Millions of investors use money market funds as a savings-account alternative, relying on their shares to hold their value and produce at least modest income. But ever since the financial crisis, the Securities and Exchange Commission has looked at money market funds as a potential systemic risk, and yesterday, the SEC finally took action that it hopes will shore up their stability.
Although many commentators believe that the stricter regulations on money market funds will make them useless, the particular focus those regulations took should limit their impact for most retail investors. Let’s take a closer look at exactly how the SEC decided to handle the risks involved in the money market fund industry.
What the SEC did
Yesterday’s ruling approved two proposals that can either stand alone or work in concert. One rule would end the long-standing tradition of having money market fund net asset values fixed at $1 per share, instead allowing the share price to float up or down the same way that stock and bond mutual fund prices do. The other proposal would allow funds to charge exit fees or temporarily stop investors from selling their shares for up to 30 days during times of market stress that affect the liquidity of fund assets.
The key to the proposals, however, is that they don’t affect all money market funds. In particular, the floating-share-price proposal wouldn’t apply to “retail” money market funds, defined as funds that limit daily shareholder redemptions to $1 million or less. In addition, even institutional funds designed for big institutional investors with large liquidity needs would be exempt if they concentrated on government securities rather than commercial paper and other less financially secure debt. Similarly, the proposal on exit fees and temporary sales restrictions wouldn’t apply to government-focused funds, although the SEC didn’t include a retail-fund exclusion.
Did the SEC just make money market funds useless?
Both of these proposals have been in the works for years, and they’ve drawn considerable debate in past iterations. The retail-investor exemption to floating share prices directly addressed concerns that fund giant Fidelity expressed last year that if money market fund prices were allowed to float, more than half of its customers would move some or all of their assets.