Regulatory Reform

Despite new safeguards adopted by the SEC further regulating the quality, maturity, liquidity, and diversification of assets, the President’s Working Group on Financial Markets issued a report saying that money market funds are susceptible to runs and provide several options for additional regulation.

These options included:

  • Floating the net asset value
  • Capital Requirements
  • Redemption Restrictions

These well-meaning, but extreme proposals, would have the unintended consequence of destroying the money fund industry.  Click here to learn more about the unintended consequences.

The History of Refrom

In 1971, the Reserve Fund, the first money market fund, was started. It was established much like a mutual fund, investing money on behalf of investors, with an investment policy designed to keep the NAV at $1.00. As inflation hit and interest rates shot up in the 1970s, money market funds became a more attractive investment vehicle.

In the 40-year fund history, only two funds have not maintained the stable $1 per share price day in and day out.  In 2008, during the height of the financial crisis and the demise of Lehman Brothers, the Reserve Fund that held Lehman’s commercial paper “broke-the-buck,” meaning that the NAV dipped below $1.00 to $.97. This, coupled with the Federal Deposit Insurance Corporation (FDIC) raising the guarantee limits to $250,000 per depository account, led to investors pulling cash out of money market funds and causing a run on the fund.  Ultimately, the federal government implemented a temporary guarantee program for money market funds to even the playing field —for the first time ever.  This inevitably created an implicit government guarantee on the money market fund industry.

Following the financial crisis of 2008, the U.S. Securities and Exchange Commission (SEC) adopted new safeguards for money market funds, further regulating the quality, maturity, liquidity, and diversification of assets. These enhancements are working. Today, money market funds are well positioned to endure financial market stresses, including the recent domestic debt-ceiling crisis and the European sovereign debt crisis.

However, in October 2010, the President’s Working Group on Financial Markets issued a report saying that money market funds are susceptible to runs and provide several options for additional regulation. These options included floating the net asset value that would force funds to abandon the stable $1.00 price per share. Federal regulators have also focused on other bank-like requirements for the funds. These well-meaning, but extreme proposals, would have the unintended consequence of destroying the money fund industry.

Safeguards for Money Market Funds (Rule 2a-7)
Following the 2008 crisis, the SEC implemented new safeguards for money market funds through enhancements to Rule 2a- 7 in January 2010. These new regulations set stricter parameters in which money market funds operate. 

  • Invest in only high-quality investments. Money market funds must invest 97% in tier-one (A1/P1) grade investments or government securities.
  • Manage a diversified portfolio.  Money market funds are forced to diversify and can only hold 5% of any one commercial issuer.
  • Keep assets liquid.  30% of money market fund’s assets must matured within a week.
    These enhancements are working. Today, money market funds are well positioned to endure financial market stresses.