SEC Proposes Rules to Prevent Losses with Money Market Funds

The Securities and Exchange Commission has proposed a series of rulings that it says will reduce the change of losses for money market fund investors. The problem is that these rulings will also reduce the attractiveness of money market funds.

The Securities and Exchange Commission has proposed a series of rulings that it says will reduce the change of losses for money market fund investors. The problem is that these rulings will also reduce the attractiveness of money market funds.

Today, the SEC voted 5-0 to seek public comment that would:

  • Require money market fund to hold more liquid assets and cash and reduce the duration of the assets held. 
  • Investigate whether money  market value should be held at a $1 NAV or allowed to float.

All of this was done because of the near run on money markets after the collapse of the Prime Reserve Money Market Fund.  The Fund's NAV fell below $1 because of losses associated with bonds issued by Lehman Bros.

The question is, will the new rulings effectively ruin money market funds as an investment alternative.  Requiring funds to hold more assets in cash and shorterning their duration is going to result in lower yields.  Already, money market fund returns are significantly below savings, money market accounts, and certificates of deposit. Today, the top money market fund on BestCashCow pays 1.08% while the top savings account pay almost 3X that rate.

While institutions may continue to park cash in these vehicles despite the low return (as a safe way to store cash), retail investors may find that the rate makes it hardly worthwhile.

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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