Federal regulators on Wednesday proposed tightened rules for money-market mutual funds that will require them to hold a reserve of assets that could be easily sold and to invest only in the highest quality securities.
The Securities and Exchange Commission action came after a $60 billion money fund "broke the buck," exposing investors to losses that could ultimately reach about 8 cents on the dollar. The value of the Primary Reserve Fund's assets in September fell to 97 cents per investor dollar — below the dollar-for-dollar level needed for full repayment.
The SEC voted, 5-0, to issue the rule changes for the popular money-market funds, which hold about $3.8 trillion in assets, for public comment. The new rules could be approved sometime after that 60-day period.
The funds are a mainstay of financial management for U.S. families and companies, holding themselves out as safe and easily accessible investments that offer returns exceeding those of conventional savings accounts.
"I believe that the proposal ... will go a long way toward better protecting investors and making money-market funds more resilient to short-term market risks," SEC Chairman Mary Schapiro said before the vote.
Retail money funds would be required to hold at least 5 percent of their assets in cash, Treasury bonds or other instruments that could be sold for cash within a day. At least 15 percent of the retail funds' assets would have to be convertible to cash within a week. There currently are no such liquidity requirements.
The change would make it easier for investors to redeem their money from the funds in a rush of demand.
The liquidity requirements for money funds marketed to institutional investors would be stricter.
In addition, the maximum maturity of bonds that money funds can invest in would be shortened to 60 days from the current 90 days.
The SEC also proposed changes in money funds' operations, such as requiring that they be able to electronically process investors' purchases and redemptions at a price other than $1 a share — to make it easier for investors to get their money back if a fund "breaks the buck."
The SEC commissioners punted, however, on the issue of more fundamental changes to the regulation of money funds, such as substituting a floating share price that would make them more akin to investments like conventional mutual funds whose value goes up and down.
The SEC wants to examine whether a floating price would better protect investors from runs on money-market funds or if the "efficiency" of the $1 price provides a greater benefit, Schapiro said.
The commissioners didn't issue proposals for such changes but recommended seeking public comment on them.
The Obama administration's plan for overhauling financial regulation, issued last week, recommended that the President's Working Group on Financial Markets — which includes Schapiro, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke — examine whether more fundamental changes are needed to better protect investors in money-market funds.
The collapse of the money fund run by Reserve Management Co. last fall was one in the cascading series of troubling events in the financial meltdown. It marked only the second such instance in the nearly four decades that money-market funds have been available to keep money safe and readily accessible while earning a modest return.
The "breaking of the buck" stoked fears over the safety of the trillions held in the money funds.
After investment bank Lehman Brothers filed for bankruptcy protection on Sept. 15, New York-based Reserve Management's board declared its $785 million investment in Lehman debt's worthless. That triggered a rush of orders from institutional clients to pull money out of the fund, gutting the fund's value as its managers were forced to sell assets amid sharply declining markets.
The Treasury Department stepped in with a temporary program to guarantee money-market funds, but the Primary Fund — the first U.S. money fund, established in 1970 — didn't qualify and had to liquidate.