SEC's long path to money market fund reform ends in compromise

Wed Jul 23, 2014 5:16pm EDT
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By Sarah N. Lynch

WASHINGTON (Reuters) - U.S. regulators adopted moderate reforms for money market mutual funds on Wednesday, in what amounted to a compromise that aims to balance the need to reduce the risk of runs on the funds while still protecting the product's utility for investors.

The Securities and Exchange Commission's rule garnered mixed reviews from the industry and even the SEC's own commissioners, with two voting against it.

The main pillar of the rule requires "prime" money funds used by institutional investors to float their values, instead of letting them maintain a stable value at $1 per share. The goal is to prevent investors from getting spooked by the prospect of funds breaking the buck, or their net asset value falling below $1 per share.

In addition, fund boards will have discretion to lower "gates" on redemptions, or charge fees of up to 2 percent if market stress causes a fund's weekly liquid assets to fall below 30 percent.

Both measures are slated to take effect in two years.

The final adoption of the reforms was the culmination of years of fierce debate, dating back to the financial crisis.

In 2008, the Reserve Primary Fund's exposure to Lehman Brothers prompted panicked investors to withdraw their money in a run that led the fund to "break the buck."

That in turn forced the Federal Reserve temporarily to backstop the $2.6 trillion industry until the chaos subsided.   Continued...

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011.  REUTERS/Jonathan Ernst