For Money Market Funds, Changes Are Mostly Cosmetic

The SEC has approved new rules for money market funds.

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The Securities and Exchange Commission on Wednesday approved a series of proposals that will further regulate money market funds. As a result of the SEC's vote, money market funds will have to report their net asset values more frequently and meet new liquidity minimums. Regulators hope that the changes, which are mostly cosmetic, will soften the funds' image in the aftermath of a rough year.

[See Money Market Insurance Program Set to Expire.]

One of the bigger changes that the SEC approved is a new liquidity threshold for money market funds. Under the guidelines, they will be required to be able to sell at least 10 percent of their assets within one day and 30 percent within one week to meet potential redemption requests.

Peter Crane, the president and chief executive of the money market tracking company Crane Data, doesn't expect funds to have to adjust their models much in order to fulfill the requirements. Money market funds are, by nature, quite liquid. As a result, most were voluntarily meeting the new minimums well before the SEC decided to mandate them. "I would say that 90 percent of funds are adhering to 90 percent of the rules already," he says.

Still, moving to full compliance could cost funds somewhere in the neighborhood of 1 basis point in yields. This would normally be an insignificant drop, but money market yields have been so painfully low that investors are bemoaning even the most minuscule of changes.

The SEC has also mandated that each money market fund display its "shadow" net asset value, a number that Crane says is essentially a "second opinion" on the value of its underlying assets, every month.

Money market funds' prices are pegged at $1 per share, but their actual value at any given moment may be fractionally more or less. These are the differences that the shadow NAV captures. A shadow NAV may show, for example, that a fund is actually at a few hundredths or even thousandths of a cent above or below $1 per share. Crane calls the new reporting requirement an attempt to "gently try to remind investors that money market funds can go down in value."

These small fluctuations are normal for money market funds (a fund that has a shadow NAV of .999 cents has not broken the buck), but until now, they have generally been a sight unseen for investors.

The biggest problem with the new reporting rule is that there will be a 60-day lag. In other words, all the numbers will be two months old by the time investors have access to them. So if a fund really does break the buck, investors will very likely hear about it on TV well before the fund is required to publish the numbers on its website. "Sixty days is a lifetime for money market funds," says Crane. "Thinking that a small investor is going to look at this thing 60 days after the fact and choose one money fund based on it being .9999 versus another one being .9998 is silly."

The SEC's vote elicited a mostly positive response from the Investment Company Institute, the trade group for mutual funds. "The mutual fund industry supports the SEC's action today to make money market funds more resilient in the face of extraordinary market conditions," the ICI said in a statement yesterday.

The SEC's decision comes at a rough time for the money market industry, which has been suffering from ultralow interest rates and is still paying penance for the Reserve Primary Fund, which broke the buck on Sept. 16, 2008.

[See SEC Looks to Put Buck Back Together in Money Market Case.]

The week before the Reserve Primary Fund fiasco, money market funds had $3.576 trillion in assets under management. As of last week, they had $3.240 trillion.