Money funds, which act much like interest-bearing checking accounts, are mutual funds that invest in short-term, high-quality IOUs issued by corporations and by the U.S., state and local governments. Unlike other funds, money funds keep their share prices at $1 so investors don’t lose money. But the funds aren’t insured, so if a fund has a significant problem with its holdings, its share price could fall below $1 — “breaking a buck,” as it’s known in the $3.1 trillion industry.
That happened in September 2008, when huge withdrawals forced some investors in the $60 billion Reserve fund to take a loss on their investments — the first time that ever happened to a money fund open to the general public.
Big institutional investors rushed to get their money out of Reserve because they worried about the fund’s holdings in securities issued by Lehman Bros., which failed in September 2008. The fund had more redemptions — mostly by large institutional investors — than it could handle, forcing its share price to 97 cents.
The SEC’s new rules, to be phased in this year, will require funds to hold enough liquid assets to meet redemptions.
•Money funds must have 10% of their assets in cash or in investments that can be converted easily into cash within one day. And 30% will have to be in investments that can be converted to cash within a week. In theory, if funds have enough liquid assets to pay departing investors, they won’t get swamped by redemptions, as Reserve did.
•For investors, a change in the mandatory maturity time for a fund’s average portfolio holding — 60 days or fewer, from 90 days now — could lead to lower yields. Longer-term investments offer higher yields but are more volatile when rates rise.
•Funds can only put 3% of their assets in investments that aren’t the highest quality, down from 5%.
The fund industry offered support for the new rules.
“The mutual fund industry supports the SEC’s action (today) to make money market funds more resilient in the face of extraordinary market conditions, such as we saw in the fall of 2008,” said Paul Stevens, president of the Investment Company Institute, the funds’ trade group, in a statement