The Securities and Exchange Commission this week - after years of debate - adopted structural and operational amendments to the rules that govern money market mutual funds.

The Securities and Exchange Commission has this week - after years of debate - adopted structural and operational amendments to the rules that govern the $2.6 trillion US money market mutual funds industry.

Around a third of all money market funds operated by asset managers including BlackRock, Fidelity, Vanguard, Charles Schwab, Pimco and Federated Investors are estimated to be affected by the rules, according to Reuters. Funds whose investors are individuals, on the other hand, will not. 

The rules build on the reforms adopted by the SEC in March 2010, designed to reduce the interest rate, credit and liquidity risks of money market fund portfolios. When the 2010 amendments were adopted, it was recognized that the 2008 financial crisis “raised questions of whether more fundamental changes to money market funds might be warranted,” the SEC said.

“Today’s 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,” said SEC chair Mary Jo White.

The new rules - backed in a reported 3-2 vote - require a floating net asset value for institutional prime money market funds, allowing the daily share prices of these funds to fluctuate 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.

The objective of a money market fund is to generate interest while maintaining a net asset value of $1 per share, through a portfolio comprised of short-term securities - reason for which they have been perceived as almost risk-free.

The SEC explained: "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. With liquidity fees and redemption gates, money market fund boards have the ability to impose fees and gates during periods of stress. The final rules also include enhanced diversification, disclosure and stress testing requirements, as well as updated reporting by money market funds and private funds that operate like money market funds."

Reaction

Moody’s, the credit ratings agency, believes the new regulation is positive for investors but negative for fund sponsors. A report in the Financial Times said some money fund managers are worried that clients – upon seeing their balance fluctuate - will pull money out of affected funds and move them into unaffected money market funds, separate accounts or higher-yielding fixed income funds.

“More importantly, a run in one fund could incite a system-wide run,” said commissioner Kara Stein, who voted against the rule, in the FT.  

In the wake of the new rules, Moody's said in a statement to "watch for more conservative and more liquid investments," adding that the change to a variable share price "will drive MMF managers to more conservative investment decisions." The firm also said that "smaller players who have hung on until now may throw in the towel," causing further industry consolidation.

It added that the US Treasury and the Internal Revenue Service will release tax guidance, proposing regulations which allow floating NAV investors to use a simplified tax accounting method to track gains and losses. 

A two-year transition period giving funds and investors time to adjust their systems, operations and investing practices, has been provided.

“These reforms are important both to investors who use money market funds as a cash management vehicle and to the corporations, financial institutions, municipalities and others that use them as a source of short-term funding,” said Norm Champ, director of the SEC’s Division of Investment Management.

"In light of these changes, we believe that money market funds will continue to prove a valuable cash investment strategy," BlackRock said in a statement on the news.