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Fight brews over MMFs

By Sheyna Steiner · Bankrate.com
Tuesday, February 7, 2012
Posted: 1 pm ET

Money market funds are designed to be safe investments that maintain a $1 per share net asset value, or NAV, at all times. Unlike money market accounts offered by banks though, money market funds are not insured by the FDIC. That means it is possible to lose money in a money market fund if the per share price dips below $1. While that rarely happens, the collapse of Lehman Brothers sent the industry into tumult, sending one money market fund, the Reserve Primary Fund, below $1, and dozens of others had to be propped up by their parent companies.

In May of 2010, the Securities and Exchange Commission put into place new rules governing money market funds. Now, new rules are set to be proposed that would further tighten regulations governing the accounts. On Tuesday, the Wall Street Journal reported that the SEC is close to revealing a two-part plan to shore up money market funds in the event of another panic.

The proposal could limit financial firms by requiring capital reserves and constrain investors by not allowing them to withdraw 100 percent of their account in one day, says the WSJ.com story, "U.S. sets money-market plan."

From the Wall Street Journal:

Investors who wish to sell all of their holdings at once would be able to get only about 95% of their money back immediately, with the remaining 5% returned to them after 30 days.

Critics say that requiring capital reserves could further limit money market fund yields.

According to imoneynet.com, top retail money market funds sport 7-day yields between 0.03 percent and 0.14 percent.  The 7-day yield averages the interest and dividends paid on the funds' investments, minus expenses, and extrapolates that to an annualized return.

Money market funds have suffered in the years since the financial meltdown. With yields as low as they are and heightened perceptions of risk following the Reserve Primary Fund meltdown, investors have looked for the guaranteed safety of FDIC-insured accounts or higher-yielding investments.

A recent story by Constance Gustke explores some of the risks of money market funds, "Could money market funds break buck again?"

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