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The U.S. Securities and Exchange Commission (SEC) plans to unveil new money market fund rules that could drastically change the industry – even end it, if investment companies' claims are true.
The SEC is designing new rules to stabilize money market funds. The investments should be secure and easily accessible, but the SEC says a Greek debt default threatens that safety.
"Money-market funds remain susceptible to runs and to a sudden deterioration in quality of holdings, and we need to move forward with some concrete ideas for proposals to address these structural risks," SEC Chairman Mary Schapiro said last week.
The $2.7 trillion mutual fund industry is livid over the new rules, claiming such strict regulation and guidelines will chase away investors.
"We're going to do everything in our power to attack it," said J. Christopher Donahue, president and CEO of Federated Investors Inc. (NYSE: FII). Donahue said his firm plans to sue the government when the rules are released.
Fidelity Investments, a portfolio manager overseeing $433 billion of the mutual fund market, said in a Feb. 3 letter to the SEC that the proposed new money market fund rules "could spark retail and institutional investors to pull significant amounts of assets out of money-market mutual funds, leading to unintended consequences for the financial markets and U.S. economy."
Fidelity said according to internal research, about 47% of retail investors would pull money out of money market accounts.
Here's a look at the new money market fund rules that could affect your investments.
New Money Market Fund Rules
- Firms would have to set aside capital reserves to prepare for an influx of redemption requests. They could do so in one of three ways:
- Raise money through stock or debt security offers.
- Collect more money from shareholders.
- Inject more money from corporations.
The industry argues this will limit how much money can be invested and will lower the yield, making money market funds less attractive to investors.
- Money market funds' net asset value would no longer be fixed at $1. It would be floatable, like other mutual funds. This would require managers to report at regular intervals the actual mark-to-market value of securities held in the money market funds, instead of reporting projected values like they do now. The industry has heavily fought the proposal since it was first introduced in 2009 by a think tank led by former U.S. Federal Reserve Chairman Paul Volcker.
- Funds would enforce a 30-day rule – or "liquidity fee" – when customers request their funds. Investors would receive about 95% upfront, and the remaining 5% after 30 days. Fund managers say holding a portion of clients' funds would make it harder for investors to make trades, since many investors constantly move money in and out of funds.
The SEC continues to debate the proposals and could release finalized new money market fund rules in the next couple weeks.
News and Related Story Links:
- Money Morning:
Money-Markets, CDs, and Bonds: The Ups and Downs of Stashing Your Cash
- Money Morning:
Our Financial "Regulators" Just Let Us Down Again
- The Wall Street Journal:
U.S. Sets Money-Market Plan
- International Business Times:
Money Market Accounts Could Disappear If New SEC Rules Go Forward: Industry