The Securities and Exchange Commission is rewriting rules that would make money market funds safer for investors, the New York Times reports. The Commission is proposing that retail funds be required to keep “at least 5 percent of their assets in cash, Treasury securities or assets that could be converted into cash within one day” to protect investors in the event of a run. At least 15 percent of assets should be able to be converted to cash within a week; institutional funds would be held to an even higher standard.
Also among the proposals, the SEC is suggesting that a fund’s board should be allowed to suspend redemptions should the funds value fall below the $1 mark. In this case, the paper reports, the fund would be able to liquidate assets in an “orderly and equitable fashion.”
“It’s a trade-off between safety and return,” Joan Ohlbaum Swirsky, a lawyer with Stradley Ronon Stevens & Young, told the Times, pointing out that if yields go too low, other products will become more attractive and investors will move away from money market funds.
“There is no doubt that these recommendations will come at some sacrifice of yield, but I think the larger issue for our shareholders is in the safety and convenience arena,” counters Paul Schott Stevens, president and chief executive of the Investment Company Institute.
The fund industry’s forbearance only extends so far, though. One of the most divisive proposals, the Times writes, is the suggestion to do away with the $1 per share redemption price in favor of a floating share price. Such a change would provide more transparency, but would add additional paperwork and increase the need for tax planning.
“We have said the stable value of a money fund is part and parcel of this product, and if you eliminate that you have unnecessarily destroyed the product,” said Mr. Stevens of the trade group. “If you take that away, they just become short-term bond funds.”
The SEC is accepting public comments on the proposals over the next 60 days. Visit www.sec.gov for more information. Full text of the proposals was not available at press time.