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SEC Approves Split Rule on Money Market Funds

This article originally ran on August 4, 2014.

By Fred Barstein

The SEC adopted new rules affecting the $2.6 trillion money market industry July 23, imposing a floating net asset value like other mutual funds rather than a fixed $1 value. The purpose of the rules is to alert investors about the risk of investments that were thought to be guaranteed. 

However, the rules will apply only to funds held by institutions, which comprise only about a third of the market. Led by Charles Schwab, consumer money market providers were able to limit the scope of the rule, which originally would have covered all funds. In addition, institutional money market funds may imposes fees and restrictions on withdrawals during a market crisis.

The issue about money market funds arose after the Lehman collapse in 2008, when many funds "broke the buck" — led by the Reserve Fund —shattering the widely held misconception that these funds are risk free. 

The 3-2 vote by the commission reflects two concerns:

  • that the rule would impose additional costs on the funds, making them less attractive to institutional investors; and 
  • that sophisticated investors sensing trouble would sell ahead of less sophisticated consumers, creating a run. 
Critics argued that the rules should apply to all investors in order to signal the real risks of money market funds, but providers serving the individual investor market supported the split rule over concerns about the impact on that market.

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