SEC proposes tougher money-fund rules
Change would create liquidity requirement
WASHINGTON - Federal regulators yesterday proposed tightened rules for money-market mutual funds that would require them to hold some assets that could be easily converted to cash and to invest only in the highest-quality securities.
The Securities and Exchange Commission action came after a $60 billion money fund “broke the buck,’’ exposing investors to losses that could ultimately reach about 8 cents on the dollar. The value of the Primary Reserve Fund’s assets in September fell to 97 cents per investor dollar - below the dollar-for-dollar level needed for full repayment.
The SEC voted 5-0 to issue the proposed rule changes for the money-market funds, which hold about $3.8 trillion in assets, for public comment. The new rules could be approved sometime after that 60-day period.
The funds are a mainstay of financial management for families and companies, holding themselves out as safe and easily accessible investments that offer returns exceeding those of conventional savings accounts.
The proposal “will go a long way toward better protecting investors and making money-market funds more resilient to short-term market risks,’’ SEC chairman Mary Schapiro said.
Money funds that cater to retail investors would be required to hold at least 5 percent of their assets in cash, Treasury bonds, or other instruments that could be sold for cash within a day. At least 15 percent of the retail funds’ assets would have to be convertible to cash within a week. There currently are no such liquidity requirements.
The change would make it easier for investors to redeem their money from the funds amid a rush of demand.
The liquidity requirements for money funds marketed to institutional investors would be stricter, and the maximum maturity of bonds that money funds can invest in would be shortened to 60 days from 90 days.
The SEC also proposed changes in money funds’ operations, such as requiring that they be able to electronically process investors’ purchases and redemptions at a price other than $1 a share - to make it easier for investors to get their money back if a fund “breaks the buck.’’
The commissioners punted, however, on more fundamental changes, such as substituting a floating share price that would make them more akin to investments like conventional mutual funds, whose value goes up and down. The SEC wants to examine whether a floating price would better protect investors from runs on funds or if the “efficiency’’ of the $1 price provides a greater benefit, Schapiro said.
The role of credit rating agencies’ assessments of money-market funds also will be studied. The industry has been widely criticized for failing to give investors adequate warning of the risks in subprime mortgage securities, whose collapse helped set off the global financial crisis. The SEC has been studying proposals to tighten its oversight.
The collapse of the money fund run by Reserve Management Co. last fall was one in the cascading series of troubling events in the financial meltdown. It marked only the second such instance in the nearly four decades that money-market funds have been available to keep money safe and readily accessible while earning a modest return.
The “breaking of the buck’’ by the Primary Fund - the first US money fund, established in 1970 - stoked fears over the safety of the trillions held in the funds.
The SEC last month charged Reserve Management and its two top executives with civil fraud, saying they withheld key facts from investors. The firm and the executives said they would defend themselves against the SEC’s allegations.
