Regulators are proposing dramatic reforms to one of the most popular places for retail investors to put their cash: money-market funds.
The staff at the Securities and Exchange Commission is drawing up new rules that would govern the $2.7-trillion money-market-fund industry after the ultra-safe reputation of the funds came into question during the financial crisis.
Money-market funds have long provided the safety and accessibility of a checking account with slightly higher returns thanks to a strategy of making almost risk-free short-term loans. During the crisis, however, one of the most popular money-market funds lost money, causing panic among investors and threatening the short-term funding market used by financial institutions.
The SEC made changes to money-market funds immediately after the crisis that did little to change their popularity or basic approach.
Now, however, the commission's chairwoman, Mary L. Schapiro, is "advocating structural reforms to money-market funds to address their susceptibility to runs and provide a buffer against losses," according to a statement from SEC spokesman John Nester.
Schapiro's staff is offering two possible changes, according to people who are familiar with the plan. In one change, the traditional practice of making each money-market-fund share worth $1 would be scrapped. That would allow the price to float and help kill the long-held belief that money-market-fund shares will not go under a dollar.
The other possibility is that money-market funds would have to hold a buffer, for use in emergencies, and make it harder for investors to immediately withdraw all of their money, according to the people.
The plans would need to be approved by the commission's five-member board, but they are already facing opposition from fund managers. A spokesman for Federated Investors, one of the largest managers of money-market funds, said the proposals would be "monumental changes that have not been tested or vetted."
Shares in Federated closed down 62 cents, or 3.3%, to $18.03 on a day when leading indexes rose.