SEC Unveils Overhaul to Money Funds


A slice of the $2.6 trillion money market fund industry would be required to fundamentally change how they price their shares in an effort to reduce the risk of abrupt withdrawals, under a major proposal unveiled on Wednesday by U.S. securities regulators.

Continue Reading Below

The Securities and Exchange Commission's new plan calls for two alternative proposals that it said could be adopted alone or in combination.

The first piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value - a change designed reduce the risk of runs like the ones during the 2008 financial crisis.

To price the shares, the funds would be required to "basis point round" their share price to the nearest 1/100th of one percent. That is a departure from the current practice of "penny rounding" their share price to the nearest one percent.

The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not be forced to move to a floating net asset value. Retail funds are defined as those that limit shareholder redemptions to $1 million per day.

Crane Data estimates that prime funds account for 55 percent of money market fund assets, with 31 percent institutional and 24 percent retail.

The second alternative in Wednesday's proposal would allow funds to maintain a stable share price, but they could utilize so-called "liquidity fees and redemption gates" during times of stress. That is an idea that the SEC's two Republican commissioners last year said they might be able to support.

The SEC said a 2 percent liquidity fee on redemptions could be imposed if a fund's level of weekly liquid assets fell below 15 percent. Boards could opt, however, not to impose the fee if they felt it was not in the best interest of investors.

The SEC said the redemption fee and gate measures would apply to non-government institutional and retail money market funds, but government funds could voluntarily impose them.

If a fund crossed this threshold, its board of directors would be allowed to impose the gates, or temporarily suspend redemptions.

In addition, funds would need to promptly tell the public if their assets fall below the 15 percent trigger point.


The Securities and Exchange Commission's lengthy plan comes after more than a year of infighting at the agency over how to craft new rules for the industry.

The rules are in response to the events of 2008, when the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as "breaking the buck."

That ignited a run by investors across the money fund industry, cutting off a major source of overnight funding for many corporations. The run did not abate until the government stepped in to back the funds.

Major fund sponsors like Fidelity and trade groups such as the U.S. Chamber of Commerce have actively lobbied against any major structural changes to funds, saying they would kill investor interest in the product.

But after it became clear that pressure was not easing for at least some new rules, several major fund sponsors including Charles Schwab began offering compromise measures.

Wednesday's proposal, unveiled at a jam-packed public meeting, does not likely represent an ideal reform for the industry. Still, it may not generate the same degree of opposition that the SEC faced last summer when then-SEC Chair Mary Schapiro called for what some consider stricter reforms.

Schapiro, who stepped down as SEC chair last December, had advocated for a series of possible reforms, including capital buffers and redemption holdbacks, or a switch to a floating net asset value - two ideas vehemently opposed by the industry.

She was unable to muster the votes needed to issue a proposal for comment after three of her fellow commissioners said they could not support her plan without additional study.

Schapiro's proposal was starkly different from what the SEC unveiled on Wednesday. This time, the SEC's plan contains some proposals that a few fund sponsors have previously said they could live with.

"It has been a journey to get to this point," said SEC Chair Mary Jo White, who took over the helm of this agency earlier this spring.