bonds or other instruments could be sold for cash within a day.   Currently, there are no such liquidity requirements and the change would make it easier for investors to redeem their money from the funds in case of increased demand.   At least 30 percent of funds’ assets will have to be convertible to cash within a week.   In addition, the maximum average maturity of bonds in which money funds can invest will be shortened to 60 days from the current 90 days.

The new disclosure rules require all money market funds to disclose their “shadow” floating share price: how the market values what investors would pay per share to get into the fund and would receive getting out of it. The information will have to be disclosed monthly, with a 60-day lag.

The SEC signals more changes ahead.   The SEC is expected to mandate changes in money funds’ operations, such as requiring that they be able to electronically process investors’ purchases and redemptions at a price other than $1 a share — to make it easier for investors to get their money back if a fund “breaks the buck.”    In addition, the SEC has been examining whether substituting a floating share price for the $1 for money funds — making them more akin to investments like conventional mutual funds whose value rises and falls — would better protect investors from runs on the funds.     SEC Chairman, Mary Schapiro said the new rules were “just a first step in our efforts to strengthen” rules governing money-market funds.  “I am committed to continuing to move forward with reforming the money-market fund industry,” Schapiro said before the vote.

Anna Timone (195 Posts)


  1. Hello Anna,
    Wasn’t it the MMF that actually sparked the crash and the FED supported it later what saved the markets from a free fall? I believe if I remember it right they ended their program somewhere end last year for supporting it? I wonder if it goes below the $1 level again if it could spark another big selloff?

  2. Ben Willis says:

    this is one SEC act that makes sense . the” buck was broken”becuase of Lehman bonds that th Reseve fund bought to try and prop up returns.the collapse of the short term commercial paper market lead to a world wide nightmare for investors in any MMF.and many brokreages were forced to make their customers whole because of the lack of transparencey in their MMF.

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