SEC proposes rule changes to boost money fund safety
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Money market mutual funds, already paying near-zero yields, could see those payouts fall further under proposed new rules to boost the safety of the portfolios.
The Securities and Exchange Commission today proposed tightening restrictions on money funds’ investments, hoping to avoid a repeat of the sudden demise of the $60-billion Reserve Primary fund last September.
Money funds, which hold a total of $3.6-trillion in investors’ savings, would have to hold more of their assets in only the most liquid securities, so that they have ready cash to pay off investors who want out.
The most liquid assets also typically pay the least, so owning more such securities probably would put more downward pressure on fund yields. The average taxable money fund’s annualized yield now is a mere 0.13%, according to iMoneyNet Inc.
Money funds already are designed to allow investors to get in or out at will, at a constant $1-a-share asset value. But when investors deluged the Reserve Primary fund with redemption notices in September it was unable to meet all of those requests.
That triggered a run on other money funds, forcing the U.S. Treasury to step in and guarantee fund assets to stem investor panic.
SEC commissioners today proposed that funds serving individual investors would have to hold at least 5% of their assets in cash, Treasury securities or other investments that could be sold in one day. At least 15% of assets would have to be in securities that could be sold within a week.
Those percentages would be doubled for funds that serve institutional investors.
The SEC also proposed that the maximum average maturity of fund holdings be cut to 60 days from the current 90 days, which also would likely depress portfolio yields further. . . .
The proposals ‘will go a long way toward better protecting investors and making money market funds more resilient to short-term market risks,’ SEC Chairwoman Mary Schapiro said.
As expected, the SEC also said it would seek public comment on whether money funds should have to float their share prices rather than maintain the $1-a-share constant value that has been the industry hallmark for nearly 40 years.
One question raised in the Obama administration’s sweeping proposals last week to reform regulation of the financial industry was whether stable pricing of money fund shares should be abolished, so that investors don’t assume their principal is 100% safe.
Unlike bank deposits, money funds never had government backing -- until the Reserve Primary fund debacle.
-- Tom Petruno