Investors will still be able to put $1 into a money market fund and expect to get $1 out when they sell shares -- at least for now. The Securities and Exchange Commission's newly released rules aimed at reducing risks associated with money market funds keep in place the so-called "stable" net asset value, or NAV.
The SEC says it still wants to consider a floating NAV that would reflect a fund's true market value. However, in the meantime, the commission is requiring the monthly disclosure of what it calls a fund's "shadow" NAV, with a 60-day lag. This is supposed to give investors a better idea of the risks associated with a particular fund and will get investors used to seeing fluctuations.
The change is just one of several that the SEC says should improve liquidity and credit quality, and keep investors better informed about investments held in the funds. The changes are in response to the collapse of Reserve Primary Fund in September 2008, which held investments that were far riskier than many of its investors probably realized.
"For consumers, the overall tightening of maturities and credit qualities will be the main thing," says Peter Crane, president and CEO of Westboro, Mass.-based Crane Data.
"It'll cost money funds roughly 10 basis points in yield, but the vast majority of that should already be reflected. I would think that money funds are already operating under the majority of these rules."
Here are some of the new rules affecting money market funds.
Improved liquidityDaily requirement: For all taxable money market funds, at least 10 percent of assets must be in cash, U.S. Treasury securities or securities that convert to cash within one day.
Weekly requirement: For all money market funds, at least 30 percent of assets must be in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, or securities that convert to cash within one week.
Higher credit qualityFunds are restricted from investing more than 3 percent of their assets in lower quality, second-tier securities.
Funds are restricted from investing more than one-half of one percent of assets in second-tier securities issued by any single issuer.
Funds are restricted from buying second-tier securities that mature in more than 45 days.
Shorter maturity limitsThe maximum "weighted average life" maturity of a fund's portfolio is restricted to 120 days.
The "weighted average maturity" of a fund's portfolio is restricted to 60 days.
RedemptionsFunds are required to hold sufficiently liquid securities to meet foreseeable redemptions and they must anticipate the likelihood of large redemptions.
A money market fund's board of directors is permitted to suspend redemptions if a fund is about to "break the buck" (drop below $1) and decides to liquidate the fund.
The new rules take effect 60 days after publication in the Federal Register.
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