Last week ratings agency Moody's announced via press release that it is reconsidering the rating system for money market funds.
Also on September 7, the agency published a paper soliciting investor comments, "Moody's proposes new money market fund rating methodology and symbols," and explained the rationale for the proposed change.
"In September 2008, 31 rated funds suspended redemptions, leading to delayed distributions, and in two cases, shareholders in those funds experienced principal losses. Further suspensions and additional losses would likely have occurred in the US if the US Treasury had not made principal protection insurance programs available to the money market fund industry."
As a result, the proposed rating system will give more weight to liquidity risk as well as the willingness of the sponsor company to prop up the fund if the net asset value, or NAV, threatens to fall below $1.
The move comes on the heels of a report released by Moody's that revealed that up to 36 domestic money market funds struggled to maintain the requisite $1 NAV in September 2008.
In January 2009 the SEC imposed new rules on money market funds aimed at reducing risks. In the Bankrate story, " SEC: New rules for money market funds," Laura Bruce reported that the rules required greater liquidity, higher credit quality, shorter maturity limits and sufficient liquidity to meet foreseeable redemptions.
According to Cranedata, a money market and mutual fund information company, low rates, fund outflows and regulatory requirements are taking a toll on the money market fund industry with a small but increasing number of companies either liquidating their funds or outsourcing them.
However, the Investment Company Institute, or ICI, reports that money fund inflows are up in recent weeks, increasing $10.55 billion to $2.839 trillion for the week ending September 8.
Money market funds play an important role for investors looking for a safe place to park their cash. An upcoming Bankrate feature by Claes Bell will look at the new SEC regulations for money market funds and how they are making them safer. Look for that September 20.
Do you use money market funds for your extra cash or do you prefer a deposit account guaranteed by the FDIC?
Don't forget to check Bankrate's rate tables for some of the best yields on money market accounts and CDs nationwide.
Get more CD and Investing News with our free weekly newsletter.
Follow me on Twitter.