SEC adopts new mutual fund rules
WASHINGTON — Federal regulators yesterday tightened rules for money-market mutual funds to require them to hold some assets that could be easily converted to cash and to disclose new information on fund values.
The Securities and Exchange Commission voted 4-1 at a public meeting to adopt the new rules designed to bolster protection for investors in money-market funds, which hold about $3.2 trillion in assets.
The move came in response to an episode in September 2008, at the height of the financial crisis, in which a $60 billion money fund “broke the buck” and exposed investors to losses.
The value of the Reserve Primary Fund’s assets fell to 97 cents per investor dollar — below the dollar-for-dollar level needed for full repayment.
SEC Chairman Mary Schapiro said the new rules were “just a first step in our efforts to strengthen” rules governing money-market funds.
“I am committed to continuing to move forward with reforming the money-market fund industry,” Schapiro said before the vote.
But Commissioner Kathleen Casey said the changes “simply do not go far enough” and she therefore was voting against adopting the new rules.
Money-market funds are a mainstay of financial management for U.S. families and companies, holding themselves out as safe and easily accessible investments that offer returns exceeding those of conventional savings accounts. They generally invest in the safest types of debt such as Treasury bonds, while so-called prime money-market funds seek slightly higher yields but accept marginal risk by venturing into short-term corporate bonds.
The “breaking of the buck” by the Reserve Primary Fund — the first U.S. money fund, established in 1970 — stoked fears over the safety of the trillions held in the money funds. During the week it happened, investors pulled out around $300 billion from prime money funds, representing 14 percent of the assets in those funds.
Under the SEC rule changes, all money funds will be required to hold at least 10 percent of their assets in cash, Treasury bonds or other instruments that could be sold for cash within a day. 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. At least 30 percent of funds’ assets will have to be convertible to cash within a week.
In addition, funds will be barred from investing more than 3 percent of their assets in securities that are other than the highest grade. That is stricter than the current limit of 5 percent.
The maximum average maturity of bonds in which money funds can invest will be shortened to 60 days from the current 90 days.
The SEC also is mandating 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 new rules will take effect in stages, with some requirements coming into force in the spring and others in the fall.
The SEC has been examining whether substituting a floating share price for the $1 for money funds — making them more akin to investments like conventional mutual funds whose value rises and falls — would better protect investors from runs on the funds.
The new rules require money market funds to disclose their “shadow” floating share price: how the market values what investors would pay per share to get into the fund and would receive getting out of it. The information will have to be disclosed monthly, with a 60-day lag.
New York-based Reserve Management, which operated the fallen Reserve Primary Fund, said Tuesday night it will return to shareholders $3.4 billion — nearly all the remaining cash it has. It is the sixth partial payout the fund has made since its collapse. Reserve Management said 99 percent of what the fund held at the peak of the financial crisis will have been returned.
About $160 million remains to cover legal and management costs.
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