What the New SEC Rules Mean for Your Money Market Funds

Don't fret the rumors. The funds individuals invest in will be safer than ever—and just as boring.

Money market mutual funds have become the Rodney Dangerfield of investments. They were created in the 1970s to allow individuals to capture market rates on their savings, rather than the meager yields held down by government caps (imposed since the Great Depression) on what insured banks and savings & loans could pay.

Older readers undoubtedly wistfully recall the days of the early 1980s when money funds showered income like manna from heaven. Average annual yields hit close to 17%. At that rate, $100,000 earned $17,000. (For those of you who are too young to remember, those numbers are not typos.)

Since then, of course, money funds have earned their way into the get-no-respect category with the miserly yields of 0.01% or 0.02%. Think about that: At one one-hundredth percent, $100,000 earns a whopping $10 a year—barely enough to trigger a 1099 report to the IRS.

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Although not insured, money funds are supposed to be boring, almost risk-free parking lots for cash. And, usually, they are, with their promise (although not a guarantee) to maintain a constant $1-per-share net asset value. But one day after Lehman Brother’s collapsed in 2008, the almost unimaginable happened. A giant money fund, the Reserve Primary Fund, “broke the buck,” and some shareholders cashed out for as little as 97 cents on the dollar. That was only the second time money fund investors lost money, and it hasn’t happened since.

So why are we writing about this six years later?

Because on October 14, new Securities and Exchange Commission rules go into effect with the aim of preventing such an event from ever happening again. There’s a lot of misinformation floating around about the rules. This story will set the record straight.

You have probably heard, for example, that one change demands that funds jettison the stable $1-a-share value and adopt a floating NAV. That means the share price could rise or fall every day depending on the actual value of the securities in the portfolio.

But that’s not completely accurate.

In fact, the floating-NAV rule does not go into effect for two years. And when it does, it will apply only to institutional funds—the ones corporations use to stash short-term cash.

It will not apply to retail money funds, the kind used by individual investors and which hold about $900 billion of the $2.6 trillion parked in money funds today. Nor will the rule apply to money funds that invest only in government securities. When the rule takes effect in 2016, covered funds will have to calculate their daily NAV to four decimal places—to one one-hundredth of a cent. Retail funds, the kind individuals use, will still be allowed to round to the nearest penny. That means a stable $1 NAV is as safe as ever because the very short-term nature of money fund investments means values are barely affected by daily changes in market rates.

Gates and Fees

Other changes that go into effect in 2016 will affect retail funds. If in times of financial stress a fund’s liquidity level falls below 30%, the directors of the fund will be able to use one of two new safety valves to prevent a run on the fund that might result in losses. The fund can either lower a “liquidity gate” to temporarily forbid withdrawals for up to 10 days or impose a withdrawal fee of 2%. The gate could not block withdrawals for more than 10 days out of any 90-day period. There’s no guarantee that either practice would prevent a fund from breaking the buck, but regulators believe the new rules—on top of changes imposed in 2010 to require higher credit standards and shorter maturities for money fund investments—make money funds safer than ever.

The Vanguard Prime money market fund (VMMXX) holds more than $100 billion, despite the fact that its current yield is just 0.01%. During the worst of the financial crisis in 2008, the fund’s liquidity status “never got close” to levels that would have triggered the new rules, according to Laura Merianos, an expert in fund group’s legal and compliance division. She says the most important thing retail investors need to know about the new SEC rules is this: “Their experience with money market funds will not change.”

Kevin McCormally
Chief Content Officer, Kiplinger Washington Editors
McCormally retired in 2018 after more than 40 years at Kiplinger. He joined Kiplinger in 1977 as a reporter specializing in taxes, retirement, credit and other personal finance issues. He is the author and editor of many books, helped develop and improve popular tax-preparation software programs, and has written and appeared in several educational videos. In 2005, he was named Editorial Director of The Kiplinger Washington Editors, responsible for overseeing all of our publications and Web site. At the time, Editor in Chief Knight Kiplinger called McCormally "the watchdog of editorial quality, integrity and fairness in all that we do." In 2015, Kevin was named Chief Content Officer and Senior Vice President.