Understanding New Money-Market Fund Rules

Understanding New Money-Market Fund Rules

The SEC is making alterations to money-market fund rules, and millions of American investors with assets stored in money-market mutual funds as part of their 401(k), individual retirement accounts, and taxable accounts could be affected. Today, we’ll give you a brief history of money-market funds, dissect the upcoming changes, and explain how they could affect investors like you.

What is a Money-Market Fund?

Money-market funds invest in short-term debt of US government securities, municipal government securities, and the commercial paper and debt of corporations. Since 1971, money-market funds have provided investors with accessible, liquid investment options that are nearly as secure as bank deposits. In the hopes of giving money-market funds more resilience in times of financial distress, the SEC has taken measures to reduce the liquidity and accessibility of certain kinds of money-market funds.

New Money-Market Fund Rules

Since the financial crisis of 2007-2008, the SEC has passed a series of amendments to strengthen the resilience of money-market funds. The most recent amendments were passed in 2014, and compliance will be required by October 14th of 2016. The SEC’s goal in altering money-market fund rules is simple: protect shareholders from loss during times of financial distress. Many investors are questioning whether the SEC’s changes are warranted, however, citing the fact that the current rules have provided liquidity, lowered the cost of capital, and increased returns for the past 40 years.

A Summary of the Changes

The new rules will abolish the historical $1 share price of institutional municipal money-market funds and institutional prime funds and require them to transact at a floating net asset value (NAV). Government money-market funds and retail money funds will retain the fixed share price, but their boards will now have the right to implement liquidity fees and redemption gates to prevent bank runs.

Changes in Detail

1. Investor Eligibility

A new distinction has been made between retail and institutional investors regarding who may invest in retail money funds.

• From this point forward, retail money funds will be offered only to “natural persons” – individuals, certain trusts, and certain retirement accounts. Other examples include participant-directed defined contribution plan accounts, living trusts, and personal choice retirement accounts.

• Under the new rules, the following entities will not be considered a “natural person”: DBAs, sole proprietors, partners, corporations, associations, endowments, and charities, defined-benefit plans, entity-directed retirement plans, nonqualified personal choice retirement plans.

2. Fund Valuation

• As we mentioned above, retail and government money-market funds will continue to be permitted to price and transact at a constant $1 NAV.

• Institutional prime funds and municipal money-market funds will be required to price and transact with a variable NAV and report their NAVs to four decimal places (such as $1.0001).

3. Additional Controls for Fund Redemption

During periods of market stress and tight liquidity, government and retail money-market fund boards may now employ the following strategies to eliminate heavy redemptions that lead to runs:

• A retail money-market fund’s board will be able to impose liquidity fees on shareholder redemptions and/or suspend fund redemptions.

• Government money-market funds are allowed—but not required—to impose fees and gates.

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