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Money Funds Get a Makeover

But a new "safety premium" comes at a cost: lower yields.

The post-apocalypse money-market fund has a new look: It's more liquid, higher quality, more transparent. And, oh, it pays less.

The Securities and Exchange Commission recently adopted rules to protect investors from a fallout such as that experienced in the aftermath of the Reserve Fund's collapse in September 2008. The fund's net asset value dropped below $1 -- breaking the buck, in money-fund speak. That led to a run on the fund, with panicked investors withdrawing throughout the industry. Investors pulled some $540 billion out of money-market funds last year (although assets still total $3.2 trillion).

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The new rules, expected to be phased in this year, will require all taxable money funds to keep at least 10% of assets in securities that can be converted into cash in one day. All funds must keep 30% of assets in securities that can be cashed in within one week.

Restrictions on buying lesser-quality securities were also tightened. And there will be new limits on the average maturity of holdings in a fund's portfolio -- for example, shortening the maximum weighted average maturity to 60 days from 90. To give a more realistic view of holdings, funds will report their true NAV monthly instead of every six months, but they may still do so with a 60-day lag.

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All of this comes at a cost. Call it a "safety premium," which cuts yields by about 0.1 percentage point, estimates Peter Crane, of money-market research firm Crane Data. Most of that has already been incorporated into near-zero yields.

The SEC says it is still considering a controversial proposal to require funds to price shares daily according to a floating net asset value instead of the current $1-per-share standard.

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