The Securities and Exchange Commission announced recently that they have adopted amendments to the rules that govern money market mutual funds. These amendments are intended to make structural and operational reforms to address the risk of investor runs in money market funds, while preserving the benefits of the funds.
The SEC is looking to prevent another disaster similar to the 2008 financial meltdown, where there was an investor exodus out of money-market mutual funds.
The new rules require a floating net asset value (NAV) for money market funds, which allows for the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. Furthermore this will provide non-government money market fund boards new tools including liquidity fees and redemption gates to address runs.
“Today’s reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system,” said SEC Chair Mary Jo White. “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investors.”
White says that the rule could prompt shareholders to move away from investing in funds that float or are not totally liquid and move to FDIC-insured products, which could have a big effect on the capital market.
With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress.
The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds.
Norm Champ, director of the SEC’s Division of Investment Management, said, “Today’s adoption of final money market fund reforms represents a significant additional step to address a key area of systemic risk identified during the financial crisis. These reforms are important both to investors who use money market funds as a cash management vehicle and to the corporations, financial institutions, municipalities and others that use them as a source of short-term funding.”
The final rules provide a two-year transition period to enable both funds and investors time to fully adjust their systems, operations and investing practices.