Money market funds to get more scrutiny
Washington • The Securities and Exchange Commission voted unanimously for a proposal Wednesday that could force some kinds of money market funds to do away with the fixed value of $1 a share that has made them so popular with many investors.
Only so-called prime money funds, which invest in corporate debt and are available to big institutional investors, are likely to have to make the change, leaving funds used by ordinary investors largely untouched.
Money funds are supposed to be one of the safest investments. But during the financial crisis, there was a run on the industry after one of the largest funds fell below $1 a share. The market recovered only after winning unusual government guarantees.
The proposal is part of new rules that still face a final vote, which will come after an open comment period of at least three months. All the rules are aimed to avoid the situation that money funds faced in 2008 when the declining value of one of the largest money market funds caused the run on the entire industry.
In the proposal, the SEC staff suggested that prime funds move to a so-called floating share value. Requiring values to float would make some money funds more like bonds, whose principal changes with increases or decreases in interest rates. That's a fundamental shift because it means investors could lose principal if the value falls below $1.
Proponents say it is a necessary change because it would show money funds, while safer than stocks and many other investments, still carry some level of risk. They say more awareness of the risk would reduce the potential for runs on money funds.
Exempt from the floating-value requirement would be money-market funds that hold at least 80 percent of their assets in cash or government securities, and retail funds those limiting an investor's withdrawals to a maximum of $1 million per business day.
The SEC proposal would limit the floating-value requirement to those money-market funds known as "prime."
Prime funds attract mainly big institutional investors as opposed to retail customers and are considered more risk-prone because they invest in short-term corporate debt. They represent roughly half of the total $2.9 trillion assets held by all money-market mutual funds.