On July 23, the Securities and Exchange Commission (SEC) adopted amendments to the rules that govern money market mutual funds. The amendments, adopted on a 3-to-2 vote, make structural and operational reforms to address risks of investor runs in money market funds, while preserving the benefits of the funds. The protection is mainly the result of requiring institutional money market funds (also called “prime” money market funds) to float their value instead of maintaining a value of $1 per share. Kara Stein, who we featured in an earlier article for her dissent to the SEC’s recent decision in a well-known seasoned issuer waiver decision, along with Michael Piwowar, voted against the measure.
The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs.
With a floating NAV, institutional prime money market funds (including institutional municipal money market funds) are required to value their portfolio securities using market-based factors and sell and redeem shares based on a floating NAV. These funds no longer will be allowed to use the special pricing and valuation conventions that currently permit them to maintain a constant share price of $1.00.
The reform was inspired by fallout from the Reserve Primary Fund in 2008. The fund’s exposure to Lehman Brothers’ bankruptcy the day before prompted panicked investors to yank their money. The fund “broke the buck,” meaning its net asset value fell below $1 per share. The Federal Reserve was ultimately forced to backstop the industry until the chaos subsided. The SEC hopes switching to a floating net asset value will prevent investors from getting spooked by the prospect of funds breaking the buck.
Another change involves a fund’s ability to impose redemption gates (a gate partially limits the ability of investors to redeem from a fund) and liquidity fees. According to SEC Chair Mary Jo White, these “reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system.” In his dissent, however, Piowar disagreed, expressing concern over application of all three changes at once: floating NAV, liquidity fees, and redemption gates. He fears the changes will undermine both the stability and liquidity of money market funds. Most investors that commented on the rules prior to their adoption seemed to agree with Piowar.
The intent of these new rules was to provide stability in money market funds by preventing a mass exodus of investors. While liquidity fees and redemption gates will slow nervous investors’ ability to make a hasty withdrawal, Piowar and the rest of the opposition fear the rules undermine the benefits of investing in a money market – easy ability to liquidate investments and gain capital. Only time will tell how these new changes affect the money market funds, but for now, investors should be aware how these changes affect their investing practices.
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