How the New SEC Regulations Will Affect Your Money Market Fund

On July 23, 2014, the Securities and Exchange Commission (SEC) issued final rules to regulate money market mutual funds.

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People often think that a money market fund is a savings account that pays a higher interest rate.

But what really is a money market fund? A money market fund is a collection of short-term (less than 1 year), highly liquid, low-risk investments, such as government securities, certificates of deposit, and commercial corporate paper. These debt instruments accrue interest daily and typically pay investors monthly with new shares. The objective is to maintain a stable, fixed $1 per share net asset value (NAV), while earning interest.

During the financial crisis of 2008, the Reserve Primary Fund experienced valuations that were below $1, and spooked the markets. As a result, on July 23, 2014, the Securities and Exchange Commission (SEC) issued final rules to regulate money market mutual funds.

While the NAV remains at a stable $1, important new rules will be phased in over the next two years. If you have a money market fund, you should pay close attention to new regulations that will begin to affect these funds. One of the new rules will require funds to disclose (daily on their website) the NAV of the fund, rounded to 4 decimal places, including weekly liquid assets as a percentage of the fund’s total assets. Funds may also be able to impose a liquidity fee (or 2% redemption fee) if weekly liquid assets are below 30% or a 1% redemption fee if weekly liquid assets fall below 10%. The fund may also use a redemption gate and suspend redemptions for up to 10 consecutive days or over a 90-day period, if weekly liquid assets fall below 30%.

In anticipation of large redemptions, money market funds must operate with specific increased liquidity levels, with at least 10% of underlying assets held in cash or U.S. Treasury securities. Increased credit quality and shorter maturities are also required, and detailed out in the new rules.

In light of these new rules, it has become evident that yields remain very low in today’s low interest rate environment. So low, in fact, that fund managers might even waive fees to maintain positive returns.

Keep in mind that these rules apply to money market funds and not a FDIC-insured money market deposit account at a bank. Now might be a good time to contact your fund manager to ask about the type of money market fund you have, and to better understand the regulations that are in place to secure stability and liquidity in times of economic stress.

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